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October 10, 2022

If the assessee failed to file details of creditors, the addition for undisclosed income is justified

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

If the assessee failed to file details of creditors, the addition for undisclosed income is justified

Facts and Issue of the Case

The facts of the case are that the assessee is an individual . Return of income for AY 2015-16 was filed manually declaring income of Rs. 2,68,740/- on 30.03.2016. The case was selected for scrutiny through CASS for the reason “large value of share or unit reported in security transaction tax return which is settled otherwise than by the actual delivery or transfer .”The assessee is engaged in the business of trading of rice and paddy. Notices u/s 143(2) & 142(1) of the Act were served on the assessee. During the course of assessment proceedings, ld. AO noticed that the assessee is holding a savings bank account with the IDBI Bank. This account is not disclosed in the return of income filed by the assessee. A copy of this bank account was obtained. Ld. AO noticed that in the said bank account there were total credits amounting to Rs. 22,61,494/- and the debits were mainly payment to a share broker namely Techno Shares & Stocks Pvt. Ltd. The assessee was asked to explain and it was stated that the alleged deposits were made out of the sale proceeds of rice and paddy and also loans from friends and relatives received from time to time but could not produce any evidence or proof in support of this claim. Ld. AO, thus, came to a conclusion that the said credits are undisclosed income of the assessee liable to be added u/s 69A of the Act. Addition for bank interest of Rs. 1,044/- on the said undisclosed bank account was also made and income assessed at Rs. 25,31,278/-.

The assessee is now in appeal before this Tribunal raising the following grounds including additional ground:

“1. For that impugned confirmation of entire assessment addition by the appellate authority is unjust and bad in law.

2. For that impugned appellate order is vitiated by recording wrong and incorrect justification of said addition of peak credit plea of the appellant before the appellate authority. But the very grounds of appeal as recorded by appellate authority is legally and factually contrary to the observation of the appellate authority.

3. For that appellant is just liable for estimated addition of said gross cash deposits since the appellant filed return u/s 44AD.

4. For that appellant may modify the grounds.”

“5. For that appellate authority could have made peak balance credit addition since there have been circulating deposits and withdrawals.”

The assessee’s senior counsel passionately argued, citing the written submissions as well as additional grounds, that additions should have been made just for the peak credit and not for the full deposits. Additionally, it was claimed that the assessee submits the income tax return required by Section 44AD of the Act on a presumptive basis, however the Senior CIT(A) has not acknowledged this fact. Second, it is contended that the funds used to fund said deposits came in part from business profits and in part from payments made to people who exchanged shares through the broker of the appellant. Thirdly, it is argued with support from judicial rulings that only the maximum credit should be added, not the entire amount . In contrast, Ld. D/R vigorously argued in favour of both the lower parties’ orders.

Observation by the Court

The court had  heard rival contentions and perused the records placed before us. The assessee has raised four grounds of appeal and one additional ground of which ground nos. 1 & 4 are general in nature which need no adjudication and through the remaining grounds, the assessee’s contention is that only the peak credit balance of the undisclosed bank account should have been added by ld. AO and not the entire amount credited during the year in the undisclosed bank account held in IDBI Bank.

The court notice that the assessee is primarily engaged in trading of rice and paddy and has offered the income on presumptive basis u/s 44AD of the Act. It is not in dispute that the bank account held by the assessee with IDBI Bank has not been disclosed. Perusal of the bank account placed on record shows that during the year, apart from the credit of interest, a sum of Rs. 22,61,494/- has been deposited. Out of this amount cash deposit is Rs. 16,55,000/- and remaining amount are bank transfers. The amount so credited in this bank account has been utilized for trading in equity shares/derivatives/future and payments are given to Techno Shares & Stocks Pvt. Ltd. It is claimed by the assessee that it has suffered huge losses and the total amount paid to Techno Shares & Stocks Pvt. Ltd. has turned into loss.

Now the dispute before us is only with regard to the credits in the said bank account which are not explained. The assessee is claiming that the source of the said deposits i.e. cash and cheque is partly from loans taken from various friends and relatives, partly from sale proceeds of business carried on by him which have been diverted to his bank account and part of the credits is on account of the money taken from relatives and friends to be invested in stock market. Though the assessee was required to file complete details of such friends and relatives and also the details of sales but the same has not been done at any stage.

Under this situation to end the controversy coupled with being fair to both the parties, the only way out left is to sustain the addition only to the extent of peak credit in such bank account. There is no specific detail of the calculation of peak credit from either of the sides and neither it is a case of cash deposits and cash withdrawals for which peak credits theory is perfectly applicable. But keeping in view that the alleged credits in the bank account in the form of cash and cheque have only been utilized for making payment to Techno Shares & Stocks Pvt. Ltd. and the assessee having incurred loss on such trading of shares is evidenced by the financial ledger appearing under the PAN number of the assessee on Form No. 10BB and also accepting the fact that the said cash deposit possibly contains the element of short term loans taken from friends and relatives, past savings, sale proceeds of the trading business and also looking to the fact that the peak credit in the bank account is Rs. 6,36,479/- as on 13.09.2014, we in the interest of justice and being fair to both the parties, sustain an addition of Rs. 8 lakhs to cover up the peak credit balance and other unexplained deposits and delete the remaining additions of Rs. 14,62,538/- and partly allow the grounds raised by the assessee.


The appeal filed by the assesse is partly allowed by the court .


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