2022 (6) TMI 1534 - AT - Income Tax

Unexplained cash deposits in bank - principle of peak credit theory - assessee before the CIT-A explained the amount of cash deposit represent amount deposited by the customer to whom vehicle parts were sold and from this activity he earned only commission income and repaid the amount to the actual supplier after retaining commission - Explanation of the assessee was rejected by the learned CIT-A on reasoning that the detail of person to whom vehicle parts were sold and the person who supplied parts were not submitted. HELD THAT - As Assessee was only acting as an agent in the transaction then why customer deposited the purchase consideration to his bank account was not explained. At the time of hearing the learned counsel has not brought any material on record suggesting that the assessee was actually carrying out commission agency business as contended by him. Accordingly we reject the contention of the assessee. On perusal of the bank statement placed on record we note that there were regular deposits of money in cash which was withdrawn in cash. Thus the amount withdrawn from the bank was also available with the assessee for depositing the same in cash. Accordingly the amount of cash deposited cannot be treated as income of the assessee without considering the corresponding withdrawal. In such a situation the principles of peak credit theory should be adopted for determining the income of the assessee. The concept of the peak credit proceeds on the fundamental premise that the money deposited and/or withdrawn from the assessee s bank account belongs to the assessee or in respect of which ownership vests in the assessee. There is no allegation of the revenue that the money withdrawn from the bank has either been utilized for incurring the expenses or for the purpose of the investments. Accordingly the working of the peak credit works out at Rs.1, 49, 727 which has not been challenged by the revenue. Thus we are of the view that in the given facts and circumstances at the most the peak balance of Rs. 1, 49, 727.00 can be brought to tax under the peak credit theory. However we note that the assessee has declared an income of Rs. 1, 02, 710/- which is less than the amount determined under peak credit theory. Accordingly we direct the authorities below to determine the income of the assessee at Rs.1, 49, 727 only. There will be an addition of Rs. 47, 017/- (Rs. 1, 49, 727 - 1, 02, 710/-) to the total income of the assessee which is over and above the income already disclosed by the assessee in the income tax return. Appeal of the assessee is partly allowed.

Summary

The core legal questions considered by the Tribunal in this appeal are:

1. Whether the reopening of the assessment under section 147 of the Income Tax Act, 1961 was valid.

2. Whether the assessment order passed under section 143(3) of the Act was legally and factually sustainable.

3. Whether the order of the Commissioner of Income Tax (Appeals) confirming the addition of Rs. 11,54,350/- on account of unexplained cash deposits in the assessee's bank account was justified.

4. Whether the addition of Rs. 11,54,350/- by treating the amount deposited in the bank account as unexplained income was correct.

5. Whether interest under sections 234A, 234B, and 234C of the Act was rightly charged when the addition itself was not sustainable.

The first two issues concerning the validity of reopening the assessment and the general challenge to the assessment order were not pressed by the assessee and hence dismissed.

Issue-wise Detailed Analysis:

Validity of Reopening of Assessment (Sections 147 and 143(3))

The assessee initially challenged the reopening of the assessment under section 147 and the assessment order under section 143(3). However, the authorized representative informed the Tribunal that these issues were not pressed. Consequently, these grounds were dismissed as not pressed. No detailed legal framework or precedent was discussed on this point.

Addition of Rs. 11,54,350/- on Account of Unexplained Cash Deposits

Legal Framework and Precedents: The reopening under section 147 is predicated on the discovery of new information indicating income has escaped assessment. The addition of unexplained cash deposits is commonly made under the principle that unexplained cash credits in bank accounts are presumed to be income from undisclosed sources unless satisfactorily explained. The principle of "peak credit theory" is also relevant, which assesses the maximum amount of unexplained cash lying at any point in the bank account during the year.

Court's Interpretation and Reasoning: The Assessing Officer (AO) relied on an AIR report indicating cash deposits aggregating Rs. 11,54,350/- in the assessee's bank account. The AO asked the assessee to explain these deposits, but the assessee failed to provide a satisfactory explanation. Consequently, the AO treated the deposits as income from undisclosed sources and added the amount to the total income.

