Sunday, August 20, 2017

Can "Peak credit theory" be applied where the deposits remains unexplained u/s 68 of Income Tax Act?


CIT vs. D. K. Garg -Delhi High Court- 16 Aug 2017


Question of law decided/ discussedWhether the Income Tax Appellate Tribunal was correct in law in restricting the addition made on account of unexplained deposits in the bank accounts of the assessee as against on the basis of peak credit theory ?

Important areas/ concepts discussed (summarized for easy reference)

1- Peak credit has been discussed by the learned courts and "According to him, the concept of working out the peak credit would arise only if it was possible to square off the deposits made in an account against the cheques issued therefrom. If ‘A’ made a deposit in the account and the ultimate payment was made to ‘A’ either in A’s account by cash or cheque then to that extent, the peak credit can be worked out. However, where a source of deposit is not explained and the corresponding outgo is also unexplained, the question of giving the Assessee the benefit of peak credit would not arise"

2- It has further been deliberated by referring to the various cases  and it was said tha "Basically, what an accommodation entry provider does is to accept cash from an Assessee and arranges to have a cheque issued from his own account or some other account, usually of 'paper' or fake entities, to make it appear to be a loan or an investment in share capital. The accommodation entry provider usually charges a commission which is deducted upfront. Where the Assessee is unable to explain the source of such credit in his account - i.e. by demonstrating the identity of the provider of the credit, the creditworthiness of such entity, and the genuineness of the transaction - the credit entry is treated as unexplained and the income is treated under Section 68 of the Act as the income of the Assessee"

3- It was said that "The premise underlying the concept of peak credit is the squaring up of the deposits in the account with the corresponding payments out of the account to the same person"  In the case of Bhaiyalal Shyam Bihari v. CIT it was held by the learned court about the peak credit" "For adjudicating upon the plea of peak credit the factual foundation has to be laid by the assessee. He has to own all cash credit entries in the books of account and only thereafter can the question of peak credit be raised"

4- In the case of CIT v. Vijay Agricultural Industries it was held that "On the facts of that case it was held that peak credit could be applied only in the case of squared up accounts. In other words, 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"

5- " 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"

6- Hence the learned court held that 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. The impugned order of ITAT is, accordingly, set aside and the order of the AO is restored to file...


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