Rahul Vijay Munot,, Ahmednagar vs Assessee

Rahul Vijay Munot, C/o Newaskar Car Care, Old Vasant Talkies Road, Ahmednagar - 414 001. PAN : AGJPM8199M .... Appellant

Vs.

Income Tax Officer, Ward- 1, Ahmednagar. .... Respondent

Assessee by : Mr. Sunil Ganoo Department by : Mr. B. C. Malakar Date of hearing : 18-02-2015 Date of pronouncement : 31-03-2015

ORDER

PER G. S. PANNU, AM

The captioned appeal by the assessee is directed against the order of

the Commissioner of Income Tax (Appeals)-IT/TP, Pune dated 06.09.2013

which, in turn, has arisen from an order dated 29.11.2011 passed by the

Assessing Officer u/s 143(3) of the Income-tax Act, 1961 (in short "the Act")

pertaining to the assessment year 2009-10.

2. In this appeal, assessee has raised the following Grounds of Appeal :-

"1. In the facts and circumstances of the case and in law, the learned C.I.T. [A] TP/IT has erred by wrongly adding the entire cash deposited in bank of Rs.1,85,97,900/- instead of peak cash deposit of Rs.65,76,900/- made by AO. The aforesaid addition being arbitrary, perverse, based on surmises and conjecture the learned C.I.T [A] enhance the same. The impugned enhance addition may please be deleted.

2. In the facts and circumstances of the case and in law, the learned C.I.T. [A] has erred in confirming for not granting the deduction by Assessing Officer of opening cash balance of Rs.7,30,561/- carried over from earlier year from peak cash deposit. The claim for not granting the credit / deduction for opening cash balance is being arbitrary, perverse, based on surmises and 2 ITA No.1923/PN/2013

conjecture the learned C.I.T. [A] ought to have allowed the said deduction. The said deduction may please be granted.

3. In the facts and circumstances of the case and in law, the learned C.I.T [A] has erred in confirming of not granting the deduction by the AO for claim of interest on borrowed fund of Rs.2,69,075/-. The aforesaid rejection being arbitrary, perverse, based on surmises and conjecture the learned C.I.T. [A] ought to have allowed the said deduction. The impugned deduction may please be granted."

3. At the time of hearing, the Ld. Representative for the assessee

submitted that assessee does not wish to press the Ground of Appeal Nos.2 &

3 and in this context, he has referred to a written communication of the

assessee dated 12.02.2015, copy of which is placed on record. Accordingly,

Ground of Appeal Nos.2 & 3, which have withdrawn by the assessee, are

treated as dismissed.

4. The only dispute remaining in this appeal is with regard to the action of

the CIT(A) in treating the entire cash deposited in bank of Rs.1,85,97,900/- as

unexplained income of the assessee instead of the peak credit of

Rs.65,76,900/- treated by the Assessing Officer as unexplained income.

5. In brief, the relevant facts are that assessee is an individual who filed

his return of income for assessment year 2009-10 on 07.05.2010 declaring a

total income of Rs.5,50,510/-. In the return of income, assessee had declared

incomes by way of share of profit, interest, remuneration, etc. from two

partnership firms, viz. M/s Newaskar Motors and M/s Newaskar Car Care,

Salary from a Pvt. Ltd. Company Sandeep Automobiles Pvt. Ltd., interest, etc..

The return of income filed by the assessee was subject to a scrutiny

assessment year 143(3) of the Act whereby the total income has been

assessed at Rs.1,21,33,490/-. The subject-matter of consideration before us

relates to an addition of Rs.65,76,900/- made by the Assessing Officer on

account of unexplained deposits in three saving bank accounts. The relevant 3 ITA No.1923/PN/2013

facts are that the Assessing Officer noted that assessee had made cash

deposits in his three saving bank accounts amounting to Rs.1,85,97,900/-, as

detailed in para 3 of the assessment order. The assessee was show-caused

to explain the cash deposits made in the three savings bank accounts.

