Concept of peak credit in Income tax assessments

Introduction

If the AO discovers cash receipts in the books, or cash deposits in the bank account of the assessee, which are apparently not satisfactorily explained and tempted to tax u/s. 68, then;

If the assessee try to explain that such deposits, or part of the deposits, are out of withdrawals made from the same cash book or bank account and then request the AO to adjust deposits against withdrawals. Then highest of unexplained deposits is treated as an undisclosed income u/s. 68. This is called determination of peak.

Concept of peak theory

For getting the benefit of peak, the assessee has to admit that, borrowings made by the assessee from cash creditors are borrowings from non-genuine creditors, and the payments or outgo was only to himself in the form of withdrawals and the payees were also bogus.

Where the assessee claims that all the deposits are genuine, the benefit of peak will not be available. – Bhaiyalal Shyam Behari v. CIT [ 2005] 276 ITR 38 (All.)]

Where AO is able to prove the particular withdrawal is not available for redeposit/ recycling, the benefit of peak will not be available.

Unaccounted cash may be introduced in the books either as cash credit or as trade credit. Both of them can be assessed as deemed income. Both can be assessee’s own money. Therefore, concept of peak would apply to trade credit also provided it is non-genuine.

Where books of account are rejected, and profits are estimated then it will not be correct on the part of the AO to work out peak on the basis of such rejected book of account and make separate addition. – CIT v. K.M.N Naidu [1996] 221 ITR 451(Mad.)]

Where peak credit theory was applied in preceding year, and there was no change of circumstances in the subsequent year, then theory of peak credit could be applied in subsequent year also. – ITO v. Niteshkumar R Dalwadi [IT Appeal No. 53 (Ahd.) of 2013, dated 11-2-2014]

Determination of peak Credit

1. All the cash deposits and withdrawals, owned up by the assessee as undisclosed, are placed in chronological order.

2.The balances are drawn against each deposit and withdrawal.

3.The deposit in the first entry becomes closing balance against that first entry.

4.This closing balance of first entry becomes opening balance for second entry.

5.Deposit or withdrawal of the second entry is adjusted to the opening balance.

6.Then closing balance against the second entry is drawn.

7. This closing balance of second entry becomes opening balance of the third entry and so on.

Highest closing balance against any entry in the accounting period, arising after such adjustment of deposit/withdrawal becomes the peak in the accounting period.

Refer:

– Saral Plastics (P.) Ltd. v. ITO [IT Appeal Nos. 3118 & 3068 (Ahd.) of 2013, dated 25-5-2017]

– S.R. Enterprise v. ITO [2002] 77 TTJ 69 (Ahd.)]

– ITO v. Uday Shankar Mahawar [IT Appeal No.1903 (Kol.) of 2009, dated 16-7-2010]

Adjustments to the peak credit

After determination of peak credit, the AO is required to provide following adjustments; – Chetan Gupta v. Asstt. CIT [2013] 34 taxmann.com 306/144 ITD 344 (Delhi – Trib.)

Opening balances – Where in a bank account assessee has opening balance on the first day of accounting period (as brought forward from last day of previous accounting period), such opening balance has to be reduced from the peak credit for computing undisclosed income of the current year.

Past capital – Whose source is proved (in respect of past undisclosed capital action u/s. 148 is attracted, provided limitation for such action is available).

Past savings – Provided there is satisfactory evidence/explanation of such past savings.

Recoveries from debtors– Provided assessee has evidence of lending money in the past and interest income is shown or offered for taxation.

Gifts – Adjustment of gifts will depend upon evidence such as gift deed, confirmation, affidavits, or personal deposition, proving that the donor had adequate money for giving gift and further that such gift is from relatives as defined in the Explanation to Section 56(2).

Other transfers – It is possible that assessee might have received cash as transfers from the known persons who are prepared to admit to have given cash to the assessee with a purpose which is acceptable, such transfers are needed to be reduced from the peak credit.

Contra-Entries : The effect of contra-entries must be given for calculating peak credit.

Arithmetical mistakes – If the assessee points out arithmetical mistakes in calculating peak credit, the AO should consider it and give it effect.

Correct nature of entries – Only those entries of deposits or withdrawals should be considered for calculating peak which are owned up by the assessee and are not apparently relatable to/owned by other parties or are relatable to admitted business dealings. The tax treatment of such other entries will be different and will not be part of calculation of peak.

Capital receipts – In deposits there could be entries which are of the nature of capital receipts as received by the assessee on sale/disposal of a capital asset. The AO has to undertake a different tax treatment of such receipts like calculation of capital gains or adjustment in written down value in a block, but they will not be part of calculation of peak.

Rolling profits – Where part of the purchases have been made by the assessee from its rolling profits from unaccounted sales, then some credit of utilization of that profit should be given, provided such profits from unaccounted sales is taxed separately.

Cash available in the books – If cash book shows sufficient cash balance which assessee may use in making deposits in bank account whose other deposits and withdrawals are undisclosed then to the extent explanation of the assessee appears reasonable and satisfactory the credit should be given in the peak undisclosed credit. – Hytaisun Magnetics Ltd. v. Jt. CIT [2018] (Guj.)

Circumstances where peak theory will not be applicable

Where withdrawals are through cheques and it remains unexplained as to whom it has gone then benefit of peak cannot be allowed. – D.K. Garg (supra). Hon’ble Delhi High Court  & CIT v. Vijay Agricultural Industries [2007] 294 ITR 610. Allahabad High Court

Where depositors are different and recipients are different other than the assessee, the theory of peak credit cannot be applied. – Bhaiyalal Shyam Behari (supra)

Where cash was deposited in a bank account, whereas most of the withdrawals were by inward clearing and there were only few instances of cash withdrawals, peak theory would not be applicable. – Shivraj Mishrilal Bafna v. ITO (IT Appeal No.434/PN/2013)

Where assessee had all along been claiming to have genuine deposits, withdrawals/payments to different persons during the previous years, the Assessee was not entitled to claim the benefit of peak credit. – D.K. Garg (supra).

Conclusion

In peak, the withdrawal of cash, if not utilized elsewhere, is considered as available for making deposits. The highest unexplained cash deposit is considered as peak. The determination of peak reduces the taxable income. However, where withdrawals are through cheques and it is not proved that such withdrawals have come back to the pocket of the assessee, then benefit of those withdrawals will not be available to explain the deposits.