2025 (8) TMI 1173 - AT - Income Tax

Peak-credit method to verify bank cash deposits and bearer-cheque withdrawals; set off peak negative cash against agricultural income under s.69A

Shakti Singh Versus NFAC, Delhi

Shakti Singh Versus NFAC, Delhi - TMI 1. ISSUES PRESENTED AND CONSIDERED Whether the Learned NFAC was justified in upholding the addition of Rs. 1,13,31,950 on account of cash deposits made in the assessee's bank account for the assessment year in question. Whether the assessee's peak-credit workings, including characterization of bearer-cheque withdrawals as cash and treatment of other credited items (fixed deposit maturities, loans, amounts from family members and business parties), were admissible and sufficient to discharge the burden of explanation vis-à-vis the cash deposits. Whether, and in what manner, the peak-credit / peak-negative-balance method should be applied to determine the taxable income arising from alleged unexplained cash deposits and how admitted agricultural income is to be set off against any resultant unexplained money (section 69A context). 2. ISSUE-WISE DETAILED ANALYSIS Issue A - Legitimacy of upholding addition of cash deposits Legal framework: Assessment additions based on cash deposits are examinable against explanations and evidentiary material; reopening under section 148 and assessment under sections 147/144 are operative to assess income escaping assessment. Precedent Treatment: The Tribunal treats the peak-credit/peak-negative-balance approach as a recognized method for determining income attributable to rotation of funds in bank accounts. Interpretation and reasoning: The Court examined whether the cash deposits represented income escaping assessment, considered that the assessee's sole admitted source was agricultural income (accepted by revenue at Rs. 20,21,800), and found that the AO/NFAC made the addition without adequately testing the peak-credit workings and other explanations furnished by the assessee and accepted by the AO on remand (for certain items). Ratio vs. Obiter: Ratio - Revenue cannot sustain addition merely by adopting peak-credit theory if the assessee provides credible evidentiary explanation for credited items and a proper computation of peak-negative cash balance is not independently verified. Obiter - Observations on the unusual nature of multiple persons withdrawing cash (borne by Revenue's scepticism) are treated as not determinative absent fact verification. Conclusions: NFAC's blanket upholding of the addition was not justified without verification of the assessee's peak-credit computations and supporting evidence; matter must be remanded for verification limited to cash and bearer-cheque transactions and computation of peak-negative balance after setting off admitted agricultural income. Issue B - Admissibility and sufficiency of peak-credit workings, bearer-cheque characterisation, and explanation of other credits Legal framework: When peak-credit / peak-negative-balance method is invoked, all relevant bank transactions must be considered; taxpayer bears a burden to explain credits; documentary evidence (bank certificates, FD receipts, loan documents, third-party returns/statements) may be used to establish non-taxable nature. Precedent Treatment: Tribunal accepts peak-credit approach as recognized and usable, subject to proper inclusion/exclusion of transactions based on evidence. Interpretation and reasoning: The assessee produced a cash-flow statement with peak-credit workings, bank certificate to support bearer-cheque withdrawals as cash, FD receipts/maturity particulars, loan document from a bank, and income-tax return and bank statements of relatives/third parties to show receipts were not assessable to the assessee. The NFAC (CIT(A)) found discrepancies and disallowed the workings for alleged omissions (unaccounted credits and classifying certain cheque payments as cash). The Tribunal found the assessee's evidences (bank certificate, FD details, loan credit, third-party returns/statements) satisfactory to explain non-cash or non-taxable nature of several credits, and therefore concluded that the peak-credit workings should be examined by the AO confined to actual cash movements (cash deposits and bearer-cheque withdrawals) rather than permitting 'cherry picking' by Revenue or blanket rejection without verification. Ratio vs. Obiter: Ratio - A taxpayer's peak-credit computation supported by contemporaneous bank evidence and corroborative papers requires verification rather than outright rejection; bearer-cheque withdrawals can be treated as cash if supported by bank confirmation and corroborative material. Obiter - Revenue's skepticism about multiple persons withdrawing cash is a credibility factor but not sufficient to negate documentary evidence. Conclusions: The peak-credit workings and characterization of bearer-cheque transactions were admissible subject to verification. The matter is remitted to the assessing officer to verify only cash transactions and bearer-cheque withdrawals and to recompute peak-negative cash balance after considering accepted non-taxable credits. Issue C - Application of peak-credit theory and set-off with admitted agricultural income; taxability under section 69A Legal framework: Peak-credit / peak-negative-balance method is a recognized technique to determine existence of unexplained receipts where rotation of funds occurs; unexplained money may be assessable as income under section 69A after appropriate set-offs. Precedent Treatment: The Tribunal follows the established recognition of peak-credit methodology and applies it subject to verification of constituent transactions. Interpretation and reasoning: Given the revenue's acceptance of agricultural income of Rs. 20,21,800, the Tribunal directs that the peak-negative cash balance derived from verified cash transactions should first be set off against the admitted agricultural income. Only any remaining unexplained sum, after such set-off, is to be treated as unexplained money assessable under section 69A of the Act. The Tribunal emphasizes that the AO must confine his re-examination to cash-related entries and bearer-cheque withdrawals when applying the peak-credit method, ensuring fairness and avoiding inclusion of already-explained non-cash credits. Ratio vs. Obiter: Ratio - Where agricultural income is admitted/accepted, it must be set off against the peak-negative cash balance before invoking section 69A; remand for verification is appropriate rather than immediate addition. Obiter - Directions as to procedural conduct of verification (limited scope to cash/bearer cheques) are pragmatic guidance rather than new law. Conclusions: On remand the AO should verify peak-credit computations based solely on cash deposits and bearer-cheque withdrawals, compute the peak-negative cash balance, set off the admitted agricultural income of Rs. 20,21,800, and bring any residual amount to tax as unexplained money under section 69A. Final Disposition (integrated conclusion) The NFAC's upholding of the addition is set aside for statistical purposes and the matter is restored to the assessing officer with directions to verify the assessee's peak-credit workings limited to cash transactions (including bearer-cheque withdrawals), allow set-off of admitted agricultural income, and assess any remaining amount under section 69A after such computation.