Peak credit theory do not apply to cash deposits made at outstation stations/cities when cash withdrawal were made at one city only-ITAT

Peak credit theory do not apply to cash deposits made at outstation stations/cities when cash withdrawal were made at one city only – ITAT

ABCAUS Case Law Citation:
962 2016 (06) ITAT
Assessment Year: 2009-10
Date/Month of Judgment/Order: June 2016

Brief Facts of the Case:
The case of the assessee was selected for scrutiny. An information was received from the Annual Information Return (AIR) that the assessee had deposited Rs. 21,25,620/- in his bank account. During the course of scrutiny proceedings, the assessee was asked to explain the source of the said deposits. The assessee explained that the deposits represent trading receipt of business of sale of automobiles parts and could not be declared the same by oversight. However when asked,  the assessee failed to produce sale/purchase bills in support of his contention.

However, the Assessing Officer (AO) held that the entire deposit of Rs. 21,25,620/- as unexplained cash credit under section 68 of the Income-tax Act, 1961. On appeal, the Commissioner of Income-tax (Appeals), reduced the addition to Rs.7,14,738/- following the asset expenditure basis.

Aggrieved by the order CIT(A), the assessee filed the present appeal before the Tribunal raising the issue of not accepting the peak credit theory by CIT(Appeals).

Contentions of the Assessee:
The assessee submitted that deposits made in bank account were subsequently withdrawn and redeposited and peak of such deposits should only be added as unexplained cash credit under section 68 of the Act and not the entire deposits of Rs. 21,25,620/-. 

Contentions of the Revenue:
The Revenue submitted, the peak theory was not applicable to the facts of the case as the cash was deposited in different cities in India and withdrawn from Delhi and it was not possible for the assessee to send withdrawn money to different cities for redeposit.

Held:
The ITAT upheld the CIT(A) order.

Important Excerprts from ITAT Judgment:
The Ld. Commissioner of income tax appeals, in the impugned order has given detailed reasoning as why the theory of peak credit was not applicable to the facts of the assessee. The relevant para of the impugned order is reproduced as under:

“6.2. I have perused the IDBI bank account where the deposits aggregating to Rs. 21,25,620/- have been made. Almost all deposits are outstation deposits; viz: Ujjain, Gondia, Varansi, Lucknow, Bilaspur, Hyderabad, Amrawati,Hubli, Rajsamand, Dimapur, Kozhikode, etc. and “almost all withdrawals are in cash in Delhi through cheques. The Ld. Counsel contended that the deposits are made by the outstation buyers of ‘bearings’ to whom the sale have been made by the appellant. I have analyzed the entire issue in-depth. The addition of peak credit in the bank account can only be made when it is established that the outgoings are being brought in back to make re-deposit in the bank. Where the cycle of deposits and withdrawals are not questionable, only the peak credit in the bank account is assessable as income has been held in the above mentioned cases relied upon by the. Ld. Counsel. However, it is not a case here because no prudent business man will make withdrawals in cash in Delhi and send it to far places across India to redeposit it in piecemeal in the bank account. Further, it is not the claim of the appellant that the withdrawals from the bank account are utilized for re-depositing in bank. Thus, in such a situation, I do not subscribe the theory of the peak credit in the bank account as assessable income. The notable feature of the bank account is that the deposits are small and numerous as compared to withdrawals. The deposits in cash vary from Rs.5,000/- to Rs.49,000/-. Further, the AO has not brought any material on the record, which may substantiate his findings that the entire deposits are income. Thus, in view of above facts and the submission of the appellant, l am inclined to agree with the contention of the Ld. Counsel that the deposits and withdrawals in the IDBI bank account. are business transactions. Here, the deposits in the bank account appear sale consideration and the entire undisclosed business transactions are in cash. ” 

We agree with the finding of the Ld. Commissioner of Income-tax (Appeals) as deposits made at different stations like Ujjain, Gondia, Varanasi etc and the withdrawals were made from Delhi and the assessee itself has accepted that the deposits were trading receipts from sale of automobiles parts and withdrawals were towards purchases then in such circumstances, the withdrawals are not utilised for redeposits and therefore peak theory of credit cannot be applied to the facts of the case.