Received cash from customers and deposited it in your bank account? When can income tax authorities tax it

An insurance agent who deposited over ₹35 lakh in cash during demonetisation won an income-tax dispute after the Income Tax Appellate Tribunal (ITAT), Jaipur, accepted that the money represented premiums collected from policyholders and not his unexplained income.

In Surendra Kumar Sharma vs Income Tax Officer, the tribunal, in an order dated 1 October 2026, directed the tax department to delete an addition of ₹35,08,550 made under Section 69A of the Income-tax Act, 1961.

The dispute arose after the tax department questioned cash deposits made by Sharma, a general insurance commission agent from Rajasthan, during the demonetisation period in assessment year 2017-18. Sharma maintained that the money belonged to customers who had paid their insurance premiums in cash and that he had deposited the collections into his bank account before transferring them to insurance companies.

The assessing officer, however, treated the deposits as unexplained money. The Commissioner of Income Tax (Appeals), or CIT(A), upheld the addition, prompting Sharma to approach the Jaipur bench of the ITAT.

Why did the income tax department question the ₹35 lakh deposits?

The tax authorities raised two main objections to Sharma’s explanation.

First, some of the insurance policies submitted as evidence named other individuals as agents instead of Sharma. The department questioned how he could claim to have collected the premiums when his name did not appear on the policy documents.

Second, the authorities questioned his failure to establish that the cash collected from policyholders during demonetisation specifically included the specified bank notes (SBNs), or the withdrawn ₹500 and ₹1,000 currency notes, which were found deposited in his bank account.

Sharma explained that he had entered into commission-sharing arrangements with agents representing other insurance companies. He said Section 42(2) of the Insurance Act, 1938, restricted an individual from acting as an agent for more than one general insurance company, which was why he worked with agents from other insurers to serve his existing customers.

He also submitted affidavits from these agents confirming the arrangements and bank statements showing that commission payments were received through banking channels.

What evidence convinced the ITAT Jaipur?

The tribunal examined the documentary evidence Sharma had submitted before the lower authorities.

This included a policy register containing customer names, vehicle registration numbers, policy numbers, dates of issuance and premium amounts collected. He also submitted date-wise details of policies sold and cash received from customers.

To establish the movement of money, Sharma furnished his cash book, bank statements and cash-flow statements showing how the collections were deposited and subsequently paid to insurance companies.

He also submitted premium collection summaries for the relevant financial year and the preceding two years to demonstrate that the receipts during the demonetisation period were broadly consistent with his earlier business trends.

The tribunal noted that the tax authorities had not identified any discrepancies in the documentary evidence or established that the records furnished by Sharma were false.

On the question of other agents appearing on the insurance policies, the ITAT observed that Sharma had adequately explained the commission-sharing arrangements through affidavits and bank statements. The CIT(A) had failed to properly examine this explanation before rejecting his claim.

Why did the tribunal reject the demonetisation argument?

The tribunal also disagreed with the tax authorities’ insistence that Sharma should separately establish that he had collected the demonetised currency notes from policyholders.

It observed that the taxpayer had already provided substantial evidence establishing that the deposits originated from his insurance agency business. The department had not disproved this evidence.

The ITAT held that merely because Sharma could not establish the specific currency denomination in which customers had paid their premiums, his explanation for the source of the deposits could not be rejected.

The tribunal observed that it was unreasonable to expect a person to maintain records of the exact currency notes received in every business transaction.

It consequently set aside the CIT(A)’s order and directed the assessing officer to delete the entire ₹35,08,550 addition. Sharma’s appeal was allowed.

Cash deposits are not automatically unexplained income. However, taxpayers who collect money on behalf of customers or as part of their business should maintain customer-wise registers, receipts, cash books, bank statements and records showing how the money was ultimately used. These documents can help establish the source of deposits if the income-tax department questions them.