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UNEXPLAINED CASH CREDITS / PEAK CREDIT / INVETSMENT IN BANK ACCOUNT

INTRODUCTION

Income generates asset, which usually is in the form of cash. As per the double entry system of book keeping, any transaction has a dual effect, i.e., debit and credit entries of equal amounts. So, in the books of a person, income earned (credit) gives rise to receipt of cash (debit). To illustrate, suppose Dr. Jekyll received consulting fee of Rs.10,00,000 from Mr. Hyde on 12.03.2012, then in the books of Dr. Jekyll, Rs.10,00,000 is credited as income and Rs.10,00,000 is debited on account of cash. The income of Rs.10,00,000 is chargeable to tax. If the income of Rs.10,00,000 is disclosed by Dr. Jekyll in his books, the cash of Rs.10,00,000 will automatically get disclosed.  However, if Dr. Jekyll does not account for the receipt of Rs.10,00,000 as his income in his books, then naturally, the cash of Rs.10,00,000 would also become unaccounted. The unaccounted cash may be used by him for incurring expenditure or making investment, which again would be unaccounted in his books of account maintained for his source of income from consultancy. Sometimes, the person may not maintain books of account. But, since the income is not disclosed by him for the purpose of income-tax, he would find it difficult to explain the source for the cash, investments made or expenditure incurred out of such unaccounted income.

2.            UNEXPLAINED INVESTMENT, MONEY, EXPENDITURE

When we, as taxmen find that any person is the owner of any such cash or investment which has not been accounted in his books of account, or in a case where no books are maintained, the source for such cash or investment is not satisfactorily explained by him, then we tax such cash or investment as unexplained money (u/s.69A) or unexplained investment (u/s.69) of the Income-tax Act, 1961 respectively. Likewise, any expenditure incurred which is not accounted in the books of account or the source for which is not satisfactorily explained is assessed as unexplained expenditure u/s.69C. So, in the P&L Account and Balance sheet which is prepared or is required to be prepared for the purpose of Income-tax, the expenditure or cash or investment is not disclosed.

2.1.         A person usually incurs personal expenses, makes on-money payments, makes benami investments or investments in jewellery or personal effects out of undisclosed sources of income, as it is easy for him to hide it. Unless action u/s.133A or 132 is carried out, such unexplained cash, expenditure or investment is difficult to detect. However, once such unaccounted investment, money or expenditure is found, it is difficult for the assessee to explain the source thereof as he is caught unaware. To illustrate with the above example, suppose a survey u/s.133A  is carried out in the case of Dr. Jekyll on 14.03.2012 and in his books the cash balance as on 14.03.2012 is Rs.2,500/-. As Dr. Jekyll has earned income of Rs.10,00,000 on 12.03.2012 which has not been accounted for in the books, this cash receipt of Rs.10,00,000 will also be not accounted. Hence, though there will be book cash of Rs.2,500/-, the actual cash found will be Rs.10,02,500/-. So, there will be unaccounted cash of Rs.10,00,000, for which the assessee will not be in a position to offer any satisfactory explanation as he is caught unaware. Hence, Rs.10,00,000 will be taxed as unexplained money u/s.69A of the Income-tax Act, 1961.

 

3.            UNEXPLAINED CASH CREDIT

Beyond a point, it is difficult for a person to hide his assets which are generated out of unaccounted income. Hence, the person is forced to disclose such assets. But, as the income from which such asset is generated has not been disclosed in the books and no tax is paid thereon, the person needs to show as if the asset is generated from a source on which no income tax is attracted. Hence, in the books of account, such asset is brought in by showing its source as gift/loan/agricultural income/bogus LTCG on shares etc. Hence, in the books of account, an entry is made whereby the asset (usually cash in hand or cash deposited in bank) is introduced by showing it as gift received or loan received or proceeds of agricultural income. So, even if such an asset is acquired out of undisclosed source of income, since it is accounted for in the books, the same cannot be assessed u/s.69 or 69A of the Income-tax Act, 1961. Here, enquiry is required to be carried out about the identity of the person providing the credit entry, the genuineness of the transaction and the credit worthiness of the person providing the credit entry. The initial burden to prove these rests on the shoulder of the assessee. If the assessee fails to discharge the burden, then the sum credited is deemed to be his income u/s.68 of the Income-tax Act, 1961 as unexplained cash credits. Maintenance of books of account is a must and there must be an entry in such books showing credit from a person.

