Case Law Details
Ponnusamy Periasamy Vs ITO (ITAT Chennai)
Chennai ITAT Applies Peak Credit Theory, Deletes Addition of Entire Cash Deposits U/s 69A
Summary: The Chennai ITAT partly allowed the assessee’s appeal for AY 2011-12, directing that the addition under Section 69A of the Income-tax Act be restricted by applying the peak credit theory instead of taxing the entire cash deposits. The Assessing Officer had reopened the assessment under Section 148 and, after an ex parte best judgment assessment, treated cash deposits of ₹10,10,100 in the assessee’s bank account as unexplained money under Section 69A. The First Appellate Authority upheld the addition. Before the Tribunal, the assessee contended that the deposits represented business receipts from the coir fibre business, supported by continuous deposits and withdrawals and a Small Scale Unit Certificate relating to the manufacture of coir fibre. The Tribunal observed that the bank statement reflected frequent cash deposits and corresponding withdrawals, indicating circulation of funds in the course of business. Considering these facts and circumstances, it directed the Assessing Officer to compute the peak credit in the bank account and restrict the addition accordingly, instead of bringing the entire cash deposits to tax.
The Chennai ITAT partly allowed the appeal of an individual engaged in the coir fibre business by holding that the entire cash deposits of ₹10.10 lakh in the bank account could not be treated as unexplained money u/s 69A. The assessment had been completed ex parte after the assessee failed to respond to reassessment notices, leading the AO to tax the entire cash deposits as unexplained money. The CIT(A) upheld the addition for want of contemporaneous documentary evidence.
Before the Tribunal, the assessee contended that the deposits represented business receipts from the coir fibre business and pointed out that the bank account reflected continuous cash deposits and corresponding withdrawals. It was alternatively argued that, even if the explanation was not fully accepted, the addition should be restricted by applying the Peak Credit Theory, as the same money was being repeatedly withdrawn and redeposited. The assessee also produced a Small Scale Unit Certificate issued by the District Industries Centre evidencing the family’s coir fibre manufacturing business.
The Tribunal observed that the bank statement clearly showed frequent cash deposits coupled with corresponding withdrawals, indicating circulation of funds in the course of business rather than independent unexplained deposits. In such circumstances, it held that taxing the entire cash deposits was unjustified. Accepting the alternate plea, the Tribunal directed the AO to compute the peak credit in the bank account and restrict the addition accordingly, instead of bringing the entire cash deposits to tax. The appeal was accordingly partly allowed.
Cases Discussed:
- Balan Logeswaran v. ITO, ITA No. 2312/Chny/2025 (order dated 30.01.2026)
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal filed by the assessee is directed against the order of Addl/JCIT(A)-2, Lucknow dated 27.02.2026 passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2011-12.
2. The assessee has raised both legal grounds and grounds on merits. However, at the time of hearing, the Ld. AR confined his arguments only to the ground challenging the action of the First Appellate Authority (FAA) in confirming the addition of Rs.10,10,000/-made by the AO as unexplained money u/s.69A of the Act. Therefore, we proceed to adjudicate only the said issue.
3. Brief facts of the case are as follows: The assessee is an individual engaged in the business of manufacturing coir fibre from coconut husk. For the assessment year 2011-12, the assessee did not file his return of income. Based on information received by the Department, it was noticed that the assessee had made cash deposits aggregating to Rs.10,10,100/- in his savings bank account maintained with KVB Bank Ltd., Namakkal, during the relevant previous year. Accordingly, the AO initiated reassessment proceedings by issuing a notice u/s.148 of the Act. As the assessee failed to comply with the statutory notices issued during the course of the reassessment proceedings, the AO completed the assessment ex-parte as best judgment assessment and treated the cash deposits of Rs.10,10,100/- as unexplained money u/s.69A of the Act.
4. Aggrieved, assessee filed appeal before the FAA. Before the FAA, the assessee submitted that he was engaged in the retail business of bundling and trading coir fibre (i.e., fibre clamp/naar mattai) and that the cash deposits represented business receipts arising from such activity. However, the FAA rejected the assessee’s contention on the ground that the same was not supported by any contemporaneous documentary evidence. Accordingly, the FAA upheld the addition made by the AO u/s. 69A of the Act.
5. Aggrieved, assessee is in appeal before the Tribunal. The Ld. AR submitted that the cash deposits in the bank account were regular business receipts from the assessee’s coir fibre business, as evidenced by continuous deposits and corresponding withdrawals throughout the year. It was contended that the AO, without examining the cash flow or the nature of the business, treated the entire deposits as unexplained money merely because the assessee could not participate in the assessment proceedings. It was argued that only the profit element embedded in the business receipts could be brought to tax and not the entire deposits. Alternatively, the Ld. AR submitted that the addition should be restricted by applying the Peak Credit Theory, as the bank statement reflected continuous withdrawals and redeposits, with the peak credit working out to Rs.1,77,553/-. Reliance was placed on the decision of the Chennai Bench of the Tribunal in Balan Logeswaran v. ITO in ITA No. 2312/Chny/2025 (order dated 30.01.2026).
6. The Ld. AR further submitted that the assessee has produced a Small Scale Unit Certificate issued by the District Industries Centre, Namakkal, dated 30.12.1998, standing in the name of the assessee’s father, wherein the business activity is described as manufacture of coir fibre out of coconut husk. It was submitted that the assessee has continued the said business and, therefore, the cash deposits represent business receipts. Accordingly, it was pleaded that the income may be reasonably estimated at 8% of the total cash deposits, which would work out to approximately Rs.80,000/-, instead of sustaining the addition u/s.69A of the Act.
7. The Ld.DR supported the order of the AO and the FAA.
8. We have heard rival submissions and perused the material on record. We have heard the rival submissions and perused the material available on record. The assessee has contended that the cash deposits represented business receipts from the coir fibre business and, therefore, only the profit element therein should be brought to tax. Alternatively, it was pleaded that the addition be restricted to the peak credit in the bank account. In support of the business activity, the assessee has produced the Small Scale Unit Certificate issued by the District Industries Centre, Namakkal, dated 30.12.1998, in the name of the assessee’s father, relating to the manufacture of coir fibre out of coconut husk. On perusal of the bank statement, we find that there are frequent cash deposits and corresponding withdrawals, indicating circulation of funds in the course of business. In these facts and circumstances, we are of the considered view that the addition should be restricted to the peak credit in the bank account instead of bringing the entire cash deposits to tax. Accordingly, we direct the AO to compute the peak credit in the bank account and restrict the addition. It is ordered accordingly.
9. In the result, the appeal filed by the assessee is partly-allowed.
Order pronounced in the open court on 9th July,2026 at Chennai.
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