Unexplained bank investments and peak credit u/s69, replaced with 0.5% turnover profit estimate; addition deleted

Whether unexplained investment could be assessed under s.69 by adopting peak credit in the assessee's bank accounts was the dominant issue. The ITAT held that, since the CIT(A)'s unchallenged order for AY 2010-11 had rejected peak-credit addition and instead estimated business profit on turnover, the lower authorities erred in departing from the accepted approach without justification. Given the disclosed low margin and the assessee's offer to be assessed at 0.5% of turnover, the ITAT directed the AO to compute income by applying a 0.5% profit rate on total turnover and to allow set-off for profit already declared, deleting the peak-credit based addition accordingly; the appeal was partly allowed.

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1. ISSUES PRESENTED AND CONSIDERED

1. Whether the addition made as alleged unexplained income under section 69, computed by applying the peak credit method to bank deposits/credits, was sustainable on the facts of the case.

2. Whether, in the circumstances where similar transactions in an earlier year were finally accepted on a profit-rate (commission) estimation basis, the current year's income should likewise be determined by applying a profit rate on turnover rather than by treating the peak credit as unexplained.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Sustainability of section 69 addition based on peak credit in bank accounts

Legal framework (as discussed in the decision): The impugned addition was made under section 69 on the premise that the bank credits/deposits represented unexplained money, and the amount was quantified by taking the peak credit reflected in the bank accounts.

Interpretation and reasoning: The Court noted that the assessee claimed the bank credits represented amounts received on behalf of another entity in connection with commission-based trading activity, with onward transfers made as instructed, and that the assessee's income was commission. The Tribunal found merit in the contention that, in similar circumstances in the immediately preceding year, the appellate authority had not sustained a peak-credit-based unexplained money addition but had instead determined income by estimating profit on turnover. Since those findings remained unaltered (not challenged further), the Tribunal found no merit in the lower authorities' rejection of that earlier accepted approach and in sustaining a peak-credit-based section 69 addition for the year under consideration.

Conclusion: The section 69 addition computed on the basis of peak credit was held to be inappropriate on these facts, and the addition was directed to be replaced by an estimation of profit on turnover.

Issue 2: Appropriate method-profit-rate estimation on turnover and applicable rate

Legal framework (as discussed in the decision): The Tribunal applied an income-determination approach based on estimating profit/commission as a percentage of turnover, consistent with the earlier year's adjudication on comparable facts.

Interpretation and reasoning: The Tribunal relied on the unchallenged findings in the earlier year where profit was directed to be computed at 0.25% of turnover after noting that disclosed profit in earlier years ranged from 0.2% to 0.25% and that the transactions were not properly explained as "circular" with supporting confirmations. For the year under consideration, however, the Tribunal noted that the assessee had offered profit at 0.5% of turnover. In view of the overall facts and circumstances and the assessee's own offered rate, the Tribunal considered it appropriate to compute income by applying 0.5% on total turnover instead of making an addition under section 69 by peak credit. The Tribunal further directed that credit be given for the profit already declared.

Conclusion: The Assessing Officer was directed to apply a profit rate of 0.5% on the total turnover and allow credit for profit already offered; consequently, the challenge to the peak-credit method and section 69 addition succeeded to that extent, and the relevant grounds were partly allowed.

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