Peak Credit theory additions apply for unexplained cash deposits or where assessee fails to give satisfactory explanation u/s 68 69-ITAT

Peak Credit theory additions apply for unexplained cash deposits or where assessee fails to give satisfactory explanation and amount is sought to be added u/s 68 69-ITAT

Peak Credit theory

ABCAUS Case Law Citation:
ABCAUS 1081 (2016) (12) ITAT

Important Case Laws cited:
CIT vs. K. Chinnatharmban (292 ITR 682)(SC)

Manoj Aggarwal vs. DCIT (113 ITD 377) (SB. Del.)
Bhaiylal Shyam Behari Allahabad High Court (276 ITR 38)

Grounds of Appeal:
Among four grounds, 

  • The assessee assailed the AO for having erred factually and legally in making addition u/s 69 on account of alleged unexplained investment on the basis of peak credit theory basis without any basis and also without appreciating the facts of the case in the right perspective.
  • The assessee assailed the order of CIT(A) for having erred in enhancing the addition made by the AO on peak credit theory basis by denying the alleged benefit of the peak credit theory without any basis and also without appreciating the facts of the case in right perspective.

Brief Facts of the Case:
The appellant assessee had deposited cash of Rs. 17,90,000/- in his saving bank account. The assessee explained that in order to obtain licence for Bhang/Doda Posta shops from the Excise Department, he formed a group of his friends and assistants who contributed cash which was deposited by him in his bank account. Out of these deposits, demand drafts were prepared which were submitted alongwith the applications to the Excise Department.

During the course of assessment proceedings, the assessee filed the affidavits of the said friends/associates confirming payment of cash amount to the assessee. In order to verify the genuineness of aforesaid creditors, the Assessing Officer (AO) summoned them and recorded their sworn statements. All the four persons were doing petty jobs ( i.e. labourer, salesman, electricians etc. ) and majority of them had no bank account neither they were assessed to income tax. All of them stated to have advanced money to the assessee  out of past savings and/or sale of agricultural produce, however no supporting evidence could be produced in this regard. Further it was observed the signatures of the aforesaid four persons did not tally with the signatures on the affidavits prepared in their name.

Under these circumstances, the AO concluded that all the persons were simply name lenders, could not prove their credit worthiness for paying the cash amount and the transactions were not genuine. The AO therefore held that the cash deposits in the bank accounts of the assessee remained unexplained and the same were added u/s 69 of the Income Tax Act, 1961 by applying peak credit theory by computing the peak credit in the bank account at Rs. 27,81,000/-.

Being aggrieved, the appellant carried the matter in appeal before the CIT(A) and stated that the assessee had entered into an agreement with the aforesaid four persons to run the business with mutual co-operation if the shop was allotted to him. However the CIT(A) was of the view that the sources of cash deposited in the bank account had to be satisfactorily explained by him, otherwise the same could be treated as his unexplained income u/s 69. Further, CIT relying on the judgment of the Allahabad High Court held that the benefit of peak credit theory could not be allowed since the assessee had accepted that the said cash deposits were not his own but made by other persons. Thus the addition was enhanced to Rs. 29,88,000/-

Not satisfied with the order of the CIT(A), the assessee further agitated the matter in the Tribunal.

Contentions of the Assessee:
The assessee contended that with the sole purposes of getting the license of the shop in auction a demand draft had to deposited. Under a mutual consent agreement, all four persons had deposited their cash in the bank account of the assessee because all four persons were not having their bank account. Thus, out of total deposit of Rs. 29,88,000/- the deposits of Rs.22,14,000/- was of these four persons and rest of Rs. 7,74,000/- belongs to the assessee from his past savings.

It was submitted that the assessee had also filed the cash flow statements which had not been denied by the Department and addition could not be made in the hands of the assessee only due to the fact that the assessee allowed cash deposits in his bank account by the said persons who were not having bank account. Where the AO was having any doubt about the creditworthiness and their source, he could have taken the action in their individuals hand and not in the hands of the assesee.

The assessee also submitted the details of cash deposits received from various persons, the details of demand drafts prepared and the amount received back on cancellation of demand drafts and subsequently returned back to the respective persons.

The assessee filed ITRs of the said persons and contended that all the persons who had deposited their cash in his bank account were income tax assessee except one and filling their IT return. However the AO and CIT(A) both ignored the same and has not given credit of a single Rupee.

It was further contended that it was wrong to hold that those persons were not having much income as they can take borrow from other persons to start any business. The duty of the assessee was only to the extent to prove the sources here. The assessee had provided the sources of source as the person had stated in their statement. As per settled legal position the assessee is only required to prove the sources not sources of sources of sources.

Thus the assessee contended that addition was made only and only based on assumption, presumption and suspicion. 

Observations made by the Tribunal:
The ITAT observed that as per the assessee, Rs 7,74,000 was out of assessee’s own money out of past savings, etc. and balance Rs 22,14,000 had been received from various persons to apply for licence for Bhang/Doda-posta shops.

In response to the letter of the AO, the District Excise officer had confirmed the receipt of the demand draft from the persons whose name were specified in the AO’s letter. It was further confirmed that these demand drafts were in respect of excise department’s tender calling for application for allotment of Bhang/Doda post. It was further stated in the said letter that two person were allotted the licence and in respect of rest all persons, the DDs had been returned.

The ITAT noted that DDs had been prepared in the name of persons who, the appellant claimed, to have deposited the money in his bank accounts and subsequently, either the licence had been allotted to them or the DDs had been returned back. The assessee’s bank account had thus been used for the purposes of getting the DDs issued by the banks for applying for Bhang/Doda post licence. The DDs, which had been returned, were subsequently deposited in the bank accounts of the appellant from where they were issued and the money has then been claimed to have been refunded to the respective persons. Thus the appellant assessee established a linkage in terms of initial cash deposit, subsequent issuance of demand drafts and refund of the money to the respective persons.

Regarding the discharge of the onus of explaining the source of the deposits made, in other words, whether the money belonged to the four persons as claimed by the assessee or the money actually belonged to the assessee, the ITAT upheld the view of CIT(A) that the appellant had not been able to discharge his primary onus of proving the creditworthiness of the aforesaid four persons and the genuineness of transaction. Thus the necessary corollary of the above finding was that all the money, which was been found deposited in his banks, belonged to the appellant.

The case was set-aside to the file of the AO to examine a fresh the source of cash deposits. The  held that if the assessee is able to provide appropriate explanation of the source of the entire cash deposits to the satisfaction of the AO, the AO will provide appropriate relief to the appellant. Otherwise, where the assessee is unable to provide appropriate explanation to the satisfaction of the AO or the AO is not fully satisfied with the appellant’s explanation, given the periodicity of deposits and utilisation of such deposits from time to time, the AO shall apply the well-accepted peak credit theory to determine the quantum of additions.

Peak Credit theory

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