Tax received in bank account for paying tax of client in bank account is treated a deemed income in it act.
Money received from a client solely to pay their tax is a pass-through receipt (liability) and not income. It will only be treated as deemed income under Section 68 if you fail to maintain proper client ledger entries or fail to substantiate the origin and purpose of the funds during tax scrutiny.
Deemed income generally refers to amounts that are treated as taxable income under specific provisions of the Income Tax Act, even when they may not look like normal business or salary income.
For example, unexplained cash credits can come under Section 68 when the taxpayer cannot satisfactorily explain the nature and source of the amount. Similarly, certain benefits, remission of liabilities, or other specified transactions can be treated as income under particular sections of the Act.
In the case of money received from a client for paying a tax liability on the client’s behalf, the accounting treatment and supporting records are important. If the amount is genuinely received as a liability and the purpose and source can be properly established, it should not automatically be treated as the recipient’s income.
The exact tax treatment depends on the nature of the transaction and the applicable provision, so maintaining invoices, ledger entries, bank records, and supporting correspondence is important. The Income Tax Department also distinguishes different categories of income and their reporting requirements in the return forms.