Peak credit theory not applicable if deposits are unexplained u/s 68. ITAT decision overruled where CA was entry provider

Peak credit theory not applicable if deposits are unexplained u/s 68. High Court overruled ITAT decision where CA was providing accomodation entries and could not explain the deposits in his bank account.

The Court held that where assessee is unable to explain the sources of deposits and the corresponding payments then he would not get the benefit of ‘peak credit’ 

Peak credit theory

ABCAUS Case Law Citation:
ABCAUS 2027 (2017) (08) HC

Assessment Year :  1995-96

Important Case Laws Cited/relied upon by the parties:
CIT v. Vijay Agricultural Industries (2007) 294 ITR 610
Bhaiyalal Shyam Bihari v. CIT (2005) 276 ITR 38 (All)

Brief Facts of the Case:
The Respondent assessee is a Chartered Accountant (CA) who had filed his return of income declaring taxable income at Rs. 49,880 which comprised his gross professional receipts of Rs. 1,91,050.  The Assessing Officer (‘AO’) noted that the CA was holding two current accounts in a Bank wherein sufficient cash and cheque deposits were made during the relevant period. It was also noted that the Assessee had floated one company and purchased two other companies. The AO further noted that the said three companies and other two companies were all sold.

The case of the assessee was reopened by issue of notice under Section 148 of the Income Tax Act (‘the Act’) with allegation of his income that escaped assessment. During the re-assesment proceedings, the CA admitted that he was indulged in the business of providing accommodation entries. The entries were routed through agriculture companies. He further stated that he earned an income of Rs. 1,91,168/- from the said accommodation entry business during the year 1994-95 and in the subsequent year he could not earn the income because the demand for fresh entries were negligible. The entries consisted of loan entries and loan entries for applying shares in public issues against which he admitted to have received 1 % commission/services charges and 0.25% on amount utilized in public issues.

As regards the credit entries in the bank accounts, wherever the CA was able to show that the corresponding issuance of cheque therefrom was to the same person, the AO gave the benefit of the principle of ‘peak credit’. However, where the source of the deposit and the issuance of the cheque was unexplained and could not be ‘squared off’, the AO treated the deposits as CA’s income Section 68 of the Act. Likewise, the unexplained cash deposits in his bank accounts were also added to his total income. The total income was, therefore, revised to Rs.72,58,880 under Section 143(3) read with Section 147 of the Act.

The CIT (A) dismissed the appeal and upheld the assessment order. It was categorically noted by the CIT(A) that the CA could not substantiate his stand through documentary evidence. The AO tried to locate the concerned persons/beneficiaries through the addresses given in their account opening forms, however, to no avail as, most of these addresses were found to be incorrect. It was noted that the Assessee was involved in the activity of providing cheques by accepting deposits in cash. In the circumstances, noting that the AO had duly accounted for squared off transactions and made additions only to the extent to which there was no convincing explanation given by the Assessee, for cash or cheque transactions, the CIT (A) dismissed the Assessee’s appeal.

The CA went in further appeal before the ITAT and challenged the additions made by the AO on account of unexplained cash deposits and for the sums representing the peak amounts in respect of the cheques in the bank accounts.

According to the ITAT, the method of working out the addition adopted by the AO wherein the cash entries and cheque entries had been treated differently was illogical and irrational and could not be upheld. The ITAT noted that while dealing with the cash deposits, the AO had worked out the difference between the total deposits and the total withdrawals in regard to the two accounts whereas with regard to the cheque transactions, the AO had worked out the peak separately relating only to the three companies.

The ITAT disapproved of the AO having worked out the peak credit separately for the cheques issued by the three companies and opined that the entire approach adopted by the revenue authorities betrayed lack of understanding of basic accounting principles.

The ITAT also found that there was a contradiction in the findings of the AO and CIT (A) inasmuch as, even after finding that the three companies were non-existent, the peak credits have been worked out separately for cash deposits and cheques issued by the companies. The ITAT then observed that if the companies were non-existent, there was no justification for the AO to treat the payments vis-a-vis the three companies as the income of the Assessee. It was further observed by the ITAT that the Assessee had himself deposited the unaccounted money in these accounts and issued cheques. It was also observed by the ITAT that the additions could not be made twice, once on the basis of cash deposits and again on the basis of cheque transactions. This would amount to double addition which could not be upheld.

