2016 (12) TMI 608 - AT - Income Tax

Addition on account of Undisclosed debtors - application of prime credit theory - Held that - From perusal of the various entries found recorded in the seized documents and the cash flow statements prepared by the assessee it is observed that in terms of amount advanced to various debtors repayment thereof to the assessee amount received from the creditors and its repayment by the assessee the assessee has tried to establish the necessary linkage in terms of outflow and inflow of funds. It is also not the case of the Revenue that inflow of funds through various credit entries was applied elsewhere by the assessee other than his money lending business. Also where necessary linkage in terms of inflow and outflow of funds are established it is immaterial whether these transactions are happening in physical form or routed through the banking channel. Accordingly we do not see any infirmity in applying the peak credit theory in the facts of the present case. Thus we set aside the matter to the file of the AO to apply the peak credit theory after taking into consideration both the debtors and creditors entries found recorded in the seized documents. - Decided in favour of assessee for statistical purposes. Addition on account of undisclosed/unexplained house hold expenses - assessee has contended that the household expenditure has been incurred out of his salary withdrawals - Held that - As except for AY 2009-10 in respect of which documents were found during the course of search no documents are found in respect of any of the other years and the AO has only made an estimation without any underlying documents. The basis of estimation which ranges from 50, 000 to 2, 50, 000 is also not clear from the records. Though both AO and ld CIT(A) has taken cognizance of the said contentions of the assessee however no credit/setoff has been given. As against the total addition of 8, 00, 000 made by the AO towards undisclosed household expenditure the assessee has reported in his return of income an amount of 8, 92, 000 as salary income for all the respective years taken together besides income from other sources. We therefore find force in the said contention of the ld AR and are of the view that necessary credit should be available in respect of salary income already offered to tax and no addition is thus called for in respect of undisclosed household expenditure. The entire addition in the hands of the assessee on account of undisclosed household expenditure for AY 2005-06 and all subsequent years under appeal are hereby deleted.- Decided in favour of assessee

Summary

Issues Involved:
1. Addition on account of undisclosed debtors.
2. Addition on account of undisclosed/unexplained household expenses.

Issue-wise Detailed Analysis:

1. Addition on account of undisclosed debtors:

The primary issue was whether the addition of ?22,800 for A.Y. 2005-06 and similar additions for other years on account of undisclosed debtors was justified. The Assessing Officer (AO) determined the amount of undisclosed debtors based on seized documents during a search operation. The AO observed that the amount of income offered by the assessee was not correct and required the assessee to provide detailed accounts of outstanding debtors, which the assessee did. The AO considered the entire amount of net outstanding balance of debtors at the year-end as undisclosed investment and taxed it accordingly, without giving credit for the amount declared by the assessee.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision but allowed a credit for the amount already declared by the assessee, confirming an addition of ?22,800. The assessee argued that the peak credit theory should be applied to avoid double taxation and that the AO erred in not considering the opening balances of debtors.

The Tribunal found that the AO was incorrect in accepting only the debit entries in respect of the debtors and ignoring the credit entries in respect of the creditors found in the same seized documents. The Tribunal held that the peak credit theory is appropriate in this case to determine the real income of the assessee. The matter was set aside to the AO to apply the peak credit theory after considering both the debtors and creditors entries found in the seized documents. This decision applied to all the assessment years under consideration.

2. Addition on account of undisclosed/unexplained household expenses:

The second issue was the addition of ?50,000 for A.Y. 2005-06 and similar additions for other years on account of undisclosed household expenses. The AO estimated the household expenses based on certain seized documents that detailed household expenditures for the financial year 2008-09. For other years, the AO made estimations without any underlying documents.

The CIT(A) upheld the AO's decision, stating that the household expenses were reasonably estimated based on the seized documents. The assessee contended that the household expenses were met through salary withdrawals, which the AO and CIT(A) acknowledged but did not give credit for.

The Tribunal noted that except for A.Y. 2009-10, no documents were found for other years, and the AO's estimations were not based on any clear records. The Tribunal found merit in the assessee's contention that household expenses were covered by salary income already reported. It concluded that necessary credit should be given for the salary income offered to tax, and no additional undisclosed household expenses should be added. Consequently, the Tribunal deleted the entire addition on account of undisclosed household expenses for A.Y. 2005-06 and subsequent years.

Conclusion:

The Tribunal allowed the appeals filed by the assessee for all the years partly for statistical purposes, directing the AO to apply the peak credit theory for undisclosed debtors and deleting the additions for undisclosed household expenses. The order was pronounced in the open court on 24/11/2016.