Peak credit theory applied to frequent bank deposits and withdrawals, only shortage amount treated as unexplained income

ITAT Indore held that frequent deposits and withdrawals in bank account should be analyzed using peak credit theory rather than treating all deposits as unexplained income. The tribunal found that assessee made regular deposits and withdrawals from the same account, establishing a pattern of genuine transactions. Only the peak shortage of Rs. 1,05,000 on specific date was considered unexplained income. The addition made by AO was restricted to this amount, with remaining additions deleted, providing substantial relief to the assessee.

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Issues Involved:

1. Addition on account of salary income.
2. Addition on account of unexplained cash deposits in the bank account.

Issue-wise Detailed Analysis:

1. Addition on Account of Salary Income:

The initial assessment order added Rs. 2,47,881/- to the assessee's income as salary income. Upon appeal, the CIT(A) granted partial relief by reducing the addition to Rs. 2,25,133/-. However, during the proceedings before the Appellate Tribunal, the assessee chose not to press this ground. Consequently, this ground was dismissed as non-pressed, and the addition as determined by the CIT(A) was upheld.

2. Addition on Account of Unexplained Cash Deposits:

The primary issue in this appeal was the addition of Rs. 11,61,000/- made by the AO on account of unexplained cash deposits in the assessee's bank account. The CIT(A) upheld this addition, rejecting the assessee's explanation regarding the source of the deposits, which included claims of exempt income from death-cum-retirement gratuity and GPF withdrawals, as well as past savings.

The assessee argued that the AO had simply aggregated the credit entries in the bank account without considering the availability of funds from opening cash balances and withdrawals during the financial year. The assessee, who was a retired government employee aged about 75 years, claimed that the lack of response to notices was due to relocation from a submergence area affected by the Sardar Sarovar Dam project.

The assessee provided alternative cash flow statements to demonstrate that there was no peak shortage of cash, suggesting that the opening balance and subsequent transactions should negate the addition. The Tribunal considered these submissions and the pattern of deposits and withdrawals, recognizing the principle of peak credit, which allows only the peak shortage to be treated as unexplained income.

Upon examining the cash flow statements, the Tribunal found that the statement with an opening balance of Rs. 2,00,000/- was appropriate, revealing a peak shortage of Rs. 1,05,000/- on 01.06.2010. Consequently, the Tribunal restricted the addition to Rs. 1,05,000/-, providing partial relief to the assessee by deleting the remaining addition.

Conclusion:

The appeal was partly allowed, with the Tribunal upholding the addition of Rs. 1,05,000/- for unexplained cash deposits while deleting the rest, thereby granting partial relief to the assessee. The addition related to salary income was not contested further and remained as determined by the CIT(A).

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