2025 (5) TMI 1086 - AT - Income Tax

Assessee's appeal allowed against unexplained cash deposits addition due to AO ignoring opening balance in peak credit calculation

ITAT Delhi allowed the assessee's appeal against addition of unexplained cash deposits. The AO had determined negative peak credit by considering only ... Unexplained cash deposits made in the bank account - addition of negative peak credit as undisclosed cash deposits in the hands of the assessee - HELD THAT:- We observed that he has extracted only the cash deposits into the bank and cash withdrawal during the year. Therefore, he determined the negative cash balance. He conveniently ignored the opening balance held by the assessee on 01.04.2014 of Rs. 28,85,000/-. In our view, non-consideration of opening balance led to the negative cash balance. Therefore, the cash deposits made in the bank account matches with the information submitted by the assessee and when the assessee has explained the details of cash deposits and cash withdrawals which match with the books maintained by him, there is no requirement for the AO not to consider the opening balance held by the assessee. Therefore, the whole reasoning basis of making addition is not proper. Accordingly, ground raised by the assessee is allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:Whether the Assessing Officer had jurisdiction and complied with procedural requirements under sections 147, 148, 148A, 149, 151, and 153 of the Income-tax Act, 1961, including the requirement of prior approval under section 151, and whether any procedural irregularities rendered the reassessment order non est.Whether the Assessing Officer provided sufficient time and opportunity to the assessee to respond to notices issued under section 148A(b) and other procedural notices, thereby adhering to principles of natural justice.Whether the Assessing Officer rightly treated the peak credit of Rs. 26,21,000/- as undisclosed income under section 56 of the Income-tax Act, based on the ledger account and bank transactions, ignoring the opening cash balance disclosed by the assessee.Whether penalty proceedings under section 270A and interest charges consequent to the additions made were justified.Whether the assessee's contention regarding his residential status and regular filing of returns before the jurisdictional Assessing Officer had any bearing on the reassessment proceedings.2. ISSUE-WISE DETAILED ANALYSISJurisdiction and Procedural Compliance (Grounds 1, 2, 3, 4, 5, and 6)The assessee raised multiple grounds challenging the jurisdiction of the Assessing Officer to initiate reassessment proceedings under section 147 read with sections 148, 148A, 149, 151, and 153, including the alleged absence of prior approval under section 151 and insufficient time to respond to notices. The assessee also contended that the assessment order was unsigned and thus non est.However, at the hearing, the assessee's authorized representative did not press these grounds, leading to their dismissal. The Tribunal thus did not delve into detailed legal analysis on these procedural issues, effectively upholding the jurisdictional validity and procedural compliance of the reassessment proceedings as per the Act.Analysis of Addition Based on Peak Credit and Ledger Account (Ground 7)Relevant Legal Framework and Precedents: The Assessing Officer's addition was made under section 56 of the Income-tax Act, which empowers the AO to treat unexplained cash credits as income. The 'peak credit' method is a recognized approach to identify unexplained cash deposits by calculating the maximum negative balance in cash transactions during the year. The AO relied on the ledger account submitted by the assessee and the bank statements to determine the cash flow and deposits.Court's Interpretation and Reasoning: The AO observed that the assessee had deposited approximately Rs. 99,76,000/- in the bank account during the year. The assessee claimed that these deposits were loans taken from and repaid to the market, supported by ledger entries such as 'self loan paid directly to market' and 'cash deposited loan received directly from market.'However, the AO, after analyzing the ledger, found that the cash withdrawals during the year were insufficient to cover the cash deposits, leading to a negative cash balance (peak credit) of Rs. 26,21,000/-. On this basis, he held that the assessee had undisclosed income which was deposited in the bank and accordingly made an addition under section 56.The assessee challenged this addition by pointing out that the AO failed to consider the opening cash balance of Rs. 28,85,000/- as on 01.04.2014, which was disclosed in the ledger account. The assessee argued that when this opening balance was taken into account, the negative cash balance would not arise, and the deposits matched the ledger entries.The Revenue defended the addition by emphasizing the AO's reliance on bank statements and the ledger analysis, asserting that the deposits were not explained by the assessee's cash flows.Key Evidence and Findings: The Tribunal examined the ledger account and bank statements. It noted that the AO had extracted only debit and credit transactions during the year but had ignored the opening cash balance, which was significant (Rs. 28,85,000/-). The Tribunal held that non-consideration of the opening balance led to an artificial negative cash balance and that the assessee's explanation and ledger entries were consistent with the bank deposits.Application of Law to Facts: The Tribunal applied the principle that unexplained cash credits can be treated as income only when the cash flow analysis conclusively shows shortfalls. Since the opening balance was not considered, the negative peak credit calculation was flawed. The Tribunal found that the assessee had satisfactorily explained the source of deposits by way of loans reflected in the ledger and cash flows.Treatment of Competing Arguments: The Tribunal gave weight to the assessee's ledger account and opening balance, rejecting the AO's approach of ignoring the opening balance. It found the AO's addition to be based on incomplete analysis and thus not sustainable.Conclusion: The Tribunal allowed the ground challenging the addition on peak credit, holding that the addition of Rs. 26,21,000/- as undisclosed income was unjustified.Penalty and Interest Proceedings (Ground 8)The assessee challenged the initiation of penalty proceedings under section 270A and the levy of interest, contending that these were consequential to the illegal addition and thus not justified.The Tribunal did not expressly rule on this ground in the order, as the addition itself was partly deleted. Typically, penalty and interest are consequential to the addition; hence, if the addition is deleted, penalty and interest cannot be sustained. The Tribunal's partial allowance of the appeal implicitly supports the assessee's contention on this ground.Residential Status and Jurisdictional Filing (Ground 6)The assessee contended that he was a permanent resident of a village in Uttar Pradesh and regularly filed returns before his jurisdictional Assessing Officer. This ground was not pressed at the hearing and was dismissed accordingly. No further analysis was undertaken by the Tribunal on this issue.3. SIGNIFICANT HOLDINGSThe Tribunal held as follows:'Non-consideration of opening balance led to the negative cash balance. Therefore, the cash deposits made in the bank account matches with the information submitted by the assessee and when the assessee has explained the details of cash deposits and cash withdrawals which match with the books maintained by him, there is no requirement for the AO not to consider the opening balance held by the assessee. Therefore, the whole reasoning basis of making addition is not proper.'This establishes the core principle that in applying the peak credit method for determining unexplained cash credits, the opening cash balance must be considered to avoid artificial negative cash balances and wrongful additions.On procedural grounds, since the assessee did not press multiple challenges related to jurisdiction, time allowed for replies, and validity of the assessment order, those grounds were dismissed.Accordingly, the Tribunal partly allowed the appeal by deleting the addition of Rs. 26,21,000/- made on account of unexplained cash deposits, while the other grounds were rejected or dismissed as not pressed.