Assessee explained that the cash deposits were out of unaccounted business

carried out by him in automobile spares, accessories tyres, tubes, etc.. It was

further explained by the assessee that he purchased goods in cash without

supporting purchase bills and also sold goods without issuing sale bills to the

customers and that no books of account or any other rough record was

maintained by him with respect to such unaccounted business activity. The

assessee submitted before the Assessing Officer, that only profit from such

business activity be assessed to tax and in this context, it was stated that net

profit @ 5% of total cash deposits of Rs.1,85,27,900/- be accepted as

unaccounted business income. In this manner, a sum of Rs.9,26,400/- was

offered to tax as income from such unaccounted business activity.

6. The Assessing Officer noted that assessee had not furnished any

precise information like since when he was in such a business, what was the

extent of initial capital, places from where such goods were purchased, etc..

Further, the Assessing Officer noted that assessee did not furnish any

information about the extent of turnover, value and position of stock at the

closing, amount of debtors/creditors, etc.. In the absence of any evidence of

having conducted such unaccounted business, Assessing Officer held that

assessee's explanation that the cash deposits in the bank account had come

out of unaccounted business receipts could not be accepted. Instead, the

Assessing Officer proceeded to tax the amount of peak credit in all the three

bank accounts. The peak credit in all the three bank accounts was determined

at Rs.65,76,900/- which was added as undisclosed income in the hands of the

assessee. The assessee carried the matter in appeal before the CIT(A) 4 ITA No.1923/PN/2013

contending that the Assessing Officer was not justified in making an addition of

Rs.65,76,900/- on the facts and circumstances of the case. Alternatively,

assessee also contended that the addition made by the Assessing Officer be

scaled down by an amount of Rs.7,30,561/- which represented opening cash

balance. However, the CIT(A) was of the opinion that the Assessing Officer

was not justified in merely taxing the peak credit of Rs.65,76,900/- as

undisclosed income but according to him the entire amount of cash deposits

amount to Rs.1,85,27,900/- was liable to the assessed as undisclosed income.

Accordingly, the CIT(A) show-caused the assessee as to why the income be

not enhanced on the aforesaid aspect. Assessee objected to the

enhancement proposed by the CIT(A) and defended the action of the

Assessing Officer in computing the undisclosed income on the basis of the

peak credit of the three bank accounts. The plea of the assessee was that the

peak deposit has been correctly worked out by the Assessing Officer on the

basis of the cash book prepared and that the source of subsequent cash

deposit is explained by the amount of earlier cash withdrawn. In other words,

assessee sought the benefit of earlier cash withdrawals for explaining the

subsequent cash deposits. The CIT(A), however, has not accepted the plea

raised by the assessee. According to the CIT(A), assessee did not lead even

a single evidence of having carried out any undisclosed business. According

to the CIT(A), the onus was on the assessee to establish the source of the

cash deposits and that assessee had failed to explain such sources. The

CIT(A) has further held that the benefit of set-off of earlier cash withdrawal

against the subsequent cash deposits being claimed by the assessee was not

automatic and the assessee was required to justify the same. The CIT(A) has

contended that such benefit could only be granted on the basis of the

evidence available on record. In the present case, according to the CIT(A),

such benefit could not be allowed to the assessee because assessee had

failed to establish the existence of the unaccounted business itself. Since 5 ITA No.1923/PN/2013

assessee had failed to establish the existence of unaccounted business, it

could not be presumed that there was a rotation of cash so as to allow the

benefit of the peak credit theory to the assessee. In this manner, the CIT(A)

enhanced the addition made by the Assessing Officer to Rs.1,85,27,900/- on

account of the undisclosed income represented by the cash deposits in the

three saving bank accounts. Against the aforesaid, assessee is in appeal

before us.

