Recently, the Chennai bench of the Income Tax Appellate Tribunal ( ITAT ) has upheld the peak credit assessed by the Commissioner of Income Tax (Appeals) [CIT(A)], owing to the circular transactions.
The tribunal upheld the application of the peak credit theory in assessing the income of Shri V.G. Rajendran for the Assessment Year (AY) 2005-06. This decision confirms the methodology adopted by the Commissioner of Income Tax (Appeals) [CIT(A)] in determining the taxable income arising from circular transactions evident in the bank statements of the assessee.
The assessee, V.G. Rajendran was found to be operating multiple undisclosed bank accounts, including one held by his father. The Assessing Officer (AO) identified substantial unexplained deposits across these accounts and added ₹24,59,12,368 as undisclosed income for AY 2005-06.
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Challenging this, the assessee contended that many transactions were circular in nature—funds were transferred between various undisclosed accounts, leading to multiple entries of the same funds.
The appellant was represented by Clement Ramesh Kumar, CIT and the respondent-assessee by T. Banusekar, Advocate
The CIT(A) had recognized the circular pattern of transactions, where credits in one account corresponded to debits in another. To avoid taxing the same funds multiple times, the CIT(A) applied the peak credit theory. This approach identifies the maximum balance at any point in time across all accounts, representing the highest unaccounted-for amount. Accordingly, the CIT(A) recalculated the undisclosed income based on this peak credit balance.
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The Revenue appealed against the decision of CIT(A), arguing that the full amount of deposits should be considered as income. However, the ITAT upheld the application of peak credit theory by CIT(A).
The Tribunal noted that the circular transactions between the accounts justified this approach, as it accurately reflected the actual unaccounted income without duplication.
The ITAT bench of Vice President Mahavir Singh and Accountant Member S R Raghunatha noted that taxing the total deposits without recognizing the nature of these transactions would lead to unjust enrichment of the Revenue.
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It was thus held that, “we find no infirmity in the order of CIT(A) directing the AO to assess
only the peak credit at Rs.2.99 crores and no further addition is to be made.”
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