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Facts
The assessee did not file an income tax return for AY 2009-10. Information from AIR indicated a deposit of ₹11,87,840/- in an HDFC Bank account. The AO initiated reassessment proceedings under section 147 r.w.s. 144, claiming the assessee shifted residence and notices were served at the old address. The AO made a huge addition of ₹32,62,154/-.
Held
The Tribunal noted that the CIT(A) failed to properly appreciate documents, apply the Peak Credit Theory, and recognize business receipts for taxing only net profit. The Tribunal observed that the deposit was related to the assessee's textile business and directed the AO to calculate Net-Profit at 20% on the deposit.
Key Issues
Whether the entire amount deposited in the bank account can be taxed as unexplained income when the assessee is engaged in business, and whether the Peak Credit Theory should be applied.
Sections Cited
144, 147, 148
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Income Tax Appellate Tribunal, SURAT BENCH, SURAT
Before: SHRI DINESH MOHAN SINHA & SHRI BIJAYANANDA PRUSETH
आदेश / O R D E R PER DINESH MOHAN SINHA, JM: Captioned appeal filed by the assessee, pertaining to Assessment Year (AY) 2009-10, is directed against the order passed by the Learned Commissioner of Income Tax(Appeals), National Faceless Appeal Centre, [(in short “Ld.CIT(A)/NFAC”] vide order dated 21.10.2025, which in turn arises out of an assessment order passed by Income Tax Department / Assessing Officer under section (u/s.) 144 r.w.s. 147 of the Income Tax Act, 1961 (in short “the Act”), vide order dated 30.11.2016. 2. Grounds of appeal raised by the assessee are as followed:
1. “1 On the facts and in the circumstances of the case, and in law, the learned Commissioner of Income Tax (Appeals) erred in sustaining the addition of 16.93,104/- as unexplained income, without properly appreciating the evidences and explanations provided by the appellant. 2 On the facts and in the circumstances of the case, and in law, the learned CIT(A) and the learned AO erred in not applying the Peak Credit Theory, which is a well-established principle to determine unexplained cash credits, especially in cases involving frequent deposits and withdrawals 3. On the facts and in the circumstances of the case, and in law, both the learned CIT(A) and AO failed to appreciate that the cash deposits represented business turnover, and only the net profit embedded in the gross receipts should be brought to tax, in line with judicial precedents.
4. On the facts and in the circumstances of the case, and in law, the learned Assessing Officer has erred in making an addition of 216,93,104/- as unexplained income without specifying any charging section under the Income Tax Act, 1961, thereby rendering the addition bad in law. The learned CIT(A) further erred in sustaining such an addition without rectifying this legal defect 5. On the facts and in law, the learned Assessing Officer passed the reassessment order u/s 144 without proper application of mind by mechanically adding total bank credits, including amounts beyond the relevant financial year. The entire order is bad in law, and the learned CIT(A) erred in sustaining part of the addition without addressing this jurisdictional defect. Your appellant further reserves his right to add, alter or to amend any of the aforesaid grounds at the time of hearing of an appeal and all the above grounds are without prejudice to each other”
Brief facts of the case that the income of the assessee was below the maximum amount chargeable to tax. The assessee had not filed the return of income for AY 2009-10. There was information form of AIR information available with Income Tax Department that assessee have deposited ₹11,87,840/- in HDFC Bank Account No. 05331000055257. Therefore, Learned AO had issued notice u/s. 148 of Income Tax Act for verifying this transaction. Assessee was engaged in textile business, he had shifted his residence and notice u/s. 148, etc was issued on old address so assessee was not aware about the notices being issued by Income Tax Department and hence assessee could not submit any documents before the learned AO. Therefore, learned AO has passed the order u/s 144 r.w.s. 147 of the Act on 30/11/2016 by making huge addition of ₹32,62,154/- and raising the huge demand of ₹ 25,48,430/-. Thereafter, assessee has preferred appeal before the learned CIT(A) on 16/01/2017. The learned CIT(A) has issued various hearing notices and against which assessee has made detailed submission on 12/09/2024, 16/10/2024, 07/11/2024 & 07/01/2025 along with all documentary evidences like Bank Fund Flow statement, Cash Flow Statement, Profit and Loss Account, Balance Sheet, Capital Account, Bank Statement. The learned CIT(A), vide order dated 21/01/2025, partly allowed the appeal by deleting addition of ₹15,69,050/- with following observation:
