Mr Sharma, an insurance agent from Neem Ka Thana, Rajasthan, landed in trouble with the Income Tax Department after depositing Rs 35 lakh cash in his bank account. The tax department treated it as “unexplained money.” When the income tax department asked Sharma to explain the source of this cash, he said that the money did not belong to him but to several policyholders who had purchased insurance policies from him, and this cash represented the premiums collected from these policyholders.
However, when the tax officer checked the insurance policy papers submitted by Sharma as evidence, it was found that in some cases, the insurance agent was someone else. When asked about this discrepancy, Sharma said that due to limitations in the insurance Act, which allows a person to work as an agent only for one insurance company at a time, he engaged the services of agents from other companies on a commission-sharing basis to serve his customers and retain his permanent clientele.
Sharma also told the income tax officer that he received commissions from these agents, and all payments were made to him through banking channels. To support his story, Sharma also furnished affidavits from all these agents, who had confirmed on oath the facts he stated.
However, the income tax officer in Alwar was not convinced by Sharma’s explanation and started the legal proceedings against him for alleged tax evasion and possession of unexplained cash. Feeling aggrieved, Sharma first filed a case before the Commissioner of Appeals and then filed an appeal before the ITAT Jaipur.
On October 1, 2026, Sharma won the case in the ITAT Jaipur with Advocate Vedant Agarwal’s help.
How Sharma won the case?
Chartered Accountant Ashish Niraj, Partner, A S N & Company, said to ET Wealth Online that Sharma won the appeal because he provided comprehensive, unrefuted evidence proving that the Rs 35,08,550 in cash deposits were insurance premiums collected in the normal course of his business. He submitted policy registers, cash flow statements, and bank records that clearly traced the end use of the money to the insurance companies.
When the lower authorities questioned why other agents’ names appeared on some policies, Sharma explained that the Insurance Act restricts an agent to one general insurance company. To serve his clients, he used a commission-sharing arrangement with other agents. He corroborated this by providing sworn affidavits from those agents and bank statements showing commission payments made to them via cheque.
Also he proved that his last period corresponding receipts were in same range as in demonetisations period. So ITAT got convinced and gave the judgement in favour of Sharma.
Can we buy an insurance policy and pay the premium in cash?
Priyanka Jain, Partner, Vaish Associates, said to ET Wealth Online: The practical answer is that you should not. No person may receive Rs 2 lakh or more in cash from one person in a day, in a single transaction, or in respect of a single event or occasion. The penalty equals the amount received and falls on the receiver, meaning the insurer, broker or agent, not the payer.
This cash rule came into force on April 1, 2017, so it did not apply to the year in Mr Sharma’s case. However, Jain says that it would apply today. Further, no health insurance deduction under section 126 of the Income Tax, 2025 is available if a health premium is paid in cash. Only preventive health check-up expenses (up to Rs 5,000) may be paid in cash.
Jain says: “Your own cash must be explainable. If you use cash, you should be able to show where it came from, such as bank withdrawals or declared savings. The Income Tax Department receives data on large cash transactions, and an unexplained cash outflow can be treated as unexplained investment or expenditure. The simple advice is pay by cheque, UPI or net banking to keep a clean trail.”
What can happen to the policyholders who pay cash to agents to buy policies?
Jain says that this judgement does not certify that every one of Sharma’s client’s cash was clean. Whether the agent’s deposit was explained and whether each policyholder’s cash came from a disclosed source are separate questions, and each policyholder is to be assessed on his own. If a policyholder cannot explain the cash used to pay the premium, the unexplained money, investment and expenditure provisions can in theory be invoked.
However, the limitation for this particular case closed in 2021 as the ordinary window to reopen an assessment for 2017-18 was three years. A longer period is available only where the escaped income is Rs 50 lakh or more. A policyholder paying a few thousand or even a few lakh rupees as premium will rarely cross that threshold, so reassessment for that year should generally be time-barred. Each case needs a check of its own dates and facts.
Jain says that the evidences (like client-wise register that the Tribunal accepted) helps the Income Tax Department identify policyholders, but it also shows ordinary premium payers whose cash may well have come from savings and earlier withdrawals.
For today’s transactions, the picture is different. Jain says that insurers and banks report large cash dealings, and the limitation period for current years has years left to run. A policyholder who pays a significant premium in cash should keep the withdrawal slips, a note of the source of funds and the premium receipt together.
ITAT Jaipur discussion
The income tax officer, in his remand report, wrote that in several insurance documents, the names of individuals other than Sharma are mentioned as agents. The tax officer also wrote that S.K Sharma has not provided evidence to support his claim of receiving cash from different individuals for insurance purposes during the demonetisation period, particularly given that transactions involving illegal tender (demonetised Rs 500 and Rs 1,000 currency notes) were banned at that time.
Sharma’s lawyer argued that just because he had accepted the demonetised currency cash notes and had not followed the RBI’s (Reserve Bank of India) notification, it does not mean that he violated the income tax law. Sharma’s lawyer said that he acted only as an intermediary and did not accept the demonetised cash currency notes for his own benefit.
After hearing the arguments, the ITAT Jaipur observed that CIT(A) had not properly dealt with Sharma’s explanation on both the issues: why his name did not appear in the insurance policy documents under agent category, and about the source of demonetised cash deposit.
The ITAT Jaipur said that they do not find any merit in the order passed by the CIT(A) holding Sharma’s explanation of the source of cash deposited in his bank account to have remained unexplained.
The only basis with the CIT(A) for rejecting Sharma’s explanation is that the evidence filed by him, namely the insurance policies, did not mention his name as agent. ITAT Jaipur said: “This finding of the CIT(A) is clearly not based on appreciation of the explanation furnished of the same by the assessee (Sharma), noted by us duly substantiated with evidence.”
The ITAT Jaipur observed that Sharma had substantiated the circumstances in which he roped in other agents to work on his behalf.
Sharma had substantiated this explanation with the affidavits from such agents, and he had also demonstrated the fact of receiving commission from these agents by furnishing a copy of his bank statement, reflecting receipt of commission by way of cheque. The ITAT Jaipur said that none of these facts have been dislodged by the CIT(A).
The ITAT Jaipur said that it is clear that the CIT(A) has held Sharma to have not substantiated his explanation for the insurance policies reflecting the names of other agents, without even appreciating Sharma’s contention, which was duly supported with evidence also.
The ITAT Jaipur said Sharma’s failure to provide evidence showing that he had collected the said demonetised currency notes was, by itself, not sufficient grounds to reject his explanation of the source of cash deposited in his bank account.
“In any case, it is weird to expect any person to keep details of currency in which payment is collected. Not substantiating the fact that premiums were collected in SBNs (specified bank notes, demonetised currency notes) cannot be the basis for rejecting explanation of the assessee (Sharma).”
Thus, the ITAT Jaipur set aside the CIT (A)’s order and directed the addition made to Sharma’s of Rs 35,08,550 be deleted.
