RAMESH KANDAKATLA,WARANGAL vs. ITO, WARD -2, WARANGAL

Succinctly stated, the assessee had filed his return of income for Assessment Year 2017-18 on 31.03.2018, declaring an income of Rs.1,10,090/-. Subsequently, the AO was in receipt of information that the assessee had during the subject year carried out substantial financial transactions, viz. (i) cash deposits made in his bank account during the demonetisation period (09.11.2016 to 30.12.2016): Rs.13,96,000/-; and (ii) total cash deposits made in his bank account No.31593392331 held with SBI, Narsampet Branch (including the aforesaid cash deposits of Rs.13.96 lacs made during the demonetisation period): Rs.24,96,000/- . Thereafter, the AO issued a notice under Section 143(2) of the Act dated 26.09.2018

During the course of the assessment proceedings, the AO issued notices under Section 142(1) of the Act dated 28.01.2019, 24.05.2019 and 29.10.2019, calling upon the assessee to explain the entries appearing in his bank accounts. However, as the assessee failed to furnish any satisfactory explanation regarding the cash source of the deposits of Rs.24,96,000/- made during the year under consideration in his Account No. 31593392331 held with SBI, Narsampet Branch (including the cash deposits of Rs.13.96 lacs made during the demonetisation period), the AO treated the entire amount of cash deposits of Rs. 24,96,000/- as the assessee’s unexplained money under Section 69A of the Act. Accordingly, the AO, vide his order passed under Section 143(3) of the Act dated 16.12.2019, determined the income of the assessee at Rs.26,06,090/-.

Aggrieved, the assessee carried the matter in appeal before the CIT(A), but without success.

The assessee, being aggrieved with the order of the CIT(A), has carried the matter in appeal before us.

We have heard the Ld. Authorized Representatives of both parties, perused the orders of the authorities below and the material available on record, as well as considered the judicial pronouncements pressed into service by them.

Shri V. Srinivas, C.A., Ld. Authorized Representative (for short, “AR”) for the assessee, at the threshold of hearing of the appeal, submitted that the assessee has filed a petition under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963, seeking admission of additional evidence in the form of a certificate dated 22.04.2026 issued by the Branch Manager, State Bank of India, ACB, Narsampet Branch, Narsampet, Warangal Rural District, Telangana. Referring to the said certificate, the Ld. AR submitted that it certifies that the assessee was during the subject year working as an SBI Customer Service Point (CSP) operator bearing Code No. 5E840000 with the aforesaid branch at Relakunta Village. The Ld. AR submitted that the certificate further stated that the assessee had maintained Settlement/Current Account No. 31593392331, through which he carried out transactions in his capacity as the Business Correspondent/Agent bearing the aforesaid code number. It was also submitted that the certificate mentioned that the assessee had earned an income of Rs.15,000/- (approx.) per month from rendering the aforesaid banking services. The Ld. AR submitted that the aforesaid certificate was not available with the assessee during the course of the proceedings before the authorities below and, therefore, the same could not be produced before them. It was submitted that as the said certificate has a material bearing on the adjudication of the controversy involved in the present appeal, the same in all fairness and in the interest of justice be admitted.

We have given thoughtful consideration, and are of the considered view that the certificate dated 22.04.2026 issued by the Branch Manager, State Bank of India, ACB, Narsampet Branch, only fortifies the claim consistently raised by the assessee before the authorities below that he was functioning as a Business Correspondent (BC) of the said bank. We find that the said claim was, even before the authorities below, supported by documentary evidence in the form of the bank appointment letter, identity card issued by the State Bank of India, bank statements and the daily transaction register reflecting the amounts received from various account holders and the corresponding transfers made to their respective bank accounts. We are of the view that, as the aforesaid certificate was not available before the authorities below and has a material bearing on the adjudication of the issue involved in the present appeal, therefore, in all fairness and in the interest of justice, admit the same under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963.