3.1.         To illustrate with example, suppose in the above case, Dr. Jekyll has not shown the above cash of Rs.10,00,000 as his income on 12.03.2012. Hence, he does not pay any tax on the same. However, suppose in his books of account he makes an entry on 13.03.2012 that he has received a gift of Rs.10,00,000/- from his father. Hence, the cash book shows cash receipt of Rs.10,00,000, but as gift on 13.03.2012. So, as on 14.03.2012, the cash balance as per books is Rs.10,02,500. Now, suppose a survey is carried out on 14.03.2012, there will be no difference in cash physically found and as per the books. Hence, no addition could be made u/s.69A. However, the assessee has still evaded tax on Rs.10,00,000/- which he has introduced in the form cash credit (gift) on 13.03.2012. The same needs investigation and can be taxed u/s.68, if the assessee fails to discharge the burden of establishing the identity & creditworthiness of the creditor and genuineness of the transaction of gift. Here, the assessee is well prepared as the whole plot is pre-planned by him and we as a taxmen need to work hard to establish that the cash credit is unexplained. However, unlike section 69, 69A & 69C, there is no need to carry out action u/s.132 or 133A to make addition u/s.68, as the information is already disclosed in the books and one only needs to establish that the cash credit is unexplained.

 

 

4.            DIFFERENCE BETWEEN UEXPLAINED CASH CREDIT AND UNEXPLAINED INVESTMENT

Sometimes, during the course of search or survey action we may find a bank pass book or bank statement of a bank account belonging to the assessee which is not accounted for in the books of the assessee. Now, if there are credits in the said bank accounts which are reflected in the bank pass book/bank statement, a question would arise whether the same is to be taxed as unexplained cash credits or as unexplained investment.

4.1.         A bank pass book or a bank statement is not a part of the books of account maintained by the assessee. It is nothing but the account statement of the assessee in the books of the bank. Therefore, the deposits made in the said bank account needs to be taxed as unexplained investment u/s.69 (or unexplained money u/s.69A) and not as unexplained cash credits u/s68. Unexplained cash credits can be taxed if there are cash credits in the books of account maintained by the assesseee.

5.            PEAK CREDITS

                Suppose, in the balance sheet of Dr. Jekyll as on 31.03.2012, there are two creditors by name Mr. Nitin & Mr. Dixit having closing credit balances as under:-

                Nitin      Rs.  5,000/-

                Dixit       Rs.35,000/-.

                                Rs.40,000/-

Enquiries caused establish that both Mr. Nitin and Mr. Dixit are not credit worthy. Now the question arises as to what is the amount of addition to be made? Is it Rs.40,000 or something else. The answer depends not on the credit balance but the credit entries in the books. So we need to get the account extracts of Nitin & Dixit in the books of Dr. Jekyll, which when obtained are as under:-

DR

 

 

NITIN A/C

 

CR

DATE

PARTICULARS

AMOUNT

DATE

PARTICULARS

AMOUNT

30-Jun-11

TO BANK

30000

01-Apr-11

BY BANK

120000

31-Mar-12

TO BANK

150000

07-Jul-11

BY BANK

65000

31-Mar-12

TO BALALNCE C/D

5000

 

 

 

 

 

185000

 

 

185000

DR

 

 

 

DIXIT A/C

 

CR

DATE

PARTICULARS

AMOUNT

DATE

PARTICULARS

AMOUNT

30-Apr-11

TO BANK

45000

01-Apr-11

BY BANK

120000

30-Jul-11

TO BANK

30000

12-May-11

BY BANK

45000

31-Mar-12

TO BANK

130000

30-Aug-11

BY BANK

75000

31-Mar-12

TO BALANCE C/D

35000

 

 

 

 

 

240000

 

 

240000

5.1.         As per the provisions of section 68, any sum credited in the books of the assessee needs to be enquired and taxed as the income of the assessee, if such sum credited is found unexplained. As it is established that both Mr. Nitin & Mr. Dixit are not credit worthy, then as per the provisions of section 68, the credits brought in the books in the name of Nitin & Dixit need to be taxed as per the details given below and not their closing credit balances of Rs.5,000 and Rs.35,000 as on 31.03.2012:-

