2022 (7) TMI 1265 - AT - Income Tax

Tribunal allows appeals, applies peak credit theory, upholds unaccounted cash receipts + stresses corroborative evidence

The Tribunal partly allowed the appeals by condoning the delay in filing, directing the application of peak credit theory for specific additions, and ... Undisclosed income - diary found during the course of search and statement recorded from the assessee - HELD THAT:- In this case, AO has admitted that what was recorded in the seized document towards debit side is expenditure outside regular books of account, although nature of said expenditure is not known to the assessee as well as the Assessing Officer. Therefore, we are of the considered view that when the AO has taken credit entries as income of the assessee earned from undisclosed source of income, he ought to have considered debit side of entries as expenditure incurred for earning said income. If you consider same analogy, then the AO should have considered income as well as expenditure. If you consider debit entry as expenditure, then only net income from said document needs to be taxed. Since, we have already stated in earlier part of this order, credit entry does not depict any income and debit entry does not show any light on expenditure, then the only possible method to determine undisclosed income for the above period is adoption of peak credit theory and in this case, particularly peak credit theory is best method to determine undisclosed income of the assessee. The assessee has filed working of peak credit, which is available in paper book filed for relevant period. The assessee has copied entries contained in seized documents relied upon by the AO and recorded date-wise receipts and payments. For the financial year 2015-16 as on 23.03.2015, peak credit works out to Rs.36.25 lakhs, which is net of debit and credit entries recorded in seized document. Therefore, addition is required to be made to the extent of Rs.36.25 lakhs for the assessment year 2015- 16. Hence, we direct the Assessing Officer to sustain additions to the extent of Rs.36.25 lakhs for the assessment year 2015- 16 towards undisclosed income. The assessee has worked out peak credit of Rs.73.13 lakhs as on 25.03.2016 which is relevant to the assessment year 2016-17, on the basis of net of debit and credit entries from so called diary found during the course of search. Therefore, we direct the Assessing Officer to restrict addition to the extent of Rs.73.13 lakhs for the assessment year 2016-17 - Therefore, addition is required to be made to the extent of Rs.422.00 lakhs for the assessment year 2017-18 and thus, we direct the Assessing Officer to sustain addition to Rs.422 lakhs for the assessment year 2017-18. Unaccounted cash receipts - Except entry in the name of M/s. Natesh Agencies amounting to Rs.50,40,000/-, the assessee could not explain other entries in the name of P.Palaniswamy for Rs.61,00,000/- M/s.Pearl Transport for Rs.10,00,000/- Mr.TNJ Nadarajan for Rs.49,90,000/- and M/s. M.S.Wines for Rs.45,00,000/- totaling to Rs.1,65,90,000/-, except stating that those entries does not belong to him and persons from whose premises said document is found needs to be explained contents of the document. We do not find any merits in the arguments of the assessee for the simple reason that document pertains to business activities of the assessee and further, persons specified in the document are all associates of the assessee and hence, it is for the assessee to explain contents recorded in the document. Since, the assessee could not explain contents; we are of the considered view that the Assessing Officer has rightly made additions towards entries as unaccounted income in the hands of the assessee. Hence, we are inclined to uphold findings of the learned CIT(A) and reject ground taken by the assessee. Issues Involved:1. Condonation of delay in filing appeals.2. Validity of additions made by the Assessing Officer (AO) based on seized documents.3. Retraction of statements made during the search.4. Application of peak credit theory.5. Addition of Rs.1,65,90,000/- towards unaccounted cash receipts.Issue-wise Analysis:1. Condonation of Delay in Filing Appeals:The assessee filed appeals that were time-barred by 5 days. The delay was attributed to the assessee being unwell and self-quarantined. The Tribunal found the reasons given by the assessee to be reasonable and condoned the delay, admitting the appeals for adjudication.2. Validity of Additions Made by the Assessing Officer (AO) Based on Seized Documents:The AO made additions based on a diary seized during a search operation, which purportedly contained details of unaccounted income and expenditures. The assessee argued that the diary was a 'dumb document' with no clear indication of unaccounted income. The AO inferred that credit entries represented unaccounted income and debit entries represented expenditures outside the regular books. However, the Tribunal found that the diary did not provide any clear evidence of unaccounted income or expenditures and criticized the AO for selectively considering only credit entries as income while ignoring debit entries.3. Retraction of Statements Made During the Search:The assessee retracted the admission of undisclosed income made during the search, claiming it was made under coercion. The Tribunal noted that the retraction was made shortly after the search and supported by an affidavit. The Tribunal emphasized that an admission is an important piece of evidence but not conclusive, especially if not supported by corroborative evidence. The Tribunal found that the AO and CIT(A) erred in disregarding the retraction without proper consideration.4. Application of Peak Credit Theory:The assessee argued for the application of the peak credit theory to determine the undisclosed income, considering both credit and debit entries in the seized documents. The Tribunal supported this approach, noting that peak credit theory is a recognized method for determining undisclosed income in cases involving repeated cash transactions. The Tribunal directed the AO to apply the peak credit theory, resulting in additions of Rs.36.25 lakhs for AY 2015-16, Rs.73.13 lakhs for AY 2016-17, and Rs.422.00 lakhs for AY 2017-18.5. Addition of Rs.1,65,90,000/- Towards Unaccounted Cash Receipts:The AO made an addition of Rs.1,65,90,000/- based on loose sheets found during the search, which the assessee could not explain. The Tribunal upheld this addition, noting that the assessee failed to provide satisfactory explanations for the entries in the loose sheets, and the document pertained to the assessee's business activities.Conclusion:The Tribunal partly allowed the appeals, condoning the delay in filing, directing the AO to apply the peak credit theory for certain additions, and upholding the addition of Rs.1,65,90,000/- towards unaccounted cash receipts. The Tribunal emphasized the need for corroborative evidence to support admissions made during searches and criticized the selective consideration of entries by the AO.