“7.4. During the remand proceedings, the AO after verification of records of the appellant pertaining to the previous assessment years stated that the contention of the appellant that he had also filed return of income for preceding two AY.2007- 08 and A. Y.2008-09 and has declared business income in both preceding years is not correct because as per the data/details of Return of income for A.Y.2007-08 and A.Y.2008-09 the appellant had shown commission income of Rs.7,86,905/- under the head business income and Agricultural income of Rs.5,80.871/- respectively. Therefore, there was no such business activities were identified in the preceding two Assessment Years for justification of claimed business of Textiles by the appellant in the F.Y.2008-09 relevant to A.Y.2009-10. Moreover, the appellant has not furnish any documentary evidence such as purchase/sale invoices, name and address of the parties from whom purchases were made, purchase/sales registers etc. Therefore, I am of the considered opinion that the appellant contention that the amount deposited/credited in the bank account was the turnover of the textile business run by the appellant during the F.Y. under reference is nothing but afterthought only. Similarly, the contention of the appellant has been considered carefully that the AO should have considered pick credit in the bank to quantify the addition. The appellant has not submitted bank ledger account with complete narrations of each transactions explaining what were the purposes of withdrawing the money form bank and re-depositing the same. Secondly, at one side the appellant is claiming that the money credited in his bank account pertained to the sales made by him out of textile business, on the other side he claims that the same deposit pertained to the withdrawals made him from time to time. The submission of the appellant self-contradictory thus cannot be accepted. In view of the facts discussed above, the remaining addition of Rs. 16,93,104/- is hereby confirmed and upheld. Accordingly, ground no. 2 and 3 of the appeal are dismissed and not allowed.
In result, the present appeal of the appellant is partly allowed.”
During the course of argument, the Ld. AR of the assessee stated that the addition of ₹16,93,104/- was confirmed by the Ld. CIT(A) without any cogent reason, that profit element is to be taxed, and not the full amount of consideration to be added.
On the other hand, Ld. DR for the revenue, relied upon the order of the Ld. CIT(A) and not objected to the prayer of the Ld. AR.
We have heard both the parties and perused the material available on record and also perused the order of Ld. CIT(A) and paper books submitted by Ld. AR. The learned CIT(A) failed to consider under mentioned documents: a. Proper appreciation of already submitted documents. b. Application of the Peak Credit Theory. c. Recognition of business receipts and taxing only the net profit. 7.1 We note that the Ld. CIT(A) disposed off the appeal, after taking the additional evidences submitted by the assessee. We note that the Ld. CIT(A) has recorded submission of the assessee. The assessee shown sale of ₹19,27,196/- profit shown as ₹1,18,263/- i.e., approximately @ 5%. Now as far as credit entry of ₹ 16,93,104/- in FY 2008-09 is concerned, it is humbly submitted that assessee was engaged in textile business, so assessee used to make cash sales and cash deposited by the assessee or directly deposit by parties in Bank Account. So major receipt in Bank Account is relating to business of the assessee only, there is no unexplained cash credit in bank account of the assessee. From bank statement, it was observed the frequency of deposits and withdrawals. The assessee have not deposited entire money A. Y.2009-10 Manish Kishanbhai Chopra v. ITO at one time. Assessee has regularly depositing money and then making payment to goods suppliers. From this observation, it appears that assessee was engaged in the business of textile. From Cash flow statement and Bank Fund flow statement, Source of the credit into bank account was clearly explained by the assessee. The appellant has furnished additional evidences comprising of details and documents about cash receipts and other credit reflecting in his bank account statement. Though the appellant has not filed reply during the assessment proceedings. During the remand proceedings, the AO has not considering the profit and loss account, Balance-sheet, Capital Account, etc., and further the AO also not considered the request of the assessee for considering the peak balance of certain income. We note that the Ld. CIT(A) has considered the documents for adjudicating the issue. We note that the whole issue is that the assessee has deposited of ₹11,87,840/- in the HDFC Bank in cash, however, it was claimed by the assessee that the money has not been deposited in one time, the assessee regularly deposit money and then made payment to the suppliers. After considering the facts and circumstances, we are of the view that whole amount deposited cannot be taxed, since the assessee doing business of textile and profit shown at @ 5%. In interest of justice, we directed the AO to calculate the Net-Profit at the @ 20% on the deposit so made and the Ld. Sr-DR for the revenue also agreed with it. In view of the above, we allow the appeal of the assessee.