2005 (2) TMI 103 - HC - Income Tax

Unexplained cash credit - Question of law - The amount of peak credit should be added as unexplained cash credit u/s 68 ? - unexplained deposits liable to be treated as income from unexplained sources u/s 68? - HELD THAT - We find that in respect of the squared up accounts of the two depositors mentioned the Assessing Officer himself had taken the peak credit as unexplained deposit and added the same u/s 68 of the Act. So far as the remaining deposits are concerned there was no transaction between the depositors and the respondent-assessee. This court in Income-tax Reference Bhaiyalal Shyam Behari v. CIT 2005 (1) TMI 424 - ALLAHABAD HIGH COURT has held that the principle of peak credit is not applicable in case where the deposits remained unexplained u/s 68 of the Act. It cannot apply in a case of different depositors where there has been no transaction of deposits and its repayment between a particular depositor and the assessee. Respectfully following the same we are of the considered opinion that the Tribunal was not justified in directing the Assessing Officer to take the peak credit for the purposes of section 68 of the Act. We accordingly answer the question referred to us in the negative i.e. in favour of the Revenue and against the assessee. There shall be no order as to costs.

Summary

Issues:
Interpretation of section 68 of the Income-tax Act, 1961 regarding unexplained cash credits.

Analysis:
The Income-tax Appellate Tribunal referred a question of law under section 256(1) of the Income-tax Act, 1961, concerning the correctness of adding only the amount of peak credit as unexplained cash credit under section 68. The case pertained to the assessment year 1979-80 and involved a registered firm engaged in manufacturing and sales. The Assessing Officer noticed cash credits in the squared up accounts of various individuals, totaling Rs. 23,200, requiring the firm to prove the deposits' genuineness. The firm submitted only confirmatory letters without additional evidence. The Tribunal's reference arose from a difference of opinion among members on whether to consider all unexplained deposits or only the peak credit under section 68.

The Tribunal, after seeking a third member's opinion, concluded that only the peak credit should be added as unexplained cash credit under section 68. However, the High Court, in line with a previous decision, held that the principle of peak credit does not apply when deposits remain unexplained under section 68, especially in cases involving different depositors with no transaction history between them and the assessee. Consequently, the High Court disagreed with the Tribunal's direction to consider peak credit for section 68 purposes.

Ultimately, the High Court ruled in favor of the Revenue, emphasizing that the Tribunal's decision to direct the Assessing Officer to take peak credit for section 68 was unjustified. The judgment highlighted the inapplicability of the peak credit principle in cases where deposits lack explanation under section 68, particularly when involving multiple depositors without transactional history with the assessee. The court's decision was based on legal precedent and the specific circumstances of the case.

In conclusion, the High Court's detailed analysis and interpretation of section 68 of the Income-tax Act, 1961, clarified the application of the peak credit principle in cases of unexplained cash credits. The judgment underscored the importance of evidence and transactional history in determining the treatment of cash deposits under section 68, ultimately upholding the Revenue's position in the matter.