DATE

NAME OF CREDITOR

AMOUNT

01-Apr-11

NITIN

120000

07-Jul-11

NITIN

65000

01-Apr-11

DIXIT

120000

12-May-11

DIXIT

45000

30-Aug-11

DIXIT

75000

 

TOTAL

425000

 

5.2.         The proposition to tax Rs.4,25,000 as unexplained cash credits is on the premise that these credits appearing in the books of the assessee are nothing but unaccounted income of the assessee worth Rs.4,25,000 which he has brought in the books of account in the guise of loan. However, a further question arises whether the assessee has really earned unaccounted income of Rs.4,25,000 which has been introduced as cash credits or it is more or less. It needs further analysis as under:-

5.3.         On 1.4.2011, there is cash credit of Rs.1,20,000 in the name of Nitin. As Nitin is not credit worthy, the amount of Rs.1,20,000 is added as unexplained cash credit. Thereafter, an amount of Rs.30,000 is shown to have been repaid by Dr. Jekyll to Nitin on 30.06.2011. Again, on 7.7.2011, there is one more cash credit of Rs.65,000 in the name of Nitin. Now, the question arises whether Nitin is not creditworthy to the extent of Rs.65,000 or Rs.35,000/- for the credit entry of Rs.65,000/-. The assessee may argue that the creditworthiness of Nitin to the extent of Rs.30,000 cannot be ruled out as the said amount is received by him from Dr. Jekyll on 30.06.2011 and source of Rs.30,000 out of Rs.65,000 stands explained satisfactorily.  For the balance Rs.35,000, the creditworthiness could be held as doubtful.

5.4.         There is force in this argument of the assessee that for the subsequent cash credit of Rs.65,000 on 7.7.2011, the source of Rs.30,000 cannot be ruled out as Nitin has received back Rs.30,000 on 30.06.2011. However, the issue cannot be decided as a matter of principle. The facts need to be examined. It may so happen that when Rs.30,000 is repaid to Nitin and is credited back to the bank account of Nitin on 30.06.2011, he has further given it as a loan to some other person before 7.7.2011 and there is fresh credit of Rs.65,000 on 7.7.2011 given to Dr. Jekyll. If it is so, then the entire Rs.65,000 needs to be taxed u/s.68. However, if in the bank account of Mr. Nitin, the amount of Rs.30,000 repaid by Dr. Jekyll is not used for any other purpose, then the credit worthiness could be said to have not been established to the extent of Rs.30,000 and therefore, the addition could be made only to the extent of Rs.35,000 u/s.68.

5.5.         Similarly, in the case of Mr. Dixit, cash credit as on 1.4.2011 of Rs.1,20,000 is liable for addition u/s.68, as the credit worthiness is not proved. However, with regard to the further credit of Rs.45,000 on 12.05.011, as there is already a debit entry of Rs.45,000 on 30.04.2011 in the account of Mr. Dixit, the creditworthiness of Mr. Dixit for the cash credit of Rs.45,000 on 12.05.2011 can be taken as established (if the said Rs.45,000 given back to him on 30.04.2011 is still standing in the credit of Mr. Dixit in his bank account upto 12.05.2011 when it is again given back as loan to Dr. Jekyll). Similarly, on 30.08.2011, there is a cash credit of Rs.75,000 in the name of Mr. Dixit. However, before such cash credit there is debit entry of Rs.30,000 on 30.07.2011 (amount given back by Dr Jekyll to Mr. Dixit). If this amount of Rs.30,000 still stands credited in the bank account of Mr. Dixit upto 30.08.2011, then the credit worthiness to the extent of Rs.30,000 out of Rs.75,000 cannot be ruled out and therefore, addition to the extent of only Rs.45,000 can be made.

5.6.         In the ultimate analysis, the addition to be made u/s.68 would be as under:-

Nitin      1.4.2011                               Rs.1,20,000

Nitin      7.7.2011                               Rs.   35,000

Dixit       1.4.2011                               Rs.1,20,000

Dixit       30.08.2011                           Rs    45,000

                                                Rs.3,20,000

5.7.         The peak credit amount of Rs.3,20,000 could be computed by ascertaining the highest amount of credit standing in the names of the creditors on any date during the year as under. The entries of debit and credit are to be chronologically arranged and the credit balances computed by deducting the debit amount from the credit balance:-

DATE

NAME

(CR)

(DR)

