Under peak theory, only peak cash deposit to be taxed instead of entire cash deposit

Under peak theory, only peak cash deposit to be taxed instead of entire cash deposit in bank account – ITAT

In a recent judgment, the ITAT Delhi has reduced addition of entire cash deposit holding that even as per the peak credit theory, instead of taxing the entire tax deposit in the bank account, only peak cash deposit is required to be taxed.

ABCAUS Case Law Citation:
ABCAUS 4101 (2024) (06) ITAT

Important Case Laws relied upon:
Godhra Electricity Co. Ltd. 1975 AIR 32
CIT Vs. Excel Industries Ltd. reported in 2013 SC 175
Commissioner of Income-tax-VI Vs. Purushottam Jhawar [2013] 40 taxmann.com 533

In the instant case, the assessee had challenged the order passed by the CIT(A), National Faceless Appeal Centre (‘NFAC’) in sustaining the addition u/s 68 as unexplained cash deposit in the bank accounts and car purchased in cash.

The case was selected for scrutiny through CASS. The reason for scrutiny selection was ‘Low income from TCS receipts and large cash deposits in saving bank account(s)’.

The assessment was concluded u/s 143(3) of the Act by making disallowance u/s 68 read with Section 115BBE of the Act on account of unexplained cash deposits.

Before the Tribunal the assessee submitted that the Assessing Officer (AO) accepted the income declared in the return on the basis of 8% of the turnover, therefore, the A.O. should have also estimated the income on the balance cash deposit in the bank accounts @ 8% by treating the same as cash generated out of the cash sales instead of taxing the entire amount u/s 68 of the Act.

On the contrary, the Income Tax Department  contended that the assessee had not produced any evidence of sale in respect of unexplained cash deposit, the assessee also not filed tax audit in Form 3CD in respect of claim that cash deposit was out of cash sales. It was also submitted that the provision of Section 44AD is not applicable to the case of the assessee as the turnover of the assessee will become more than one crore.

The Tribunal observed that the assessee had no other business except the business of scrap materials. It was the case of the Assessee that, the entire cash deposits made in the current account as well as the SB account by way of cash were the business income.

Further, all the cash were not deposited on a single day, rather it had been deposited on various occasions throughout the year and some of the amount deposited in the saving bank account had been transferred to current account. It was the case of the Assessee that the cheques had been issued for the purpose of purchasing PVC and iron scrap and such PVC and iron scrap purchased had been sold in the Kabadi Market in cash, thus, the source of balance cash deposit in the bank accounts were the cash sales of PVC and iron scrap purchased out of the funds generated by way of total cash deposit in both the bank accounts.

The Tribunal opined that there was nothing on record to infer that the cash deposits were not the business income of the Assessee. The Assessee had not maintained any books of accounts, since the Assessee filed his return u/s 44AD, the A.O. found that the cash deposited in the Assessee’s bank account were liable to be taxed u/s 68 of the Act. However, as observed assessee had no source of income other than the business and capital gain, therefore, it can be inferred that the cash deposited by the Assessee was out of business receipts.

The Tribunal stated that it is difficult to estimate the rate of net profit in the business of the Assessee without any data and details. However, assessee should be taxed on the real income earned by him as held by the Hon’ble Supreme Court.

The Tribunal further opined that as held by the Hon’ble High Court even as per the peak credit theory, instead of taxing the entire tax deposit in the bank account, only peak cash deposit is required to be taxed

The Tribunal observed that the assessee had computed the amount of the peak of cash deposit in the saving bank account and the current account both taken together. In view of the facts and circumstances, the Tribunal by applying the peak theory, restricted the addition and partly allowed the ground of apeal.

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