Coming to the core issue involved in the present appeal, the Ld. AR submitted that both the authorities below had grossly erred in law and facts of the case in treating the cash deposits of Rs.24.96 lakhs made in the assessee’s bank account during the subject year as his unexplained money under Section 69A of the Act. The Ld. AR submitted that the assessee was functioning as a Business Correspondent/Agent of the State Bank of India, ACB, Narsampet Branch, Narsampet, Warangal Rural District, and that the cash deposits made in his bank account represented amounts received from various account holders in his capacity as the Business Correspondent/Agent of the bank for onward transfer to their respective bank accounts. Elaborating on his aforesaid contention, the Ld. AR submitted that the assessee, as a Business Correspondent/Agent of the bank, was rendering banking services at the doorsteps of the account holders residing in areas not served by a regular branch of the bank. The Ld. AR submitted that the assessee had, in the course of the proceedings before the authorities below, furnished the bank appointment letter and identity card evidencing that he was working as a Business Correspondent (BC) of the State Bank of India, ACB, Narsampet Branch. The Ld. AR submitted that the assessee, to dispel any doubt regarding the nature of the transactions, had also produced the bank statement and the daily transaction register reflecting the amounts received from each account holder and the corresponding transfers made to the respective accounts of such account holders.

The Ld. AR, relying on the aforesaid facts, submitted that the entire cash deposits routed through the assessee’s Current Account No. 31593392331 maintained with the State Bank of India, ADB, Narsampet Branch, Warangal Rural District, represented transactions carried out by him solely in his capacity as a Business Correspondent/Bank Agent (CSP) bearing Code No. 5E840000. It was submitted that, as certified by the Branch Manager of the aforesaid bank vide 6 certificate dated 22.04.2026, the assessee had merely earned a commission income of Rs.15,000/- per month for rendering the said banking services. The Ld. AR, to buttress his aforesaid contention, took us through the Daily Transaction Register (extracts) maintained by the assessee in his capacity as the Business Correspondent (BC) of the bank (Pages 389 to 460 of the APB), pertaining to a part of the demonetization period, i.e., from 09.11.2016 to 16.11.2016. The Ld. AR also carried out a conjoint reading of the entries recorded in the Daily Transaction Register vis-à-vis the transactions reflected in the assessee’s Current Account No. 31593392331. It was submitted that the said exercise clearly established that the impugned transactions were undertaken by the assessee solely in his capacity as a Business Correspondent/Customer Service Point (BC/CSP) of the State Bank of India and not in his individual capacity. It was further submitted by him that the assessee had duly substantiated the aforesaid factual position by placing on record cogent documentary evidence, including the bank appointment letter, identity card, Daily Transaction Register, bank statements and the certificate dated 22.04.2026 issued by the State Bank of India. It was thus contended that, in the backdrop of the aforesaid documentary evidence, there remained no justification for the authorities below to have treated the cash deposits routed through the aforesaid current account as the assessee’s unexplained money under Section 69A of the Act. The Ld. AR, to dispel all doubts regarding the true nature of the transactions carried out by the assessee in his capacity as a Business Correspondent/Agent of the State Bank of India, carried out a conjoint reading of the assessee’s bank statement (Page 12 of the APB) and the extracts of the Daily Transaction Register (Page 367 of the APB). The Ld. AR submitted that the transactions reflected in the assessee’s Current Account No. 31593392331 stood duly recorded in the Daily Transaction Register maintained by him in the ordinary course of his functioning as a Business Correspondent of the bank. The Ld. AR relying on the aforesaid facts, submitted that there was no justification for the authorities below in treating the cash deposits made during the year under consideration in the assessee’s aforesaid bank account as his unexplained money under Section 69A of the Act, as the said deposits merely represented cash collected from the customers of the bank in his capacity as its authorised Business Correspondent (BC) for onward credit to their respective bank accounts.