CUM CR. BALANCE

01-Apr-11

NITIN

120000

0

120000

01-Apr-11

DIXIT

120000

0

240000

30-Apr-11

DIXIT

0

45000

195000

12-May-11

DIXIT

45000

0

240000

30-Jun-11

NITIN

0

30000

210000

07-Jul-11

NITIN

65000

0

275000

30-Jul-11

DIXIT

0

30000

245000

30-Aug-11

DIXIT

75000

0

320000

31-Mar-12

DIXIT

0

150000

170000

31-Mar-12

DIXIT

0

130000

40000

However, as discussed earlier, the theory of peak credit cannot be applied blindly without appreciating facts of each case.

6.            PEAK DEBIT/INVESTMENT:-

We have already discussed about the taxability of deposits made in the unaccounted bank account of the assessee. The amount deposited in such bank account needs to be taxed as the unexplained investment or unexplained money of the assessee. However, just like peak credit, if there are deposits and withdrawals on various dates overlapping one another, then the peak deposit in the bank account needs to be brought to tax. The working is illustrated with an example. Suppose the assessee has a bank account which has not been accounted for in the books of the assessee. The bank pass book shows entries of cash deposits, cash withdrawals, non-cash deposits and non-cash withdrawals as under:- 


DATE

PARTICULARS

DEPOSITS

WITHDRAWALS

BALANCE

01-Apr-11

Opening Balance

 

 

2350

09-Apr-11

Cash

28000

 

30350

22-Apr-11

Cash

37000

 

67350

23-Apr-11

Cash

8000

 

75350

04-May-11

ABC Enterprises

 

55000

20350

17-May-11

Clearing

21000

 

41350

09-Jun-11

Self

 

30000

11350

12-Jun-11

Cash

26000

 

37350

15-Jul-11

Cash

21000

 

58350

22-Jul-11

Self

 

40000

18350

24-Jul-11

Cash

50000

 

68350

29-Jul-11

ABC Enterprises

 

6000

62350

11-Aug-11

Clearing

33000

 

95350

22-Aug-11

Cash

60000

 

155350

05-Sep-11

Self

 

22000

133350

25-Sep-11

Self

 

13000

120350

30-Sep-11

Interest

150

 

120500

03-Oct-11

Self

 

34500

86000

10-Oct-11

Cash

10000

 

96000

11-Oct-11

ABC Enterprises

 

40000

56000

31-Oct-11

Bank of India

 

11250

44750

22-Nov-11

Self

 

18000

26750

30-Nov-11

Bank of India

 

11096

15654

24-Dec-11

Self

 

3000

12654

31-Dec-11

Bank of India

 

10942

1712

27-Jan-12

Cash

81000

 

82712

31-Jan-12

Bank of India

 

10788

71924

01-Feb-12

Clearing

9590

 

81514

04-Feb-12

Self

 

23000

58514

29-Feb-12

Bank of India

 

10634

47880

03-Mar-12

Cash

 

 

47880

16-Mar-12

Self

 

33000

14880

31-Mar-12

Interest

100

 

14980

31-Mar-12

Bank of India

 

10480

4500

 

TOTAL

3,84,840

3,82,690

 

 

 

6.1.         Here, the above bank statement shows total deposits of Rs.3,84,840/- and peak balance of Rs.1,55,350 as on 22.08.2011. Now the question arises as to what is the quantum of unexplained money/investment to be brought to tax. Is it Rs.3,84,840 or Rs.1,55,350/-. In order to bring to tax any deposit in bank which is not recorded in his books, the assessee needs to be given an opportunity to explain the source for such deposit. The assessee for sure will not have any explanation for the source for deposits of Rs.28,000, Rs.37,000 and Rs.8,000 on 9.4.2011, 22.04.2011 and 23.04.2011 respectively. Hence, these deposits would be brought to tax as the income of the assessee u/s.69 or 69A. So far so good. However, on 9.6.2011, the assessee has withdrawn Rs.30,000 by cash and therefore, for the subsequent deposit of Rs.26,000 on 12.06.2011, the assessee’s argument that the source is out of the withdrawn cash of Rs.30,000 cannot be ruled out unless proved otherwise. However, like peak credit theory, the theory of peak deposits also cannot be blindly applied. It is possible that the amount of Rs.30,000 withdrawn on 9.6.2011 has been used by the assessee for his personal expenses and therefore cannot become a source for the subsequent deposit of Rs.26,000 on 12.06.2011. Hence, facts of each case have to be examined and considering human probabilities, the peak deposit needs to be worked out.

