2016 (4) TMI 862 - AT - Income Tax

Tribunal directs peak credit method for undisclosed account transactions

The Tribunal partly allowed the appeal, directing the AO to adopt the peak credit method for taxing transactions in the undisclosed account, verify ... Unexplained cash credit - peak credit method - deemed dividend under section 2(22)(e) - determination of shareholder status and availability of accumulated profits - director's remuneration versus loan transaction - reimbursement of tax as pass through receipts - bank deposits as source and verification of withdrawalsUnexplained cash credit - peak credit method - bank deposits as source and verification of withdrawals - Whether the addition of Rs. 28,53,113 relating to deposits in the undisclosed ICICI Bank account should be sustained or dealt with by application of the peak credit method. - HELD THAT: - The Tribunal found that the transactions in the undisclosed ICICI Bank account ought to be dealt with by adopting the peak credit method rather than by mechanically treating entire credits as unexplained cash credit. The assessee was directed to furnish workings of peak credit and the matter was set aside to the Assessing Officer for verification of those workings and framing any addition accordingly. The Tribunal accordingly allowed the assessee's grounds 1-3 for statistical purpose and remitted the issue for computation and verification by the AO. [Paras 6]Set aside to the file of the Assessing Officer to frame any addition after verification of peak credit workings furnished by the assessee; grounds allowed for statistical purpose.Deemed dividend under section 2(22)(e) - determination of shareholder status and availability of accumulated profits - Whether the sum of Rs. 2,20,000 received as an unsecured loan from M/s G.S. Laminators Pvt. Ltd. is taxable as deemed dividend under section 2(22)(e). - HELD THAT: - The Tribunal observed discrepancies in the company's annual return and noted that the lower authorities had not examined whether the lending company had accumulated profits. Given the uncertainty on the true shareholding pattern for the relevant years and the absence of enquiry into availability of accumulated profits, the Tribunal considered it appropriate in the interest of justice to remit the issue to the Assessing Officer. The AO was directed to verify the register of shareholders and relevant documents for the financial years 2007 08 and 2008 09 and to determine availability of accumulated profits before deciding the applicability of section 2(22)(e). [Paras 9]Issue remitted to the Assessing Officer for verification of shareholding and accumulated profits and decision in accordance with law; ground allowed for statistical purpose.Director's remuneration versus loan transaction - bank deposits as source and verification of withdrawals - Whether the addition of Rs. 1,35,000 treated as director's remuneration is sustainable, having regard to the assessee's plea that the amounts were loans repaid to and from M/s G.S. Fertilisers Pvt. Ltd. - HELD THAT: - The Tribunal examined the ledger in the paper book which indicated borrowings and repayments by cheques to M/s G.S. Fertilisers Pvt. Ltd to the tune claimed by the assessee. Noting that the Assessing Officer had not examined this aspect, the Tribunal set the matter aside to the AO to verify the ledger and related records and to decide the issue afresh. The Tribunal thus treated the matter as requiring verification rather than resolving it on merits at the appellate stage. [Paras 12]Set aside to the Assessing Officer for verification of loan and repayment entries and fresh decision; ground allowed for statistical purpose.Reimbursement of tax as pass through receipts - bank deposits as source and verification of withdrawals - Whether credits totalling Rs. 51,368 in the disclosed State Bank of Hyderabad account, explained as reimbursements for taxes paid on behalf of other companies, are to be treated as unexplained cash credits. - HELD THAT: - On perusal of the bank statement and tax remittance challans in the paper book, the Tribunal found that the amounts were received from the stated companies, credited to the assessee's disclosed bank account and immediately utilized for online payment of taxes on behalf of those companies. The documentary evidence supported the assessee's explanation and the Tribunal accordingly concluded there was no need for any addition on this issue. [Paras 16]Addition deleted; ground allowed.Unexplained cash credit - bank deposits as source and verification of withdrawals - Whether the cash deposit of Rs. 50,000 on 21 01 2009 should be treated as unexplained cash credit. - HELD THAT: - The Tribunal noted an earlier cash withdrawal of Rs. 34,000 on 