2025 (12) TMI 723 - AT - Income Tax

Peak credit method upheld for cash deposits, taxing only highest unexplained balance u/s 69A to prevent duplication

ITAT held that, in assessing unexplained money under s.69A arising from cash deposits, the correct method was to compute and tax only the peak credit to ... Unexplained money u/s.69A - unexplained source of cash deposits - cascading effect of the unexplained credit entries in the bank account - Assessee submitted that only peak credit balance alone needs to be added because cash deposits made were immediately withdrawn and utilized for lending to other borrowers - AO did not accept the submission of the assessee for the reason that he has not identified the persons to whom the money has been advanced and from whom the money was collected back, the date of such collection and the mode of collection, etc. - CIT(A) had directed the assessee to submit the working of peak cash credit to the AO and explain the source for the same. HELD THAT:- The above directions of the CIT(A) is in consonance with the dictum laid down in assessee’s own case for assessment years 2011-12 & 2014-15, (supra). In one of the family member’s case namely Shri A. Anbukkannan, the Hon’ble Madras High Court [2019 (5) TMI 1129 - MADRAS HIGH COURT] had upheld the Tribunal order wherein addition was directed to be made on the basis of peak credit in order to remove the cascading effect of unexplained entries in the bank account. We upheld the orders of the CIT(A) are correct and in accordance with law. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether, in respect of cash deposits in bank accounts of a person engaged in money lending, the entire cash deposits are liable to be assessed as unexplained money under section 69A of the Income-tax Act, 1961, or only the unexplained peak credit balance in the bank account is taxable. 1.2 Whether the benefit of the 'peak credit' method can be denied on the ground that the assessee claims all deposits to be genuine and has not admitted that the borrowings are from non-genuine creditors. 1.3 Whether the directions issued by the first appellate authority to the Assessing Officer to compute and tax only unexplained peak credit, considering only cash deposits and cash withdrawals, are legally sustainable. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Taxability of entire cash deposits versus unexplained peak credit under section 69A Legal framework (as discussed) 2.1 The assessments were framed by invoking section 69A of the Act, treating the entire cash deposits in the assessee's bank accounts as 'unexplained money'. The appellate authority and the Tribunal examined the applicability of the 'peak credit' theory to such deposits in the context of money-lending activity, with reference to earlier Tribunal orders in the assessee's own cases and related family members, and the judgment of the jurisdictional High Court affirming the use of peak credit for similar fact situations. Interpretation and reasoning 2.2 The assessee, engaged in money lending, contended that cash deposits were made from receipts of the business and were periodically withdrawn and re-used for further advances; hence, only the peak credit in the bank account should be subjected to tax. The Assessing Officer rejected this, citing lack of specific identification of borrowers, dates and modes of recovery, and treated the entire deposits as unexplained money under section 69A. 2.3 The first appellate authority relied on several decisions of the Tribunal in the assessee's own cases for earlier years and in cases of family members, wherein it had been held that, in similar factual matrices of repeated cash deposits and withdrawals in a money-lending business, only the unexplained peak credit in the bank account should be brought to tax to avoid multiple taxation of the same circulating funds. 2.4 The appellate authority also relied on the judgment of the jurisdictional High Court in a family member's case, which approved the Tribunal's approach of adopting the peak credit method in situations where there are both cash deposits and cash withdrawals in the same bank account, and where addition based on peak credit is adopted 'to remove the cascading effect of the unexplained credit entries in the bank account.' The High Court observed that where entries remain unexplained, addition on the basis of peak credit is an accepted and 'well settled and common principle' and no substantial question of law arises when such method is applied on the facts. 2.5 The Tribunal noted that the directions of the first appellate authority were in consonance with its own earlier orders in the assessee's cases for prior assessment years, where the issue had already been decided that the assessee is liable to explain only the peak credit balance and only the unexplained peak cash credit can be added to the returned income. 2.6 The Tribunal examined the Revenue's contention that the entire cash deposits should be taxed and observed that the Departmental Representative could not point out any legal or factual error in the approach and directions of the appellate authority, particularly in light of binding precedent from the jurisdictional High Court and consistent Tribunal decisions in identical factual circumstances. Conclusions 2.7 Only the unexplained peak credit in the assessee's bank accounts, and not the entire cash deposits, is liable to be brought to tax under section 69A in the present facts, where there are both cash deposits and cash withdrawals connected with money-lending activity. 2.8 Addition of the gross sum of cash deposits as unexplained money was held to be incorrect; the correct method is to determine and tax only the unexplained peak credit, applying the peak credit theory to avoid cascading additions on circulating funds. Issue 2: Availability of peak credit benefit despite assessee's claim that deposits are genuine Interpretation and reasoning 2.9 The Revenue argued that the benefit of peak credit can be granted only when the assessee accepts that borrowings are from non-genuine creditors and that the payments or outgoings represent amounts paid to himself, and further that where the assessee claims all deposits are genuine, the peak credit method is not available. 2.10 The appellate authority, while applying the peak credit method, did not predicate its directions on any admission by the assessee regarding non-genuine creditors. Instead, it proceeded on the established factual pattern of cyclical cash deposits and withdrawals in a money-lending business and the principle that additions should be confined to unexplained peak credit where the sources of entries remain partly unexplained. 2.11 The Tribunal, by endorsing the reasoning of the appellate authority and relying on the jurisdictional High Court's affirmation of the peak credit method in similar circumstances, implicitly rejected the Revenue's restrictive contention. The High Court's formulation, as cited, made clear that where the assessee fails to explain entries in the bank account, the additions 'on the basis of Peak Credit can be adopted to remove the cascading effect,' without making the benefit conditional on any specific admission by the assessee about the genuineness of creditors. Conclusions 2.12 The availability of the peak credit method is not dependent on the assessee admitting that deposits or creditors are non-genuine; the method is applicable where, on facts, there are recurring cash deposits and withdrawals in the same account and the entries are not wholly explained. 2.13 The Revenue's contention that the assessee's claim of genuineness of deposits, by itself, disentitles the assessee to the benefit of peak credit was not accepted. Issue 3: Legality and scope of directions issued to the Assessing Officer for working out peak credit Interpretation and reasoning 2.14 The first appellate authority directed that: (i) Only the unexplained peak credit balance is liable to be brought to tax and added to the returned income; (ii) The assessee must submit a working of the peak cash credit and explain the source for such peak; (iii) The Assessing Officer must verify the working and 'bring to tax only the peak credit for which the source is not explained' by the assessee, allowing the balance; and (iv) 'Only cash deposits and cash withdrawals alone to be considered for working out the peak cash credit.' 2.15 The Tribunal compared these directions with the earlier orders in the assessee's own cases and noted that they were consistent with the settled approach adopted in those decisions and upheld by the jurisdictional High Court, particularly in directing that only unexplained peak credit be taxed and that both cash deposits and withdrawals in the same account be considered for the computation. 2.16 The Tribunal further noted that the Departmental Representative was unable to identify any infirmity, either legal or factual, in the directions of the appellate authority. The directions were found to properly balance the burden on the assessee to explain sources with the requirement that only unexplained amounts be brought to tax, and to avoid double or cascading additions. Conclusions 2.17 The directions of the first appellate authority to compute and tax only the unexplained peak credit, based solely on cash deposits and cash withdrawals in the bank account, and to require verification by the Assessing Officer of the assessee's working and explanations, are legally valid and in accordance with binding precedent. 2.18 The orders of the first appellate authority were upheld in full, and the Revenue's appeals challenging these directions were dismissed.