Per contra, the Ld. Senior Departmental Representative (for short, “DR”) supported the orders of the lower authorities. It was submitted that the assessee had not placed on record the complete Daily Transaction Register covering the entire demonetization period, i.e., from 09.11.2016 to 30.12.2016. The Ld. DR, to buttress his aforesaid contention, pointed out that the extracts of the Daily Transaction Register furnished by the assessee pertained only to the period 09.11.2016 to 16.11.2016. Apart from that, the Ld. DR submitted that, as against the total cash deposits of Rs. 24,96,000/- made during the year under consideration in the assessee’s Current Account No. 31593392331 maintained with the State Bank of India, ACB, Narsampet Branch, a substantial amount of 8 Rs.13,96,000/- had been deposited during the demonetization period itself. The Ld. DR submitted that the amount of the cash deposits made during the demonetization period raised serious doubts regarding the assessee’s claim that the subject deposits represented cash collected by him from the customers of the bank in his capacity as its Business Correspondent.

The Ld. AR rebutted the aforesaid contentions of the Revenue. The Ld. AR had drawn our attention to the letter issued by the Reserve Bank of India dated 08.11.2016 addressed to the Chairman/Managing Directors of all banks regarding the withdrawal of the legal tender status of the existing Rs.500/- and Rs.1,000/- banknotes. The Ld. AR submitted that the said communication specifically authorized the Business Correspondents (BCs) to exchange Specified Bank Notes (SBNs) up to Rs.4,000/- per person, in the same manner as bank branches, subject to production of valid identity proof and a requisition slip. It was further submitted that the said communication further provided that banks could, at their discretion, enhance the cash holding limits of their Business Correspondents at least till 30.12.2016. The Ld. AR submitted that, considering the extraordinary circumstances prevailing during the demonetisation period, when customers were depositing or exchanging demonetized currency through bank branches as well as Business Correspondents, and the assessee was duly authorized by the bank to exchange Specified Bank Notes (SBN’s) within the prescribed limits, the cash deposits of Rs.13,96,000/- made during the demonetisation period stood fully explained as amounts collected by the assessee from the customers of the bank in 9 discharge of his official functions as its authorized Business Correspondent. The Ld. AR further submitted that the entire cash deposits routed through Current Account No.31593392331 during the year under consideration stood duly reconciled with the transactions recorded in the Daily Transaction Register maintained by the assessee in his capacity as the Business Correspondent of the bank. The Ld. AR reiterated that the aforesaid factual position also stands independently certified by the Branch Manager, State Bank of India, ACB, Narsampet Branch, vide certificate dated 22.04.2026, wherein it was categorically stated that all the transactions carried out through the aforesaid current account during Financial Year 2016-17 were undertaken by the assessee in his capacity as a Business Correspondent/Bank Agent bearing Code No.5E840000, for which he was receiving only a commission income of Rs.15,000/- per month. It was thus submitted that, in the face of the supporting documentary evidence on record, no doubt whatsoever survived regarding the true nature and source of the impugned cash deposits.

We have given thoughtful consideration to the contentions advanced by the Ld. Authorized Representatives of both the parties in the backdrop of the material available on record.

Before adverting to the merits of the controversy, we deem it apposite to briefly refer to the role and functions of a Business Correspondent/Customer Service Point (BC/CSP). A BC/CSP is an outlet established by a bank through its authorized Business Correspondent to provide basic banking services to customers, particularly in rural and semi-urban areas. It functions as an extended service outlet of the bank, though it is not a regular branch. The services ordinarily rendered through a BC/CSP include opening of eligible savings bank accounts, acceptance of cash deposits and withdrawals, fund transfers, Aadhaar Enabled Payment System (AePS) transactions, Direct Benefit Transfer (DBT) payments, collection of loan installments, utility bill payments and such other banking services as may be authorized by the concerned bank. A BC/CSP is operated by an authorized Business Correspondent using a micro-ATM, biometric device or such other banking infrastructure as may be approved by the bank. Accordingly, the Business Correspondent (BC) merely acts as an agent of the bank and performs banking transactions strictly under its supervision and control. Insofar as the cash deposits routed through the bank account of a Business Correspondent (BC) are concerned, the same ordinarily represent monies received from customers for the purpose of being deposited or transferred into their respective bank accounts on behalf of the bank. Accordingly, though substantial amounts may pass through the bank account maintained by a Business Correspondent (BC) in the course of rendering such services, the said amounts do not partake of the character of his own money but merely constitute funds handled by him in a fiduciary capacity as an agent of the bank.

