Reassessment of Unexplained Cash Deposits: AO to Apply Peak Credit Theory and Set Off Against Agricultural Income

Issue:

Whether, in a reassessment where an assessee with only agricultural income deposits substantial cash, the Assessing Officer (AO) should work out the peak negative cash balance by considering all cash transactions (including withdrawals and bearer cheques) and then set off this peak against agricultural income, taxing only the remaining sum as unexplained money under Section 69A of the Income-tax Act, 1961.

Facts:

For the assessment year 2016-17, the assessee did not file any return of income. The Assessing Officer (AO) received information through AIR (Annual Information Return) indicating that the assessee had deposited a substantial amount of cash in a bank account. The AO reopened the assessment under Section 147, reasoning that since no return was filed, these cash deposits represented income escaping assessment. Consequently, an assessment order was passed, and additions were made on account of the entire cash deposits.

The assessee contended that the cash deposits represented a rotation of funds (from prior cash withdrawals) and partly from net agricultural income earned. It was accepted that the assessee’s only source of income was from agriculture, a fact also acknowledged by the revenue. However, there were indeed certain cash deposits made in bank accounts, co-existing with cash withdrawals.

Decision:

Yes, the court held that other cash transactions (i.e., both cash withdrawals, including bearer cheque transactions, and cash deposits) were to be worked out separately to consider the peak negative cash balance, if any, to arrive at the income of the assessee. For this purpose, the only method was to consider the peak negative balance of cash by adopting the “peak credit theory,” which is a recognized method for determining negative cash balance in view of the rotation of funds happening in bank accounts. Thus, the matter was restored to the file of the Assessing Officer to verify the peak credit workings given by the assessee by considering only cash transactions and bearer cheque transactions. Finally, the peak negative cash balance should be set off with agricultural income, and the remaining sum, if any, was to be brought to tax as unexplained money under Section 69A. The matter was remanded.

Key Takeaways:

Peak Credit Theory for Cash Deposits: When an assessee makes multiple cash deposits and withdrawals, and the source is contended to be rotation of funds or existing cash, the “peak credit theory” is a recognized method. This theory considers the highest net unexplained cash in hand at any point in time, avoiding taxing the same cash multiple times as it moves in and out of the bank account.
Analysis of Cash Transactions: The AO is required to meticulously analyze all cash transactions (deposits and withdrawals, including those by bearer cheques) to ascertain the actual peak unexplained cash.
Set-off Against Agricultural Income: Agricultural income, being exempt from income tax, can be a valid source for cash deposits. If the assessee can establish a nexus between the agricultural income and the cash deposits, that portion should not be added as unexplained money.
Section 69A (Unexplained Moneys): Section 69A allows the AO to tax unexplained money, bullion, jewelry, or other valuable articles. However, if the assessee provides a plausible explanation and sufficient evidence (like agricultural income or prior withdrawals), the addition under this section should be limited to the genuinely unexplained portion.
Burden of Proof on Assessee: While the onus is on the assessee to explain the source of cash deposits, the AO cannot make an arbitrary addition of the entire deposit if explanations are partly substantiated.
Remand for Proper Verification: The matter was remanded back to the AO for proper verification of the assessee’s peak credit workings and consideration of agricultural income, ensuring a fair and accurate assessment.
Importance of Proper Accounting/Records: This case underscores the importance for assessees, even those with exempt income, to maintain adequate records to explain their cash flows, especially during periods of high scrutiny like demonetization.

IN THE ITAT DELHI BENCH ‘G’

Shakti Singh

NFAC, Delhi

M. Balaganesh, Accountant Member
and Yogesh Kumar U.S., Judicial Member

IT Appeal No. 4589 (Delhi) OF 2024
[Assessment year 2016-17]

MAY 15, 2025

Rohit Kapoor, Adv. and Virsain Aggarwal, ITP for the Appellant. Sahil Kumar Bansal, Sr. DR for the Respondent.

ORDER

M. Balaganesh, Accountant Member. – The appeal in ITA No.4589/Del/2024 for AY 2016-17, arises out of the order of the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘ld. NFAC’, in short] in Appeal No. ITBA/NFAC/S/250/2024-25/1067242817(1) dated 01.08.2024 against the order of assessment passed u/s 147 r.w.s. 144 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 28.03.2022 by the Assessing Officer, NaFAC, Delhi (hereinafter referred to as ‘ld. AO’).

2. Though the assessee has raised several grounds, the only effective issue to be decided in this appeal is as to whether the Learned NFAC was justified in upholding the addition made in the sum of Rs 1,13,31,950/- on account of cash deposits in the facts and circumstances of the instant case.

