Facts of the Case

The assessee had substantial cash deposits exceeding ₹18 lakh in his bank account during the relevant assessment year. No return of income was originally filed. Based on AIR information regarding these deposits, reassessment proceedings were initiated under Section 147, and notice under Section 148 was issued.

In response, the assessee filed a return declaring income from contract receipts under Section 44AD. The assessee explained that part of the deposits represented contract receipts, while certain amounts were deposited by third parties for obtaining demand drafts using his bank account.

The Assessing Officer rejected the explanation and treated the deposits as unexplained income. The addition was confirmed by the CIT(A), leading to the appeal before the Tribunal.

Issues Involved

  1. Whether the reassessment based on AIR information regarding cash deposits was valid.
  2. Whether the entire cash deposits in the bank account could be treated as unexplained income.
  3. Whether deposits made by third parties for issuance of demand drafts could be excluded.
  4. Whether, in the presence of frequent deposits and withdrawals, only peak credit should be considered for addition.

Petitioner’s (Assessee’s) Arguments

  • A major portion of deposits represented contract receipts, income from which was duly offered under presumptive taxation.
  • Certain deposits were made by third parties (friends/business associates) for obtaining demand drafts in favor of companies such as Bharti Airtel and Indian Oil Corporation.
  • Confirmations, affidavits, and identity details of these persons were submitted.
  • Statements of third parties were recorded without confronting the assessee, violating principles of natural justice.
  • Alternatively, due to frequent withdrawals and redeposits, only peak credit should be considered, not the gross deposits.

Respondent’s (Department’s) Arguments

  • The assessee failed to respond to preliminary inquiries and did not file a return originally.
  • No credible evidence supported the claim of contract receipts.
  • Confirmations from third parties were unreliable; in one case, the person allegedly denied transactions with the assessee.
  • The assessee failed to discharge the burden of proving the source of deposits.
  • Therefore, the addition of total deposits as unexplained income was justified.

Court Order / Findings (ITAT)

  • The assessee failed to substantiate the claim of contract receipts with supporting evidence; hence, that explanation could not be accepted outright.
  • However, where bank accounts show frequent deposits and withdrawals, taxing the entire deposits is not appropriate.
  • Withdrawals must be considered as potential sources for subsequent deposits.
  • Therefore, the principle of peak credit should be applied for determining unexplained income.
  • Deposits claimed to be made by third parties for issuance of demand drafts were prima facie supported by bank entries but required proper verification.
  • Statements of such persons recorded without the assessee’s presence could not be relied upon conclusively.
  • Proper examination of these individuals in the presence of the assessee was necessary.

Accordingly, the Tribunal set aside the orders of lower authorities and remanded the matter to the Assessing Officer for fresh adjudication after verification. The appeal was allowed for statistical purposes.

Important Clarification

  • Peak credit theory should be considered where there are cyclical deposits and withdrawals.
  • Additions cannot be sustained solely on gross deposits without examining corresponding withdrawals.
  • Third-party confirmations cannot be rejected without proper examination of those parties.
  • Statements recorded behind the back of the assessee violate principles of natural justice.
  • Proper opportunity of hearing must be granted during reassessment proceeding

Link to download the order -  https://itat.gov.in/public/files/upload/1679633680-Irfan%20Ahmad.pdf

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