6.2.         Further, it is only cash withdrawals which could be said to be source for the subsequent cash deposits. Non-cash withdrawals cannot be said to be source for the subsequent cash deposits. Similarly, any cash withdrawal made cannot become a source for the non-cash deposits. Therefore, the theory of peak bank deposit is applicable only for cash deposits and cash withdrawals. So, the cash deposits and cash withdrawals need to be separated from non-cash deposits and withdrawals and need to be chronologically arranged as under to ascertain daily balances and the peak cash deposit during the year:-

DATE

PARTICULARS

DEPOSITS

WITHDRAWALS

BALANCE

01-Apr-11

Opening Balance

 

 

2350

09-Apr-11

Cash

28000

 

30350

22-Apr-11

Cash

37000

 

67350

23-Apr-11

Cash

8000

 

75350

09-Jun-11

Self

 

30000

45350

12-Jun-11

Cash

26000

 

71350

15-Jul-11

Cash

21000

 

92350

22-Jul-11

Self

 

40000

52350

24-Jul-11

Cash

50000

 

102350

22-Aug-11

Cash

60000

 

162350

05-Sep-11

Self

 

22000

140350

25-Sep-11

Self

 

13000

127350

03-Oct-11

Self

 

34500

92850

10-Oct-11

Cash

10000

 

102850

22-Nov-11

Self

 

18000

84850

24-Dec-11

Self

 

3000

81850

27-Jan-12

Cash

81000

 

162850

04-Feb-12

Self

 

23000

139850

03-Mar-12

Cash

 

 

139850

16-Mar-12

Self

 

33000

106850

6.3.         Considering that all the cash withdrawals made by the assessee are used by him for making the subsequent cash deposits, the  peak cash deposit works out to Rs.1,62,850 as on 27.01.2012. Out of this, the opening balance is Rs.2,350/- for which the source is pertaining to A.Y.2011-12 and the balance of Rs.1,60,500/- to the A.Y.2012-13.

6.4.         Further, the assessee also needs to explain the sources for the deposits of Rs.63,590/- made  by clearing as under:-

17-May-11

Clearing

21000

11-Aug-11

Clearing

33000

01-Feb-12

Clearing

9590

 

6.5.         If the assessee is unable to explain the sources (which he would not be), the aggregate of peak cash deposits and deposits by clearing (Rs.1,62,850+63,590), needs to be assessed as unexplained investment/money, out of which Rs.2,350 would be assessed for the A.Y.2011-12 and the balance of Rs.2,24,090 in the A.Y.2012-13. Further, the interest income of Rs.250 also needs to taxed as income from other sources.

7.            CONCLUSION

                The theory or concept of peak credit / investment does not find any place in the Income-tax Act, 1961. However, it is settled law that a person should not be taxed more than once for the same source of income. The peak credit theory has evolved on this principle of avoiding double taxation for the same source of income.  Hence, peak credit / investment is to be computed to ensure that the assessee is not taxed twice for the same source of income and the benefit of telescoping could be given to him. However, whether to apply the peak credit theory or not and to which entries it is to be applied depends on facts of each case and material on record. As an Assessing Officer, our concern is with each credit and the assessee is required to explain each credit. It should be the case of the assessee and not the Assessing Officer to apply the peak credit theory and the asessee should come with his explanation and evidence as to why peak credit has to be applied to the facts of his case.  

365
omsanthi1994 on March 14 2016 19:30:56

Lucid and simple, makes it so easy to understand the concept. Well written Nitinji

144
kr dahiya on April 21 2016 13:34:40

Great. Gagar men sagar

101
gurunathahs on June 16 2016 21:13:59

very informative. Thanks to Divakar sir

11
Jitendra Kumar Verma on July 30 2016 00:13:11

Maza aa gya Smile Smile

644
DHARANI NATH on October 16 2016 21:16:56

There could not have been a simpler way to explain the topic Nitin Diwakar sir.

649
sunil941973 on July 06 2017 14:02:27

Very informative sir

3646
binoditax on October 25 2017 16:59:40

Nicely elaborated and explained. Very useful and simple for the users to understand and apply in assessment.

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