7. Before us, the Ld. Representative for the assessee pointed out that the

only issue in dispute was relating to the enhancement of income effected by

the CIT(A). The Ld. Representative submitted that there was no justification

for the CIT(A) to negate the computation of peak credit made by the Assessing

Officer for the purposes of computing undisclosed income relating to the

transactions in the three bank accounts. The Ld. Representative pointed out

that the peak credit theory has been accepted by the Hon'ble Allahabad High

Court in the case of CIT vs. Fertilizer Traders, (2014) 98 DTR 323 (All) and

also by the Hon'ble Bombay High Court in the case of CIT vs. Jawanmal

Gemaji Gandhi, (1985) 151 ITR 353 (Bom), which were also relied upon

before the CIT(A).

8. On the other hand, the Ld. Departmental Representative appearing for

the Revenue has relied upon the order of the CIT(A) in support of the case of

the Revenue.

9. We have carefully considered the rival submission. In the present case,

assessee does not dispute that the cash deposits found to have been made in

the three saving bank accounts in question are unexplained. We say so for

the reason that the explanation rendered by the assessee that the cash

deposits represented proceeds of unaccounted business carried on by him 6 ITA No.1923/PN/2013

has not been accepted by the Assessing Officer as well as by the CIT(A).

Both the authorities below have recorded concurrent finding that the existence

of the unaccounted business canvassed by the assessee could not be proved

on the basis of any material or evidence. Even before us, the said position

continues and therefore we proceed on the basis that there is no material on

record to indicate presence of unaccounted business by the assessee. The

CIT(A) held that the entire gross amount of cash deposits are assessable as

unexplained and not merely the amount of peak credit of the three bank

accounts.

10. We are in agreement with the CIT(A) that fundamentally the onus is on

the assessee to establish the source of any cash credit and in the present

case assessee has failed to explain the source of cash deposits in the banks

accounts. The alternate plea of the assessee was that the withdrawals made

from the bank account should be given credit vis-à-vis the subsequent cash

deposits made in the bank accounts. The CIT(A) has rejected the aforesaid

alternate plea and according to him, benefit of the earlier cash withdrawals

cannot be allowed against the subsequent deposits since assessee was not

able to establish the existence of the unaccounted business. The moot

question is that in the absence of any clinching explanation with regard to the

withdrawals and deposits, can the assessee be allowed the benefit of the

earlier cash withdrawals against the subsequent cash deposits. In this

context, the Hon'ble Allahabad High Court in the case of Fertilizer Traders

(supra) has observed as under :-

"13. After hearing both the parties and on perusal of the record, it appears that the basic dispute is regarding the re-computation of the peak pertaining to the credits/debits for the purpose of undisclosed income. The Tribunal in its impugned order has observed that :-

"... We fail to understand as to how the AO has worked out the peak on the basis of pick and choose. It is settled law that in the block assessment, the computation of undisclosed income could be made 7 ITA No.1923/PN/2013

only on the basis of seized material and matters seized during search. The AO cannot ignore some material."

14. Regarding the peak theory, it may be mentioned that the peak theory was defined in the Sampath Iyengar's Law of Income-tax, Vol. 3, 9th edition, page 3547. Accordingly, "Peak credit" theory - One of the commonest defects of an assessee, where a single credit or number of credits appear in the books in the account of any particular person side by side with a number of debits is that they should all be arranged in serial order, that a credit following a debit entry should be treated as referable to the latter to the extent possible and that, not the aggregate but only the "peak" of the credit should be treated as own explained. To give a simple example, suppose there are credits in the assessee's book in the account. A or Rs.5,000 each on 1st October, 1990 and again on 5th November, 1990 but there is a debit by way of repayment shown on 27th October, 1990, the explanation will be that the credit appearing on 5th November, 1981 has or could have come out of the withdrawal/repayment on 27th October, 1981. This plea is generally accepted as it is logical and acceptable (whether the creditor is a genuine party or not), provided there is nothing in the material on record to show that a particular withdrawal/repayment could not have been available on the date of the subsequent credit.

15. A refinement or extension of the plea occurs where the credits appear not in the same account but in the accounts of different persons. Even then, if the genuineness of all the person is disbelieved and all the credits appearing in the different account are held to be the assessee's own moneys, the assessee will be entitled to set off and a determination of the peak credit after arranging all the credits in the chronological order.

