2014 (11) TMI 1195 - HC - Income Tax

Addition u/s 68 - benefit of peak credit automatically granted to the assessee - HELD THAT - This court in the case of Commissioner of Income Tax Vs. Tyaryamal Balchand 1986 (4) TMI 14 - RAJASTHAN HIGH COURT after relying on several judgments, also upheld the finding about peak credit theory. This Court in CIT Vs. Ishwardas Mutha 2002 (4) TMI 9 - RAJASTHAN HIGH COURT also accepted the contention to take into account, the peak credit. When any amount is paid, later withdrawn from the books, would be available for recycling and rotation, unless otherwise established as invested elsewhere by the Revenue. We hold the assessee was entitled to the benefit of peak credit which ought to have been allowed instead of making separate addition of entire amount. However, we may observe that the Assessing Officer has to come to a definite finding that the amount withdrawn was used by the assessee in any other expenditure or investment. If the Assessing Officer comes to a finding that withdrawn amount was used or spent by the assessee for any other investment or expenditure than the benefit of peak of such credit, in such circumstances, may not be available. - Decided in favour of assessee. Addition u/s 69 - all unexplained expenditure has to be added to the income of the assessee for such financial year - HELD THAT - As assessee does not press the question quoted above and thus this question is decided against the assessee.

Summary

Issues:
- Interpretation of peak credit theory for income tax assessment
- Application of section 69 of the Income Tax Act on unexplained expenditure

Interpretation of Peak Credit Theory:
The case involved an income tax reference against an ITAT order for the assessment year 1994-95. The primary issue was whether the benefit of peak credit could be automatically granted to the assessee. The Assessing Officer had noticed discrepancies in the accounting of goods purchased by the assessee from a medical store, leading to an addition of a specific amount under section 69 of the IT Act. The CIT(A) partially upheld the addition but allowed only the peak amount of such credits. The ITAT, however, upheld the full addition, stating that the benefit of peak credit cannot be automatically granted, especially when the assessee denied any investment outside the books of accounts. The court analyzed the situation, referring to previous judgments, including the Hon'ble Apex Court's decision in Anantharam Veerasinghaiah & Co. v. CIT, emphasizing the concept of undisclosed income constituting a fund from which subsequent withdrawals could be made. The court held that the assessee was entitled to the benefit of peak credit, which should have been allowed instead of the full addition, provided the withdrawn amount was not used for other investments or expenditures.

Application of Section 69 of the IT Act:
Another aspect of the case involved the application of section 69 of the IT Act on unexplained expenditure. The Assessing Officer had made a trading addition invoking section 145 due to the absence of a day-to-day stock register. The CIT(A) upheld a partial addition, while the ITAT supported the full addition. However, the focus of the judgment primarily revolved around the peak credit theory. The court examined various precedents, including Commissioner of Income Tax v. Tyaryamal Balchand and CIT v. Ishwardas Mutha, which upheld the concept of peak credit theory. The court reiterated that the Assessing Officer must establish that the withdrawn amount was used for other investments or expenditures to deny the benefit of peak credit. Consequently, the court answered the first question in favor of the assessee, affirming the entitlement to peak credit benefit, with the caveat that if the withdrawn amount was indeed used elsewhere, the benefit might not apply. The second question, which was not pressed by the assessee, was decided in favor of the revenue department.