3. We have heard the rival submissions and perused the materials available on record. The assessee holds a total landholding of 60 bighas of land at Fatehpur, VPO, Nanauta, Tehsil Rampur Maniharan, District Saharanpur, Uttar Pradesh. The primary source of income, it was stated that the primary source of income of the assessee is only from agricultural activities. The assessee did not have taxable income, hence had not filed any return of income for the year under consideration. The case of the assessee was sought to be reopened vide issuance of notice under section 148 of the Act dated 31-3-2021 based on the information received through the AIR indicating that assessee had deposited cash amounting to Rs 1,13,31,950/- in Prathama UP Gramin Bank, Nanauta. The Learned AO observed that since the assessee had not filed any income tax return regularly under section 139 of the Act for the year under consideration, the cash deposits made in the bank account represent income escaping assessment in the hands of the assessee and accordingly proceeded to issue notice under section 148 of the Act dated 31-3-2021. The assessment ultimately stood completed under section 144 read with section 147 of the Act making an addition of Rs 1,13,31,950/- on account of entire cash deposits made in the bank account. The assessee preferred an appeal before the Learned NFAC, stating that the cash deposit represents rotation of funds out of cash withdrawals and partly out of net agricultural income earned amounting to Rs 20,12,800/-. The assessee also furnished a petition under in terms of Rule 46A of the Income Tax Rules certain additional evidences which were admitted by the Learned CITA and a remand report was called from the Learned AO. The Learned AO accepted the assessee’s explanation and allowed the benefit of set off against agricultural income amounting to Rs 20,12,800/- as explained, in respect of cash deposits. The assessee also furnished a cash flow statement which reflected a peak credit workings containing peak credit of Rs 19,77,410/- as on 28-01-2016 excluding the agricultural income. It was submitted that once the agricultural income is also included in the said workings, there would be no addition that would be warranted in the case of the assessee.

4. The Learned CITA identified certain discrepancies in the peak credit workings submitted by the assessee and proceeded to ignore the same. Some of the discrepancies pointed out by the Learned CITA in the peak credit workings are that the assessee had claimed certain payments made to certain individuals by cheques as cash withdrawals. This was stated to be bearer cheques issued to the parties who had withdrawn cash from the bank on behalf of the assessee and given the cash to the assessee. However, this explanation was found to be not accepted by the Learned CITA. Further, the Learned CITA observed that there were certain credit entries in the bank account other than cash which remained unexplained. Since the assessee had not considered those credit entries in the bank account in the peak credit workings, the peak credit workings deserve to be rejected. With these observations, the Learned CITA ignored the peak credit workings submitted by the assessee.

5. Before us, the Learned AR submitted that assessee had issued bearer cheques to certain parties who had withdrawn cash from the bank and given to the assessee. Hence, the same should be construed as cash withdrawals. Further, in support of this, the Learned AR also filed a bank certificate confirming the fact that those transactions represent only cash withdrawals made by those certain individuals from the bank. The Learned AR also submitted the date wise details of credits made in the bank account other than cash to represent maturity proceeds of fixed deposits. The Learned AR also gave the details of fixed deposit receipt numbers, the date of investment together with the date of maturity there on. It was pleaded by the Learned AR that the interest income on fixed deposits was less than the maximum amount not chargeable to tax and hence there was no obligation on the part of the assessee to file the return of income. The Learned AR also sought to explain that the Learned CITA erroneously referred to the credit amount of Rs. 12 lakhs on 31-3-2016 while factually no such credit entry of Rs. 12 lakhs existed neither in the Pratama UP Gramin Bank nor in the loan account maintained with Punjab National Bank as on 31-32016. Further, the Learned AR also submitted that there were certain transactions of amounts received and paid from / to Mr. Jatinder Kumar (son of the assessee) who is regularly assessed to tax and in support of which the copy of income tax return of the son together with his bank statements were placed on record. Hence those sums could not be included in the peak credit workings. Similar was the transactions made with Mrs. Anguri Devi, mother of the assessee. Further, the assessee had raised a loan of Rs. 5 lakhs from Punjab National Bank on 6-4-2015 which amount also stood credited in the Pratama UP Gramin Bank account of the assessee. This was sought to be not considered by the assessee in the peak credit workings. Further, a sum of Rs. 72,500/- was received from Bharat Traders (Proprietor Jagdish Lal Chawla) who is regularly assessed to income tax. This sum was received through regular banking channels and the same does not represent any element of income there on. Accordingly, it was not considered in the peak credit workings of the assessee.

6. Per Contra, the Learned DR vehemently pleaded that it is very unusual that 13 persons were engaged by the assessee to make cash withdrawals from the bank account. Hence the bearer cheques theory quoted by the Learned AR together with the bank certificate thereon cannot be believed. He argued that having decided to adopt peak credit for determination of income of the assessee, it is bounden duty of the assessee to consider all the transactions in the bank account and cannot do cherry picking thereon.

7. We find that the assessee was able to satisfactorily explain the credits in the bank account other than cash transactions with proper evidences in the maturity proceeds of fixed deposits, amounts received from son, mother, Bharat Traders and loan from Punjab National Bank. It is to be noted that the assessee’s only source of income is from agriculture which fact has also been accepted by the revenue by accepting agricultural income of Rs 20,21,800/-. However, there were certain cash deposits made in the bank accounts together with the cash withdrawals. The agricultural income transactions as claimed by the assessee have been duly accepted by the revenue already. Hence the other cash transactions of cash (i.e both cash withdrawals including bearer cheque transactions and cash deposits) are to be worked out separately to consider the peak negative cash balance, if any, to arrive at the income of the assessee. For this purpose, the only method is to consider the peak negative balance of cash by adopting the peak credit theory, which is a recognized method of determination of negative cash balance in view of rotation of funds happening in the bank accounts. The assessee had duly given those workings which were not examined by the revenue. Hence in the interest of justice and fair play, we deem it fit and appropriate, to restore this issue to the file of the Learned AO to verify the peak credit workings given by the assessee by considering only cash transactions and bearer cheque transactions. The peak negative cash balance should be set off with the agricultural income of Rs 20,21,800/- and remaining sum, if any, is to be brought to tax as unexplained money under section 69A of the Act in the hands of the assessee. With these directions, the grounds raised by the assessee are allowed for statistical purposes.

8. In the result, the appeal of the assessee is allowed for statistical purposes.