Coming to the facts of the present case, we find that the State Bank of India, ACB, Narsampet Branch, Narsampet, vide certificate dated 22.04.2026, has 11 categorically certified that the assessee was working as an SBI Customer Service Point (CSP) bearing Code No. 5E840000 with the aforesaid branch and was operating the CSP at Relakunta Village. The certificate further states that the assessee had maintained Settlement/Current Account No. 31593392331 and that all the transactions carried out through the said current account during the Financial Year 2016-17 were undertaken by him in his capacity as a Bank Agent/Business Correspondent bearing Code No. 5E840000, against which he was earning a commission income of Rs.15,000/- per month.

We, thus, in the backdrop of the aforesaid certification by the bank, have carefully perused the Daily Transaction Register maintained by the assessee in his capacity as a Business Correspondent, as well as the transactions reflected in his Current Account No.31593392331 maintained with the State Bank of India, ACB, Narsampet Branch. On a conjoint perusal of the aforesaid documents, we concur with the Ld. AR’s contention that the impugned transactions represent cash collections made by the assessee from the customers of the bank in his capacity as its authorized Business Correspondent (BC), followed by corresponding transfers to their respective bank accounts. We are of a firm conviction that the nature of the entries in the aforesaid bank account of the assessee leaves little room for any doubt that he was merely acting as an intermediary on behalf of the bank and not dealing with his own funds. We, thus, are of the considered view, that the documentary evidence placed before us, read in the backdrop of the certificate issued by the State Bank of India, ACB, Narsampet Branch, 12 conclusively establishes that the cash deposits appearing in the assessee’s current account represented monies collected by him from the customers of the bank while discharging his duties as a Business Correspondent (BC), and thus, the same could not have been treated as the assessee’s unexplained money for the year under consideration.

We shall now deal with the Ld. DR’s contention that the substantial cash deposits of Rs.13,96,000/- made during the demonetization period, i.e., from 09.11.2016 to 30.12.2016, were disproportionate to the pattern of cash deposits during the remaining part of the year and, therefore, cast doubt on the assessee’s explanation. We find considerable force in the explanation offered by the Ld. AR that, pursuant to the Reserve Bank of India letter dated 08.11.2016 addressed to all banks regarding demonetization, the Business Correspondents (BC’s) were specifically authorized to exchange Specified Bank Notes (SBNs) up to Rs.4,000/- per person, in the same manner as bank branches, subject to the prescribed conditions. The said communication also permitted banks to enhance the cash holding limits of their Business Correspondents (BC’s) during the demonetization period. In our view, considering the extraordinary circumstances prevailing during the demonetization period, when members of the public were required to exchange or deposit demonetized currency within the prescribed time, it is only natural that a Business Correspondent (BC) operating in a rural area would witness a significant increase in cash collections from the customers of the bank. Accordingly, the enhanced volume of cash deposits routed through the 13 assessee’s current account during the demonetization period is, therefore, a normal and expected consequence of the additional banking functions entrusted to him and cannot, by itself, be viewed as a circumstance adverse to the assessee.

We, thus, are of the firm conviction that in the totality of the facts and circumstances of the case, and in the light of the supporting documentary evidence placed on record, no adverse inference could have been drawn merely because substantial cash deposits were routed through the assessee’s current account while acting as a Business Correspondent (BC) of the State Bank of India. At this stage, we may herein observe that the Revenue has failed to bring any material on record to dislodge the assessee’s consistent explanation, which, in our view, stands duly corroborated by the records maintained by him and, more importantly, by the certificate issued by the bank itself.

We, therefore, are unable to persuade ourselves to subscribe to the view taken by both the lower authorities who had erred in treating the cash deposits of Rs.24,96,000/- routed through the assessee’s Current Account No.31593392331 as his unexplained money under Section 69A of the Act. Accordingly, we set aside the CIT(A) order and direct the AO to vacate the addition of Rs.24,96,000/- made by him under Section 69A of the Act.

In the result, the appeal filed by the assessee is allowed in terms of our aforesaid observations.