The ITAT, thereafter, restricted the addition to peak credit as worked out by the Assessee as Rs. 5,87,374 as against Rs. 72,08,996.

Contention of the Appellant Revenue:
It was contended that the approach of the ITAT was erroneous inasmuch as the ITAT has failed to appreciate that the Assessee had not provided an explanation for all the cheque deposits or even the cash deposits and the corresponding cheques issued from his account. According to him, the concept of working out the peak credit would arise only if it was possible to square off the deposits made in an account against the cheques issued therefrom.

It was submitted that if ‘A’ made a deposit in the account and the ultimate payment was made to ‘A’ either in A’s account by cash or cheque then to that extent, the peak credit can be worked out. However, where a source of deposit is not explained and the corresponding outgo is also unexplained, the question of giving the Assessee the benefit of peak credit would not arise.

Contentions of the Respondent Assessee:
It was contended that there was no justification in working out the peak credit separately for the cash and the cheque transactions.

It was argued that all the cheque and cash credits in his own accounts should be consolidated and adjusted against all the entries reflecting the outgo, either by cash or cheque. The peak credit, thus, worked out should alone be taxed as that alone was the Assessee’s income. According to him, the issue should not be seen from the point of view of ‘ethics’ but only from the point of view of ‘accountancy’.

Observations made by the High Court:

The Hon’ble High Court observed that the Assessee’s plea was that he should be taxed only on a composite ‘peak credit’ is based entirely on principles of accountancy. The CA questioned the logic behind allowing peak credits for some of the credit entries by way of cheques and denying it for the other entries in cash. He also questioned the practice of working out separate peak credits for cheque and cash transactions.

The Hon’ble High Court noted that Allahabad High Court had explained that benefit of peak can be given only when the assessee owns up all the cash credits in the books of accounts. It was further held that: 

“For adjudicating upon the plea of peak credit the factual foundation has to be laid by the assessee. He has to own all cash credit entries in the books of account and only thereafter can the question of peak credit be raised.”

It was observed that In that case, it was held that as the amount of cash credits stood in the names of different persons which the Assessee had all along been claiming to be genuine deposits, withdrawals/payments to different persons during the previous years, the Assessee was, therefore, not entitled to claim the benefit of peak credit.

Later the Allahabad High Court again reiterated that:

“The principle of peak credit is not applicable in case where the deposits remained unexplained under Section 68 of the Act. It cannot apply in a case of different depositors where there has been no transaction of deposits and repayment between a particular depositor and the assessee.”

On the facts of that case it was held that peak credit could be applied only in the case of squared up accounts. In other words, where an assessee was unable to explain the sources of deposits and the corresponding payments then he would not get the benefit of ‘peak credit’.

Thus the Hon’ble High Court opined that the legal position in respect of an accommodation entry provider seeking the benefit of ‘peak credit’ appears to have been totally overlooked by the ITAT. The Hon’ble High Court clarified that if the assessee as a self-confessed accommodation entry provider wanted to avail the benefit of the ‘peak credit’, he had to make a clean breast of all the facts within his knowledge concerning the credit entries in the accounts. He had to explain with sufficient detail the source of all the deposits in his accounts as well as the corresponding destination of all payments from the accounts. The Assessee should be able to show that money has been transferred through banking channels from the bank account of creditors to the bank account of the Assessee, the identity of the creditors and that the money paid from the accounts of the Assessee had returned to the bank accounts of the creditors. The Assessee had to discharge the primary onus of disclosure in this regard.

It was noted that while the AO in the present case did not question the working out of the peak credit by the Assessee, he, at the same time, insisted that the additions made by him to the returned income of the Assessee should be sustained. The peak credit worked out by the Assessee was on the basis that the principle of peak credit would apply, notwithstanding the failure of the Assessee to explain each of the sources of the deposits and the corresponding destination of the payment without squaring them off. That is not permissible in law as explained by the Allahabad High Court with which, the Hon’ble expressed it concurrence.

The Hon’ble High Court opined that ITAT went merely on the basis of accountancy, overlooking the settled legal position that peak credit is not applicable where deposits remain unexplained under Section 68 of the Act. T

The order of ITAT was set aside and the order of the AO was restored.

Peak credit theory

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