Peak balance principle limits unexplained bank deposits where revolving funds appear in an undisclosed account

Late service of an assessment order did not by itself establish that the assessment was time-barred where the order was dated within the permissible period and there was no material to show backdating. In relation to an undisclosed bank account, repeated deposits and withdrawals indicated circulation of the same funds, so the unexplained amount was confined to the peak balance rather than the aggregate of all entries. The addition was therefore restricted to the peak balance as unexplained investment under section 69, and the larger addition was reduced accordingly.

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Issues: (i) Whether the assessment order was barred by limitation because it was received by the assessee after the date of its completion. (ii) Whether the addition arising from deposits and withdrawals in an undisclosed bank account should be sustained in full under the provisions relating to unexplained money or restricted to the peak balance as unexplained investment.

Issue (i): Whether the assessment order was barred by limitation because it was received by the assessee after the date of its completion.

Analysis: The assessment order was dated within the permissible time and the delay in service on the assessee was only of about 20 days. No material was brought to show that the order had been backdated. Mere late receipt of the order did not establish that the assessment itself was time-barred.

Conclusion: The limitation challenge failed and the assessment order was upheld on this ground.

Issue (ii): Whether the addition arising from deposits and withdrawals in an undisclosed bank account should be sustained in full under the provisions relating to unexplained money or restricted to the peak balance as unexplained investment.

Analysis: The bank account was undisclosed and the entries were not reflected in the books. The assessee could not explain the source of deposits, but the record also showed repeated deposits and withdrawals. In such a situation, the same circulating funds could not be treated as separate unexplained sums at every stage. The appropriate approach was to adopt the peak balance as the unexplained amount and assess it as unexplained investment.

Conclusion: The addition was restricted to the peak balance of Rs. 16,15,261 under section 69, and the larger addition sustained by the lower authorities was set aside to that extent.

Final Conclusion: The appeal succeeded only in part, with the limitation objection rejected and the quantum addition reduced to the peak unexplained balance in the undisclosed account.

Ratio Decidendi: Where an undisclosed bank account shows revolving deposits and withdrawals, and the circulation of the same funds is reasonably probable, the unexplained amount may be confined to the peak balance rather than the aggregate of all entries.

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