13 10 2008 and observed that the revenue did not produce contrary material to show that this sum was expended for other purposes. Accordingly, the Tribunal accepted Rs. 34,000 as source for the deposit and granted relief to that extent. The balance amount was held to be unexplained and the addition in respect of that portion was confirmed. [Paras 19]Partly allowed - Rs. 34,000 accepted as source; balance Rs. 16,000 confirmed as unexplained and added.Final Conclusion: The appeal is partly allowed: the issues relating to the undisclosed ICICI Bank account, deemed dividend, and director's remuneration are remitted to the Assessing Officer for verification and fresh decision in accordance with the directions given; the reimbursement of tax credits is deleted; the cash deposit of Rs. 50,000 is partly allowed (relief of Rs. 34,000) with the balance confirmed as unexplained. Issues Involved:1. Addition of Rs. 28,53,113/- representing cash/cheque deposits in undisclosed bank account.2. Addition of Rs. 2,20,000/- towards deemed dividend under section 2(22)(e) of the Income Tax Act.3. Addition of Rs. 1,35,000/- on account of alleged director's remuneration.4. Addition of Rs. 51,368/- representing reimbursement of taxes.5. Addition of Rs. 50,000/- representing cash deposits in the bank.Detailed Analysis:1. Addition of Rs. 28,53,113/- Representing Cash/Cheque Deposits in Undisclosed Bank Account:The assessee maintained a disclosed bank account with State Bank of Hyderabad and an undisclosed account with ICICI Bank. The AO treated the entire credits in the ICICI Bank account, totaling Rs. 28,53,113/- (Rs. 18,94,400/- in cash deposits and Rs. 9,58,713/- in cheque deposits), as unexplained cash credit under section 68 of the Income Tax Act. The assessee claimed that the ICICI account belonged to his HUF and the cash deposits were gifts from his grandmother, while cheque deposits were proceeds from share sales. The CIT(A) disbelieved the HUF status and the gift explanation, noting inconsistencies and the death of the grandmother before the account's opening. The Tribunal directed the AO to adopt the peak credit method for taxing the transactions in the undisclosed account, requiring the assessee to provide workings of peak credit for verification.2. Addition of Rs. 2,20,000/- Towards Deemed Dividend Under Section 2(22)(e) of the Income Tax Act:The assessee, a director in M/s. G.S Laminators Pvt. Ltd, received Rs. 2,20,000/- as an unsecured loan from the company. The AO invoked section 2(22)(e) based on the shareholding pattern, asserting that the shares were held by the assessee's HUF. The assessee contended that he was not a shareholder, and the shares were held by an individual, not the HUF. The Tribunal found discrepancies in the shareholding records and noted that the lower authorities had not examined the availability of accumulated profits in the lending company. The issue was remanded to the AO for verification of the shareholding pattern and accumulated profits.3. Addition of Rs. 1,35,000/- on Account of Alleged Director's Remuneration:The AO added Rs. 1,35,000/- credited in the assessee's State Bank of Hyderabad account as director's remuneration from M/s. G.S Fertilisers Pvt. Ltd. The assessee later claimed this amount was a loan, not remuneration, and had been repaid. The CIT(A) rejected this change of stance as an afterthought. The Tribunal directed the AO to verify the ledger account and bank statements to ascertain the nature of the transaction, remanding the issue for further examination.4. Addition of Rs. 51,368/- Representing Reimbursement of Taxes:The AO added Rs. 51,368/- credited in the assessee's State Bank of Hyderabad account, representing reimbursements from companies for tax payments made on their behalf. The CIT(A) did not admit the bank statements as fresh evidence and upheld the addition. The Tribunal, upon verifying the bank statements and tax remittance challans, found that the reimbursements were indeed for tax payments made on behalf of the companies. The addition was deleted.5. Addition of Rs. 50,000/- Representing Cash Deposits in the Bank:The AO added Rs. 50,000/- deposited in cash on 21-01-2009, noting insufficient cash balance and withdrawals to explain the deposit. The Tribunal found that the assessee had withdrawn Rs. 34,000/- on 13-10-2008, which could partly explain the deposit. The Tribunal granted relief for Rs. 34,000/- and confirmed the addition of the remaining Rs. 16,000/- as unexplained cash deposit.Conclusion:The appeal was partly allowed for statistical purposes, with directions for further verification and examination by the AO on several issues. The Tribunal emphasized the need for accurate verification of facts and proper application of legal provisions.