2017 (8) TMI 450 - HC - Income Tax

Addition on account of unexplained deposits in the bank accounts of the assessee - addition u/s 68 - basis of peak credit theory - Assessee is a Chartered Accountant - Assessee does not deny that he is an accommodation entry provider - Held that - Where an Assessee was unable to explain the sources of deposits and the corresponding payments then he would not get the benefit of peak credit . The legal position in respect of an accommodation entry provider seeking the benefit of peak credit appears to have been totally overlooked by the ITAT in the present case. Indeed, if the Assessee as a self-confessed accommodation entry provider wanted to avail the benefit of the peak credit , he had to make a clean breast of all the facts within his knowledge concerning the credit entries in the accounts. He has to explain with sufficient detail the source of all the deposits in his accounts as well as the corresponding destination of all payments from the accounts. The Assessee should be able to show that money has been transferred through banking channels from the bank account of creditors to the bank account of the Assessee, the identity of the creditors and that the money paid from the accounts of the Assessee has returned to the bank accounts of the creditors. The Assessee has to discharge the primary onus of disclosure in this regard. While the AO in the present case did not question the working out of the peak credit by the Assessee, he, at the same time, insisted that the additions made by him to the returned income of the Assessee should be sustained. The peak credit worked out by the Assessee was on the basis that the principle of peak credit would apply, notwithstanding the failure of the Assessee to explain each of the sources of the deposits and the corresponding destination of the payment without squaring them off. That is not permissible in law as explained by the Allahabad High Court in the aforementioned decisions which, this Court concurs with. As already noted, the ITAT went merely on the basis of accountancy, overlooking the settled legal position that peak credit is not applicable where deposits remain unexplained under Section 68 of the Act. The question of law framed by this Court, is accordingly, answered in the negative i.e. in favour of the Revenue and against the Assessee.

Summary

Issues Involved:
1. Whether the ITAT was correct in restricting the addition made on account of unexplained deposits in the bank accounts of the assessee to ?5,87,374/- based on the peak credit theory.
2. The treatment of accommodation entries and the application of the peak credit theory.

Issue-Wise Detailed Analysis:

1. Whether the ITAT was correct in restricting the addition made on account of unexplained deposits in the bank accounts of the assessee to ?5,87,374/- based on the peak credit theory:

The Revenue appealed against the ITAT's decision, which restricted the addition made on account of unexplained deposits to ?5,87,374/- from ?72,08,996/-. The ITAT's decision was based on the peak credit theory. The Assessee, a Chartered Accountant, had filed his return of income declaring ?49,880/- as taxable income. The Assessing Officer (AO) noted significant cash and cheque deposits in the Assessee's bank accounts, which were unexplained. The AO added ?72,08,996/- to the Assessee's income, considering unexplained deposits and peak credits separately for cash and cheque transactions.

2. The treatment of accommodation entries and the application of the peak credit theory:

The Assessee admitted to providing accommodation entries and argued that only the peak credit should be considered for tax purposes. The AO, however, treated the unexplained deposits as the Assessee's income. The Commissioner of Income Tax (Appeals) [CIT (A)] upheld the AO's decision, noting that the Assessee could not substantiate his claims with documentary evidence.

The ITAT, however, found the AO's method of treating cash and cheque entries separately as illogical and irrational. It noted that the AO's approach lacked understanding of basic accounting principles and resulted in double addition. The ITAT restricted the addition to the peak credit of ?5,87,374/- as worked out by the Assessee.

Submissions and Analysis:

The Revenue argued that the ITAT failed to appreciate that the Assessee had not provided an explanation for all cheque and cash deposits. The concept of peak credit applies only if deposits can be squared off against corresponding cheques. The Assessee contended that the AO had accepted the peak credit, and there was no justification for separate treatment of cash and cheque transactions.

The Court analyzed the legal position on accommodation entries and peak credit. It noted that an accommodation entry provider must disclose all facts about credit entries, including the source of deposits and the destination of payments. The Assessee failed to explain these, and thus, the benefit of peak credit was not applicable.

Conclusion:

The Court concluded that the ITAT overlooked the settled legal position that peak credit is not applicable where deposits remain unexplained under Section 68 of the Income Tax Act. The question of law was answered in favor of the Revenue, and the ITAT's order was set aside. The AO's order was restored, and the appeal was allowed with no order as to costs.