Next, in the case of Swaroop Chandra Kojuram, 235 ITR 732, wherein the question before the Hon’ble High Court was whether the benefit of peak credit theory could or could not be granted to the assessee. The Hon’ble Court has held that it was not a referable question of law. It was pleaded, quote “it was submitted that a refinement or extension of the peak theory occurs where the credits appear not in the same account but in the accounts of different persons. If the genuineness of all the persons is disbelieved and all the credits appearing in the different accounts are held to be assessee’s own money, the assessee will be entitled to a set off and a determination of the peak credit after arranging all the credits in chronological order. It was admitted that these propositions should not, however, be treated as propositions of law. They are inferences based on normal probabilities and can be displaced by material on record which may indicate facts to the contrary.” unquote. It was held by the Hon’ble Court that the theory of peak credit presupposes an adverse finding against the petitioner that certain borrowings made by the petitioner from the cash creditor were the borrowings from non-genuine creditors and therefore the same is to be treated as unexplained fund-borrowing to the assessee. Having found, the borrowings had been made from various characters which were not genuine, the question of law arises so as to determine the quantum of the addition to be made under the theory of incremental peak credit to be applied so as to ascertain the maximum amount which the petitioner had in the books of account at particular date during the year which is to be treated as non-genuine.
So the logic behind the applicability of the peak credit theory is that if the borrowing from various persons is to be treated as non-genuine then systematic repayment to such person should also be treated as non-genuine. Such recycling thus constituted unexplained credits and unexplained debits, thus, accordingly a netting of the two is required to be worked out from the cash flow statement. In the back-ground of the above observations it can finally be summarized that the procedure to be followed by the A.O. ought to be to first work-out the interest income generated from the finance business, on one hand, and the interest paid to the parties as per seized material, so as to arrive at the net figure of interest earned from the finance business. Thereupon, the net investment is to be worked out, which shall be the difference between the borrowings from the parties and the loans advanced to the parties. The third figure is the incremental peak as computed on the basis of the cash flow. Then the A.O. is required to decide whether the net undisclosed investment in the finance business is to be taxed or the net undisclosed finance business income is to be assessed. In any case the telescoping amongst these two computations are permissible in such type of working. These suggestions are not exhaustive so the A.O. is directed to finalize the correct figure of net addition as per law and as per the accounting principles. We hold accordingly.
During the course of hearing, when this question of working of the incremental peak cash credit was argued, learned AR has drawn our attention on the order given effect to the orders of learned CIT(A) u/s. 250 of IT Act for A.Y. 2004-05, 2005-06 and 2006-07. It is contested that the AO has not correctly appreciated the directions of learned CIT(A) and there was a default in giving the effect to the order of learned CIT(A). Now the present position is that the aforesaid directions of learned CIT(A) have now been challenged by the Revenue Department in the grounds of appeal as reproduced above. Therefore, the said directions are now required to be modified in the light of the directions presently given in this judgment by us. The aforesaid directions of learned CIT(A) thus stood merged with the fresh finding given in this judgment of the Tribunal. We, therefore, direct the assessee to co-operate with the Revenue Department in preparation of a cash flow statement on the basis of the seized material and thereupon compute the incremental peak credit in respect of the findings of the assessee. As a result we hereby resolve the controversy. The effect of the above finding is that the grounds raised by the Revenue stood allowed but restored back with directions to adopt the correct way of computation of undisclosed income, needless to say as per law.
To sum up, the issue raised by the assessee to assess the income in the status of AOP is hereby dismissed. However, the income of the Firm is required to be assessed as per the direction made hereinabove, resultantly, the appeals of the Revenue are allowed for statistical purpose.