2016 (11) TMI 596 - AT - Income Tax

Unexplained cash credit - commission income from providing accommodating entries - Held that - We conclude that assessee has furnished his statement on oath stating that he is engaged in providing accommodating entries to various parties and for this act earned nominal amount of commission income. From the perusal of bank statement, we find that cash was deposited and immediately it was transferred to the account of the party leaving negligent amount of balance in the bank account of assessee. In our considered view, we conclude that assessee is engaged in providing accommodated entries to the parties. Had there been the business of the iron and steel of the assessee then the lower authorities should have brought on record the evidence of the business but the ld. DR failed to bring the same. We also find that the cash was immediately withdrawn after the deposit of the cash. This transaction shows that the money does not belong to the assessee. In the absence of any information about the iron & steel business of the assessee, we are accordingly inclined to apply the peak credit theory to tax the undisclosed income of assessee. - Decided in favour of assessee.

Issues Involved:
1. Addition of ?1,09,50,000/- as unexplained cash credit under Section 68 of the Income Tax Act, 1961.
2. Application of the peak credit theory to determine the undisclosed income.

Detailed Analysis:

Issue 1: Addition of ?1,09,50,000/- as Unexplained Cash Credit

The sole issue raised by the assessee in the appeal was that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming the action of the Assessing Officer (AO) by sustaining the addition of ?1,09,50,000/- on account of unexplained cash credit. The facts in brief are that the assessee, engaged in the business of iron and steel products, filed a return of income declaring a total income of ?2,51,820/-. During the assessment proceedings, the AO discovered an undisclosed Savings Bank account with Bank of Baroda, where a sum of ?1,09,50,000/- was deposited in cash on various dates. The assessee, upon being summoned under Section 131 of the Act, admitted to providing accommodation entries in lieu of cash but failed to provide the identities of the beneficiaries. Consequently, the AO treated the entire cash deposit as the assessee's unexplained income and added it to the total income.

Upon appeal, the CIT(A) confirmed the AO's addition, stating that the assessee failed to disclose the source of the cash deposits and the identities of the parties from whom the cash was received. The CIT(A) observed that the cash was deposited and immediately withdrawn by issuing cheques, and there was no evidence that the cash withdrawn was available for re-deposit. Therefore, the peak credit theory was not applicable, and the addition of ?1,09,50,000/- under Section 68 was justified.

Issue 2: Application of Peak Credit Theory

The assessee argued that the AO should have applied the peak credit theory, which is a method to determine undisclosed income based on the peak balance of deposits and withdrawals in the bank account. The assessee contended that he was merely providing accommodation entries and that the cash deposited did not belong to him. He offered an amount of ?9.20 lakh, being the peak credit balance, for taxes. However, the CIT(A) rejected this plea, stating that the peak credit theory was not applicable as there was no cash withdrawal from the undisclosed bank account, only cheque withdrawals.

Before the Tribunal, the assessee reiterated the argument for applying the peak credit theory, citing various judicial precedents where this method was used to determine undisclosed income in similar circumstances. The Revenue, on the other hand, argued that since the money was withdrawn by issuing cheques, the peak credit theory could not be applied, and the entire amount of cash deposited should be treated as undisclosed income.

The Tribunal, after hearing the rival contentions and perusing the materials on record, found that various courts have held to apply the peak credit theory in similar cases. The Tribunal relied on the decision of the Kolkata Tribunal in the case of Binod Kumar Jha Vs. ITO, where it was held that the peak credit theory should be applied to determine the undisclosed income when the assessee is engaged in providing accommodation entries.

The Tribunal concluded that the assessee was engaged in providing accommodation entries and that the cash deposited did not belong to him. The Tribunal observed that the cash was immediately withdrawn after deposit, indicating that the money did not belong to the assessee. In the absence of any evidence of the assessee's business in iron and steel, the Tribunal applied the peak credit theory to tax the undisclosed income. The Tribunal reversed the orders of the lower authorities and directed the AO to assess the peak credit.

Conclusion:

The Tribunal allowed the assessee's appeal, directing the AO to assess the peak credit as the undisclosed income instead of the entire cash deposit of ?1,09,50,000/-. The Tribunal emphasized that the peak credit theory is applicable in cases where the assessee is engaged in providing accommodation entries and the cash deposited does not belong to the assessee. The order was pronounced in open court on 09/09/2016.

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