16. Such proposition was also considered by this Hon'ble Court in the matter of CIT vs. Neemar Ram Badlu Ram, 122 ITR 68 (All) in which the relevant paragraphs are reproduced as under:-

"The Tribunal also did not agree with the departmental authorities that merely because the assets in the balance sheet changed from time to time, the difference would not be available for explaining a similar difference in subsequent years."

17. In the light of above discussion, we find nothing wrong in the directions given by the Tribunal before restoring the matter back for re-computation."

11. In terms of the aforesaid discussion, as per the Hon'ble High Court,

even where the creditors are found to be not genuine, the peak credit theory

was available to the assessee provided there is no material on record to show

that a particular withdrawal/repayment could not have been available on the

date of the subsequent deposit. The aforesaid decision of the Hon'ble

Allahabad High Court clearly supports the plea of the assessee in-spite of the

assessee having failed to establish the existence of the unaccounted

business.

8 ITA No.1923/PN/2013

12. The Ld. Departmental Representative referred to a judgement of the

Hon'ble Allahabad High Court in the case of Bhaiyalal Shyam Behari vs. CIT,

(2005) 276 ITR 38 (All), which has also been relied upon by the CIT(A) to

justify the denial of peak credit theory to the assessee. We have perused the

said judgement of the Hon'ble Allahabad High Court and find that the facts

therein were quite different. In the aforesaid case, assessee was claiming that

all the cash credit entries in the different names were genuine. The Revenue

had treated the amounts of cash credits as unexplained and brought to tax the

same in terms of section 68 of the Act. In this background, assessee

canvassed that the peak credit should alone be treated as income of the

assessee and not the entire deposits. The aforesaid plea was rejected by the

income-tax authorities and the said action was approved by the Hon'ble

Allahabad High Court. In rejecting such a plea, the Hon'ble High Court noted

that the amount of cash credit standing in the names of different persons were

all along claimed by the assessee to be genuine deposits, and therefore, the

withdrawals/payment of the amounts to different set of persons during the

previous year would not entitle the applicant to claim benefit of peak credit.

Quite clearly, facts in the present case stand on a different footing inasmuch

as in the present case, the transactions in the three savings bank accounts are

not at all claimed to be explained transactions, rather assessee has accepted

them to be unexplained transactions. Therefore, the fact-situation in the case

of Bhaiyalal Shyam Behari (supra) considered by the Hon'ble Allahabad High

Court is not comparable to the present case. Thus, the said decision does not

help the case of the Revenue in the present circumstances.

13. Another decision relied upon by the Ld. Departmental Representative

as also by the CIT(A) is the judgement of the Hon'ble Allahabad High Court in

the case of CIT vs. Vijay Agricultural Industries, (2007) 294 ITR 610 (All). In

the said decision, the Hon'ble Allahabad High Court followed its earlier 9 ITA No.1923/PN/2013

decision in the case of Bhaiyalal Shyam Behari (supra) because the facts were

similar. As we have already noted earlier that the fact-situation in the present

case is quite distinct from the facts in the case of Bhaiyalal Shyam Behari

(supra), therefore the aforesaid decision also does not help the case of the

Revenue in the present case.

14. Another judgement relied upon by the Ld. Departmental Representative

is the judgement of the Hon'ble Madhya Pradesh High Court in the case of

Jhamatmal Takhatmal Kirana Merchants vs. CIT, (1999) 152 CTR 311 (MP).

