Facts of the Case

During the assessment proceedings, the Assessing Officer (AO) discovered multiple cash deposits totaling ₹25.73 lakhs in the Savings Bank Account maintained by the assessee with Canara Bank. Due to a lack of response and non-appearance from the assessee, the AO proceeded to pass an ex parte best judgment assessment. The entire amount of ₹25.73 lakhs was added to the assessee's income, treating it as undisclosed investment/income.

The assessee appealed before the Commissioner of Income Tax (Appeals) [CIT(A)], demonstrating sufficient cause that prevented her from appearing before the AO. She furnished bank statements showing a continuous pattern of 125 deposits (ranging from ₹585 to ₹45,000) and 124 corresponding withdrawals throughout the financial year. The assessee contended that instead of adding the entire volume of transactions, only the maximum peak credit balance of ₹95,293 should be considered for tax assessment. The CIT(A) accepted this explanation and restricted the addition to ₹95,293, which was subsequently upheld by the Income Tax Appellate Tribunal (ITAT).

Issues Involved

  • Whether the lower appellate authorities were justified in restricting the quantum of tax addition to the "peak credit" balance of ₹95,293 instead of the total aggregate cash deposits of ₹25.73 lakhs.
  • Whether a pure finding of fact regarding a bank statement's cash flow pattern (deposits and withdrawals) gives rise to a substantial question of law under Section 260A of the Income Tax Act.

Petitioner’s (Revenue's) Arguments

The Revenue (represented by the Appellant's advocate) contended that the Assessing Officer was fully justified in making an addition of the entire sum of ₹25.73 lakhs as undisclosed income. They argued that because the assessee failed to provide necessary explanations and source details during the initial assessment stage, the total sum of the unexplained cash deposits should be taxed in full, without granting the benefit of peak credit calculations.

Respondent’s (Assessee's) Arguments

The assessee argued that she was prevented by sufficient cause from presenting her case before the Assessing Officer initially. By producing detailed bank statements before the CIT(A), she established a consistent velocity of transactions consisting of alternating cash deposits and subsequent withdrawals. It was argued that the same funds were being rotated, and therefore, adding the gross aggregate sum would lead to double taxation. The addition, if any, should strictly be restricted to the peak credit balance of ₹95,293 reached during the year.

Court Order / Findings

The High Court of Delhi dismissed the Revenue's appeal, affirming the orders of the CIT(A) and the ITAT. The Court observed that the bank statement clearly exhibited approximately 125 deposit entries and 124 withdrawal entries throughout the period from April 2, 2004, to March 30, 2005. Both appellate authorities correctly deduced that the continuous cycle of deposits and withdrawals allowed for an easy determination of the peak balance. The High Court held that the determination of the peak deposit amount of ₹95,293 is a pure finding of fact and concluded that no substantial question of law arose for its consideration.

Important Clarification

  • Peak Credit Validity on Rotational Deposits: When a bank account reflects a clear and continuous pattern of alternating cash deposits and cash withdrawals, the entire aggregate of deposits cannot be treated as undisclosed income. The tax liability must be confined only to the highest "peak credit" balance in the account during the financial year, as withdrawals are presumed to feed the subsequent deposits.
  • Fact vs. Law in Best Judgment Cases: The calculation and acceptance of a peak credit balance based on verified bank statements constitute a pure finding of fact, which does not warrant interference as a substantial question of law under Section 260A.

Sections Involved

  • Section 68 of the Income Tax Act, 1961 (Unexplained Cash Credits / Undisclosed Income)
  • Section 144 of the Income Tax Act, 1961 (Best Judgment Assessment)
  • Section 260A of the Income Tax Act, 1961 (Appeal to High Court)

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2010:DHC:11365-DB/AKS20122010ITA20152010_161113.pdf

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