The assessee contended that he was a commission agent for sale and purchase of vehicle parts. Customers deposited cash directly into his bank account, which he immediately withdrew to pay suppliers, retaining only the commission income of Rs. 1,51,800/- which was declared in the return of income. The assessee argued that the entire cash deposits represented turnover and not income and that only the commission income should be taxed. He further submitted that the books of accounts reflected these transactions and that under the real income theory, the gross deposits should not be taxed. Alternatively, he argued that the peak credit theory should be applied, which would yield a maximum taxable amount of Rs. 1,49,727/-.

The Commissioner of Income Tax (Appeals) rejected the assessee's contentions, holding that:

• The claim that the deposits represented sale proceeds was unsupported by any evidence, such as details of customers or suppliers.
• The claim was not made before the AO despite specific show-cause notices, amounting to an afterthought and additional evidence not admissible at the appellate stage.
• The entire deposits were withdrawn almost immediately, so the peak credit theory was not applicable.
• The nature of the business and the withdrawals/deposits were unclear, making the assessee's claim untenable.

The Tribunal examined the bank statements and noted regular cash deposits and corresponding withdrawals. It held that since the cash withdrawn was also available for redeposit, the entire deposits could not be treated as income without considering withdrawals. The Tribunal applied the peak credit theory, which assumes that the money deposited and withdrawn belongs to the assessee unless proven otherwise. The Tribunal found no allegation by the revenue that the withdrawn money was used for expenses or investments, thus the peak credit theory was applicable.

The Tribunal calculated the peak credit at Rs. 1,49,727, which was not challenged by the revenue. The assessee had declared income of Rs. 1,02,710, which was less than the peak credit amount. Therefore, the Tribunal directed that the income be determined at Rs. 1,49,727, resulting in an addition of Rs. 47,017 (difference between peak credit and declared income) rather than the entire Rs. 11,54,350 added by the AO and confirmed by the CIT(A).

Application of Law to Facts: The Tribunal applied the principle that unexplained cash deposits are presumed income but tempered this with the peak credit theory to avoid double taxation of amounts withdrawn and redeposited. The assessee's failure to provide evidence of actual business transactions weakened his claim that the deposits were only turnover. However, the Tribunal's analysis of bank statements showed that deposits and withdrawals were nearly equal, supporting the application of peak credit theory.

Treatment of Competing Arguments: The Tribunal rejected the assessee's claim that the entire cash deposits were sale proceeds and not income due to lack of evidence and the late introduction of this claim. It also rejected the CIT(A)'s outright dismissal of the peak credit theory by noting that the deposits were withdrawn and redeposited, making the entire amount taxable incorrect. The revenue's argument for full addition was balanced against the facts of bank transactions.

Interest under Sections 234A, 234B, and 234C

This ground was considered consequential and infructuous since the addition itself was partly disallowed. Therefore, the Tribunal dismissed the ground without separate adjudication.

Significant Holdings:

The Tribunal held:

"The concept of the peak credit proceeds on the fundamental premise that the money deposited and/or withdrawn from the assessee's bank account belongs to the assessee, or in respect of which ownership vests in the assessee. In the given facts and circumstances, there is no allegation of the revenue that the money withdrawn from the bank has either been utilized for incurring the expenses or for the purpose of the investments. Accordingly, the working of the peak credit works out at Rs.1,49,727 which has not been challenged by the revenue."

It further concluded:

"Accordingly, we direct the authorities below to determine the income of the assessee at Rs.1,49,727 only. In other words, there will be an addition of Rs. 47,017 (Rs. 1,49,727 - 1,02,710) to the total income of the assessee which is over and above the income already disclosed by the assessee in the income tax return."

The Tribunal established the principle that in cases involving cash deposits and withdrawals, the peak credit theory is an appropriate method to determine taxable income, provided there is no evidence that the withdrawn amounts were used for expenses or investments. It also emphasized the necessity for the assessee to provide credible and timely evidence to substantiate claims regarding the nature of deposits.

In conclusion, the Tribunal partly allowed the appeal by reducing the addition from Rs. 11,54,350 to Rs. 47,017, directing the income to be assessed at Rs. 1,49,727, and dismissed other grounds as not pressed or infructuous.