CIT vs. D. K. Garg -Delhi High Court- 16 Aug 2017
Question of law decided/ discussed: Whether 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...
For reading full text of judgement please refer http://itatonline.org/archives/cit-vs-d-k-garg-delhi-high-court-s-68-peak-credits-an-accommodation-entry-provider-wanting-to-avail-the-benefit-of-the-peak-credit-has-to-make-a-clean-breast-of-all-the-facts-within-his-know/dk-garg-68-cash-credits-peak-credit/
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