2016 (8) TMI 72 - AT - Income Tax

Additions under peak credit theory - Held that - We find lot of force in the alternative argument of the assessee that the peak credit should be worked out after considering all the transactions in the undisclosed bank account and the peak credit so arrived should be treated as undisclosed income. We find that the Ld. AO took peak deposit in the bank account acceptable under peak credit theory which in our opinion is against the spirit of such theory. Adoption of peak credit balance after considering all the transactions in the bank account and adding the same as undisclosed income of each year would meet the ends of justice. Accordingly we deem it fit and proper in the interest of justice and fair play to set aside this issue to the file of the Ld. AO to determine the undisclosed income based on the peak credit workings as directed above. The assessee is directed to provide the workings of peak credit as per above directions and the Ld. AO is directed to verify the veracity of the said workings for both the assessment years and determine the undisclosed income of the assessee accordingly. The Ld. AO is also directed to eliminate the commission income offered by the assessee in the return of income in view of the directions contained above for determination of income of the assessee for both the assessment years. - Decided in favour of assessee for statistical purposes.

Issues Involved:
1. Unexplained cash credit and application of peak credit theory.
2. Taxation of income under both peak credit theory and undisclosed commission income.
3. Charging of interest under sections 234A, 234B, and 234C.

Detailed Analysis:

1. Unexplained Cash Credit and Application of Peak Credit Theory:
The primary issue revolves around the addition of ?34,50,000/- and ?5,50,000/- towards unexplained cash credit by adopting the peak credit theory. The assessee, a proprietor of M/s. Alankita Traders, was subjected to a search and seizure operation under section 132 of the Income Tax Act. Several bank accounts were found to be undisclosed, and the assessee admitted to using these accounts to provide accommodation entries, earning commission income. The assessee disclosed commission income based on cash deposits but did not maintain any books of accounts. The AO invoked section 68 of the Act, treating the peak deposits in the bank accounts as unexplained income. The CIT(A) upheld the addition for AY 2009-10 but reduced it for AY 2010-11, considering the source of deposits from the previous year.

2. Taxation of Income Under Both Peak Credit Theory and Undisclosed Commission Income:
The assessee contested the AO's action of taxing income under both peak credit theory and undisclosed commission income, arguing that only the higher of the two should be considered. The AO, however, aggregated both incomes. The Tribunal found merit in the assessee's argument that the peak credit should be determined by considering all transactions in the undisclosed bank accounts. It directed the AO to rework the peak credit, ensuring that the peak balance reflects the undisclosed income, thus avoiding double taxation.

3. Charging of Interest Under Sections 234A, 234B, and 234C:
The assessee also challenged the charging of interest under sections 234A, 234B, and 234C, arguing that the AO incorrectly calculated the interest. The CIT(A) did not adjudicate this issue. The Tribunal directed the AO to re-compute the interest based on the revised peak credit determination.

Conclusion:
The Tribunal concluded that the peak credit theory should be applied correctly by considering all transactions in the bank accounts. It set aside the issue to the AO to determine the undisclosed income based on peak credit workings and eliminate the commission income already offered by the assessee. The appeals were allowed for statistical purposes, and the AO was directed to re-compute the interest under sections 234A, 234B, and 234C accordingly.

Order Pronouncement:
The order was pronounced in the open court on 15.07.2016.

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