2015 (12) TMI 1612 - AT - Income Tax

Addition u/s 68 - peak credit theory application - Held that - We find from the copy of the account of the Syndicate Bank in the books of the assessee that the all deposits were of less than ₹ 50,000/- and the money was regularly withdrawn in cash by the assessee. In the present circumstances the addition of entire amount of deposits into bank of ₹ 29,79,700/- was wrong and cannot be sustained. We find reasoning in the submissions of the ld.AR that in such scenario where the regular deposits and withdrawals from the bank were made for the purpose of business of the assessee, the income could be assessed on the basis of peak cash credit only. AO framed the assessment ex-parte without giving an opportunity to the assessee, whereas the ld.CIT(A) dismissed the appeal of the assessee after rejecting the contentions of the assessee of applying peak credit theory or presumptive tax scheme under section 44AD of the Act. Under the present circumstances, we are of the opinion that ends of justice would be met if the assessee is brought to tax on the basis of peak credit worked out on the basis of deposits and withdrawals. Accordingly, we set aside the order of ld.CIT(A) and direct the AO to assess the income of the assessee on the basis of peak credit theory in the bank account of the assessee after affording a reasonable opportunity of hearing to the assessee. - Decided in favour of assessee for statistical purposes.

Summary

Issues:
1. Addition of cash deposits under section 68 of the Income Tax Act, 1961.
2. Assessment based on unexplained cash credits.
3. Failure to comply with notices and provide explanations.
4. Applicability of peak credit theory and presumptive tax scheme under section 44AD.

Issue 1: Addition of cash deposits under section 68:
The appeal challenged the addition of Rs. 29,54,385 under section 68 of the Income Tax Act, 1961. The assessee, a director of a company, had deposited cash in his bank account throughout the year. Despite various notices and opportunities, the assessee failed to provide satisfactory explanations or evidence for the cash deposits. The Assessing Officer (AO) proceeded ex-parte and added the amount to the income. The Commissioner of Income Tax (Appeals) upheld the addition, noting the lack of evidence or valid explanations from the assessee.

Issue 2: Assessment based on unexplained cash credits:
The CIT(A) observed that section 68 of the Act applies when no explanation is offered for cash credits or when explanations are unsatisfactory. The provision does not differentiate between commercial and non-commercial loans. The burden of proof lies on the assessee to establish the transaction leading to a cash credit, including the identity of the creditor, capacity to advance money, and genuineness of the transaction. In this case, the AO's addition under section 68 was deemed correct as the assessee failed to provide evidence or valid explanations.

Issue 3: Failure to comply with notices and provide explanations:
The assessee's failure to comply with statutory notices and provide necessary details during assessment proceedings led to adverse inferences. Despite claims of being a scrap dealer and citing business transactions as the source of cash deposits, the assessee could not substantiate these claims with documentary evidence. The AO and CIT(A) found the explanations inadequate, resulting in the addition of cash deposits to the income.

Issue 4: Applicability of peak credit theory and presumptive tax scheme:
During the appeal, the assessee argued for assessing income based on peak credit or under the presumptive tax scheme. The Tribunal agreed that assessing the entire amount of deposits as income was incorrect. Considering the regular deposits and withdrawals for business purposes, the Tribunal directed the AO to assess the income based on the peak credit theory in the bank account, affording the assessee a fair hearing opportunity. The appeal was allowed for statistical purposes.

This judgment highlights the importance of providing valid explanations and evidence for cash deposits, the burden of proof on the assessee in cases of unexplained credits, and the consideration of business practices in determining taxable income.