Surat tribunal rules cheque discounting turnover cannot be taxed entirely as unexplained income

The Income Tax Appellate Tribunal Surat held that in cheque discounting businesses, only the commission or income earned from the transactions can be subjected to tax, rather than the entire gross turnover. The tribunal set aside orders that treated the full volume of discounted cheques as unexplained income of the assessee. Cheque discounting involves financial intermediaries providing immediate liquidity against negotiable instruments for a fee or commission.

Tax authorities sometimes err by treating the entire monetary movement through bank accounts as taxable profit instead of taxing solely the business margin. Tax professionals managing clients engaged in financial intermediation or cheque discounting must segregate gross turnover from net commission income in their financial statements. CAs should cite this precedent when defending clients against arbitrary additions of gross bank deposits.

Bottom line: Only actual commissions earned from discounting activities should form the basis of tax calculations.