By TIOL News Service

KOLKATA, NOV 15, 2016: THE ISSUE IS - Whether where assessee admitted that he was engaged in providing accommodating entries to various parties where by cash was immediately withdrawn after the deposit of the cash, this transaction shows that the money does not belong to the assessee and accordingly, peak credit theory was to be applied for taxing the undisclosed income of assesseee. YES IS THE VERDICT.

Facts of the case:

The assessee, was engaged in the business of iron and steel products. During the course of assessment proceedings, the AO observed that the assessee did not disclose savings bank a/c in the IT return. On scrutiny of the bank statement it was noted that for the year under consideration a sum of Rs.1,09,50,000/- was deposited by way of cash in the said a/c on different dates. The assessee accepted that he was engaged in providing accommodation entries in lieu of cash. However, he was not aware about the name of the beneficiaries as the assessee failed to provide the identity of the persons from whom the cash was accepted and cheques were issued to them. It was held that cash deposited in his bank a/c belonged to assessee and this is his unexplained income. Accordingly, AO treated the entire amount of cash deposited in his bank a/c as undisclosed income and added to the total income of assessee. On appeal, assessee submitted that he has issued cheques to third parties in lieu of cash so cash deposited with his bank account does not belong to him. Therefore no addition can be made. He further, submitted that AO should have applied the peak credit theory to arrive at the undisclosed income as there were deposit and withdrawals in the bank a/c of assessee. It is well settled that undisclosed income of assessee should be determined on the basis of peak credit method. The assessee, accordingly, offered an amount of Rs.9.20 lakh being peak credit balance.

On appeal , the ITAT held:

++ the authorities have treated the entire cash deposits with the bank account of assessee as undisclosed income on the premise that assessee failed to produce the parties to whom the cheques were issued. Authorities Below has also denied the arguments made by assessee that he was engaged in the business of accommodating entries provided to various parties. Now the question before us arise so as to whether the cash deposit in the bank account of assessee amounts to undisclosed income. In the aforesaid facts and circumstances, we find that various courts have held to apply the peak credit theory.

++ it is seen from records that the assessee has furnished his statement on oath stating that he is engaged in providing accommodating entries to various parties and for this act earned nominal amount of commission income. From the perusal of bank statement, we find that cash was deposited and immediately it was transferred to the account of the party leaving negligent amount of balance in the bank account of assessee. In our considered view, we conclude that assessee is engaged in providing accommodated entries to the parties. Had there been the business of the iron and steel of the assessee then the lower authorities should have brought on record the evidence of the business but the DR failed to bring the same. We also find that the cash was immediately withdrawn after the deposit of the cash. This transaction shows that the money does not belong to the assessee. In the absence of any information about the iron & steel business of the assessee, we are accordingly inclined to apply the peak credit theory to tax the undisclosed income of assessee.

(See 2016-TIOL-1946-ITAT-KOL)