1997 (4) TMI 30 - HC - Income Tax

High Court denies reference on peak credit theory under Income-tax Act

The High Court rejected the application for reference under section 256(2) of the Income-tax Act, 1961, stating that the benefit of the 'peak credit' ... Cash Credits, Peak Credit Theory Issues Involved:1. Whether the Tribunal was right in law in sustaining the addition of Rs. 3,58,000.2. Whether the Tribunal was right in not sustaining peak credit addition at Rs. 1,42,846.3. Whether the Tribunal was right in ignoring/distinguishing the decisions cited before it.4. Whether the Tribunal was right in observing the modus operandi of introducing one's own money.5. Whether the Tribunal was right in holding that Kachi rokar was not produced before the income-tax authorities.6. Whether the Tribunal was right in not sustaining peak credit addition at Rs. 1,42,846 for the assessment year 1980-81.7. Whether the Tribunal was right in not sustaining addition on peak credit theory due to the failure of formal settlement application.8. Whether the Tribunal was right in sustaining separate addition of Rs. 24,000 without telescoping it with Rs. 1,42,846.Summary of Judgment:1. Sustaining Addition of Rs. 3,58,000:The Tribunal sustained the addition of Rs. 3,58,000 against the order of the Commissioner of Income-tax (Appeals) which had sustained Rs. 1,42,846. The Tribunal ignored the practice and conventions of working on peak credit basis, which was previously accepted by the Department.2. Non-sustaining Peak Credit Addition at Rs. 1,42,846:The Tribunal did not sustain the peak credit addition at Rs. 1,42,846, reasoning that the assessment by the Income-tax Officer was u/s 144 of the Income-tax Act, 1961. The Tribunal's decision bypassed the peak credit theory, which was applied in similar circumstances for the assessment year 1980-81.3. Ignoring/Distinguishing Decisions Cited:The Tribunal ignored the decisions cited before it, which were recorded in para. 9 of the impugned order. The Tribunal's decision was contrary to the accepted practice of making additions based on peak credit when cash credits remain unexplained or are found to be bogus.4. Observing Modus Operandi:The Tribunal observed that in the normal working of a business, introducing one's own money in the shape of cash credit and withdrawing it later is a common practice. This observation was made despite the Kachi rokar being impounded and in possession of the Department.5. Kachi Rokar Production:The Tribunal held that Kachi rokar was not produced before the income-tax authorities, although it was impounded during the survey and used by the Income-tax Officer to work out the peak credit of Rs. 1,42,846.6. Non-sustaining Peak Credit Addition for Assessment Year 1980-81:The Tribunal did not sustain the peak credit addition at Rs. 1,42,846 for the assessment year 1980-81, despite similar circumstances where an addition of Rs. 41,551 was made against credits of about Rs. 8 lakhs.7. Failure of Formal Settlement Application:The Tribunal did not sustain the addition on peak credit theory at Rs. 1,42,846 because the assessee failed to make a formal settlement application on the terms offered by the Department.8. Separate Addition of Rs. 24,000:The Tribunal sustained a separate addition of Rs. 24,000 without telescoping it with the amount of Rs. 1,42,846. This decision was contested by the assessee-petitioner firm.Final Decision:The High Court rejected the application for reference u/s 256(2) of the Income-tax Act, 1961, stating that the question of whether the benefit of 'peak credit' theory should be allowed is not a fit case for making a reference. The Tribunal's decision was based on facts and did not raise any question of law to be referred to the High Court.