In the case before the Hon'ble Madhya Pradesh High Court, unexplained

credit and debit entries were found recorded in a rough cash book. The

explanations of the assessee were found untrue by the income-tax authorities

as also by the Tribunal. The Assessing Officer had made addition of the gross

amount of the credit entries appearing in the rough cash book. Assessee had

sought the benefit of peak credit theory which was denied by the income-tax

authorities. The Hon'ble Madhya Pradesh High Court also denied the benefit

of peak credit theory by noticing that the entries of crediting and debiting itself

showed that assessee had undertaken only a jugglery to somehow evade the

income tax. In the context of such factual appreciation of the matter, the

Hon'ble High Court held that there was no question of allowing benefit of the

peak credit theory in such a situation. The aforesaid decision has been

rendered by the Hon'ble Madhya Pradesh High Court in the background of its

own peculiar facts. It cannot be understood as a proposition to say that the

peak credit theory cannot be applied in all circumstances. In-fact, the Hon'ble

Supreme Court in the case of Anantharam Veerasinghaiah & Co. vs. CIT,

(1980) 123 ITR 457 (SC) has noted that "it is a matter of consideration in each

case whether the cash credit can be reasonably attributed to a pre-existing

fund of concealed profits or they are reasonably explained by reference to

concealed income earned in that very year".

10 ITA No.1923/PN/2013

15. Quite clearly, the parity of reasoning by the Hon'ble Supreme Court is

to the effect that it would be a matter of consideration in each case whether a

cash credit can be reasonably attributed to a pre-existing fund of concealed

profits or they are reasonably explained by the reference to the concealed

income earned earlier in the very same year. To the similar effect also is the

judgement of the Hon'ble Bombay High Court in the case of Jawanmal Gemaji

Gandhi (supra). In-fact, in the case before the Hon'ble High Court, addition

related to the value of gold seized and confiscated by the Excise Authorities.

The value of gold was held to be the income of the assessee from undisclosed

sources. For the relevant assessment year, Assessing Officer also made an

addition on the ground that the rate of gross profit shown by the assessee was

low. In doing so, the Assessing Officer estimated the turnover and the rate of

gross profit. The assessee was agitating both the additions before the

Appellate Authorities. However, in the appeal before the Tribunal, assessee

also made an alternative contention that as there had been intangible addition

for the same assessment year, there was no reason to make a separate

addition for the value of the gold. The Tribunal accepted the said position and

held that there was no ground for making a separate addition for the value of

the gold. The aforesaid aspect of the matter travelled to the Hon'ble Bombay

High Court, which affirmed the action of the Tribunal. The Hon'ble High court

specifically noted that though the assessee did not contend before the

Assessing Officer that the source for the acquisition of the gold was the

addition made by the Assessing Officer to the turnover, yet it was assessee's

case before the Assessing Officer that the gold had been legitimately

acquired. The Hon'ble High Court further noted that even before the Tribunal

assessee had adopted similar stand but only as an alternate plea it was

contended that the value of gold can be said to have come out of the

intangible addition on account of estimated turnover. This aspect of the matter

was accepted by the Hon'ble High Court. A premise which can be drawn from 11 ITA No.1923/PN/2013

the aforesaid judgement of the Hon'ble Bombay High Court is to the effect that

the assessee was competent to plead for the benefit of peak credit theory

even when his plea of the impugned bank transactions were from

unaccounted business, was not accepted.

16. Therefore, in conclusion, we hold that there was no justification for the

CIT(A) to enhance the income amounting to Rs.1,85,97,900/- having regard to

the facts and circumstances of the present case. The Assessing Officer was

quite justified in applying the peak credit and bringing to tax a sum of

Rs.65,76,900/- on account of the unexplained deposits in the three saving

bank accounts. As a consequence, we set-side the order of the CIT(A) and

retain the addition of Rs.65,76,900/- made by the Assessing Officer as

undisclosed income in the hands of the assessee. Consequently, assessee

succeeds in Ground of Appeal No.1.

17. In the result, the appeal of the assessee is partly allowed.

Order pronounced on 31 st March, 2015.

Sd/- Sd/- (SUSHMA CHOWLA) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER

Pune, Dated: 31 st March, 2015. Sujeet

Copy of the order is forwarded to: - 1) The Assessee; 2) The Department; 3) The CIT(A)-IT/TP, Pune; 4) The CIT-IT/TP, Pune; 5) The DR "B" Bench, I.T.A.T., Pune; 6) Guard File. By Order //True Copy// Assistant Registrar I.T.A.T., Pune