2014 (2) TMI 418 - AT - Income Tax

Tribunal upholds addition under Section 68 of Income Tax Act, rejects peak credit theory

Shri Sudhir Kumar Sharma Versus Income Tax Officer

The Tribunal dismissed the appeals of the assessees and allowed the appeals of the revenue, upholding the addition of Rs. 1,26,66,000/- under Section 68 ... Addition made u/s 68 of the Act – Held that:- The modus-operandi explained during the course of survey was that the assessee was receiving the amount in cash and the same were being returned vide cheques through bank accounts - the assessee failed to produce the books of account nor give any explanation vis-à-vis the source of cash deposits in the bank account - In the absence of any explanation or any evidence being produced by the assessee - The onus cast upon the assessee not being discharged, the said cash credits are to be included as income of the assessee in view of the provisions of section 68 of the Act. The assessee failed to file any confirmation in respect of the said cash credits nor any of the persons were produced for examination before the Assessing Officer, though specific direction in this regard was given by the Assessing Officer within the course of recording of statement of the assessee, during assessment proceedings - The assessee even failed to produce the books of account - In the absence of the assessee having discharged his onus of proving the identity, credit worthiness and genuineness of the cash transaction of the cash credits in the bank account, there was no merit in the plea of the assessee - the provisions of section 68 of the Act are applicable. Applicability of peak credit theory – Held that:- The peak credit theory is not applicable as the assessee had deposited cash in the bank account and thereafter, cheques were issued to different parties - there are deposits in cash but as against the said cash deposited, various cheques were issued and the assessee was unable to explain the source of cash deposited in his bank account – there was no legal infirmity in the order of the Tribunal – Decided against Assessee. Issues Involved:1. Applicability of Section 68 of the Income Tax Act.2. Addition of cash credits in the bank account.3. Application of peak credit theory.4. Non-production of books of account and clients for verification.5. Plea of accommodation entries and commission income.Detailed Analysis:1. Applicability of Section 68 of the Income Tax Act:The primary issue revolves around whether the provisions of Section 68 of the Income Tax Act are applicable to the cash deposits found in the assessee's bank accounts. The assessee failed to produce the books of account or any clients for verification, which led to the Assessing Officer (AO) invoking Section 68. The CIT(Appeals) upheld this decision, stating that the assessee did not discharge the onus of proving the identity, creditworthiness, and genuineness of the cash transactions. The Tribunal confirmed that Section 68 was applicable given the lack of evidence provided by the assessee.2. Addition of Cash Credits in the Bank Account:The AO added Rs. 1,26,66,000/- as unexplained cash credits under Section 68. The assessee argued that the cash deposits were from clients and should not be treated as income. However, the assessee failed to provide any supporting evidence or produce any clients for verification. The CIT(Appeals) initially reduced the addition to Rs. 10,55,260/- based on peak credit theory, but the Tribunal reinstated the full addition of Rs. 1,26,66,000/- as the assessee could not substantiate the source of the cash deposits.3. Application of Peak Credit Theory:The CIT(Appeals) applied the peak credit theory, reducing the addition to Rs. 10,55,260/-. However, the Tribunal rejected this approach, stating that the peak credit theory was not applicable since the deposits were not followed by cash withdrawals but by cheque payments to various parties. The Tribunal restored the AO's original addition of Rs. 1,26,66,000/-, supporting its decision with the precedent set by the Hon'ble Allahabad High Court in Bhaiya Lal Shyam Behari V Commissioner of Income-tax.4. Non-Production of Books of Account and Clients for Verification:The assessee's failure to produce books of account or clients for verification was a significant factor in the AO's decision to invoke Section 68. Despite multiple opportunities, the assessee did not provide the necessary documentation or produce any clients who allegedly deposited the cash. This non-compliance led to the addition being upheld by both the CIT(Appeals) and the Tribunal.5. Plea of Accommodation Entries and Commission Income:The assessee argued that the cash deposits were related to providing accommodation entries and that only the commission income should be taxed. This plea was not raised during the assessment or appellate proceedings and was introduced for the first time before the Tribunal. The Tribunal rejected this new plea, emphasizing that it was a factual issue that should have been addressed earlier in the proceedings.Conclusion:The Tribunal dismissed the appeals of the assessees and allowed the appeals of the revenue, upholding the addition of Rs. 1,26,66,000/- under Section 68. The Tribunal confirmed that the assessee failed to discharge the onus of proving the genuineness of the cash deposits and rejected the application of the peak credit theory. The decision was based on the consistent failure of the assessee to provide adequate evidence and the precedent set by higher judicial authorities.