2015 (7) TMI 863 - AT - Income Tax

Tribunal limits unexplained deposits, upholds disallowances. Peak credit theory applied.

Income-Tax Officer, Ward 3 (4), Surat Versus Shri Rajpal Singh Shekahawat Prop, of Monu Industrial Security

The Tribunal upheld the ld. CIT(A)'s decision to restrict the addition of unexplained deposits in the bank account to Rs. 9,41,557, applying the peak ... Unexplained deposit in bank account - CIT(A) after applying the peak credit theory on the bank account restricted this addition - Held that:- CIT(A) has worked out the peak credit in both the accounts. These credits are on 14th July, 2006 in the current account and 27th January, 2007. He worked out the total of the cash deposits and thereafter computed the GP on turnover of cash deposits after 14th July, 2006 in current account and after 27th January, 2007 in savings account. The CIT(A) has worked out the GP element in these transactions. He has added the profit earned by the assessee in the business after working out the peak credit. In other words the maximum amount of the peak deposits is ₹ 3,82,688/-. This was considered as representing the investment in this activity which has been carried out with these two bank and thereafter worked out the profit element. He made an addition of ₹ 9,41,557/- which is total of Rs, 5,58,872/- + ₹ 3,82,685/- i.e. profit on the turnover + alleged initial investment in the shape of peak credit. This factor can take care of both these issues. The assessee in his C.O. has submitted that net profit shown by him is 3.36% in AY 2007-08. The maximum profit shown by him is 5.05% in AY 2010-2011 whereas the lowest is 1.94% in 2014-2015. Considering this subsequent history of the assessee the profit ought to be worked out by adopting a reasonable figure and not as high as 15.50% considered by the CIT(A). However, we do not see any merit in this contention of assessee because he is unable to support his claim with any authentic books of account. It is not discernible whether these net profits have been accepted in the scrutiny assessment or not. Considering the facts and circumstances of the case we do not find any reason to interfere in the order of CIT(A) - Decided against revenue and assessee. Ad hoc disallowance at 20% of the expenses - Held that:- Since the assessee is running a proprietorship concern, element of personal benefits out of the use of these facilities i.e. phone(s) and car cannot be ruled out. The assessee was not maintaining any log book nor produced any other details, in support of his claim. Therefore, ld. revenue authorities have rightly disallowed the expenditure on an estimate basis. We do not find any reason to interfere with the order of CIT(A). Both the grounds are rejected. Decided against assessee. Issues:1. Addition of unexplained deposit in bank account.2. Application of peak credit theory.3. Disallowance of certain expenditures.Analysis:Issue 1: Addition of unexplained deposit in bank accountThe Revenue appealed against the order of the ld. CIT(A) regarding the addition of Rs. 68,51,309 made by the AO on account of unexplained deposits in the bank account, which was later restricted to Rs. 9,41,557 by the ld. CIT(A). The assessee's contention was that the deposits were from the discontinued textile trading business and payments received from debtors. However, the AO rejected this claim due to lack of evidence. The ld. CIT(A) applied the peak credit theory and considered the regular intervals of debits and credits in the bank accounts, concluding that the entire deposits cannot be treated as income. The peak credit amounts were determined, and the gross profit declared in the return of income on the cash deposits was calculated. The addition was upheld at Rs. 9,41,557 by the ld. CIT(A, considering the peak credit and gross profit elements.Issue 2: Application of peak credit theoryThe Revenue argued against the application of the peak credit theory, stating that the same amount of withdrawal was not deposited repeatedly. However, the assessee's counsel supported the CIT(A)'s decision and cited a relevant case law. The CIT(A) had analyzed the bank statements, showing a chain of deposits and withdrawals, and determined the peak credit amounts for both accounts. The Tribunal upheld the CIT(A)'s decision, considering the systematic nature of transactions and the profit element worked out through the peak credit theory.Issue 3: Disallowance of certain expendituresThe assessee's CO raised concerns about the disallowance of telephone, mobile, vehicle expenses, depreciation, and petrol expenses. The AO had made ad hoc disallowances due to lack of supporting evidence, which were confirmed by the CIT(A). The Tribunal upheld the disallowances, noting the absence of proper documentation and the potential personal benefit element in the use of facilities. The grounds related to these expenditures were rejected.In conclusion, the Tribunal dismissed the appeal of the Revenue and the CO of the assessee, upholding the decisions made regarding the unexplained deposits, application of peak credit theory, and disallowance of certain expenditures.