Defense of Peak Credit cannot be taken where deposits remain unexplained u/s 68 of the Income Tax Act: Delhi HC [Read Order]

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Justices S Muralidhar and Prathiba M Singh, in a recent ruling, held that the assesse cannot take a defence of peak credit theory when the deposits remain unexplained under Section 68 of the Income Tax Act, 1961.

Explaining the scope of Peak Credit Theory, a division bench of the Delhi High Court held that an accommodation entry provider wanting to avail the benefit of the ‘peak credit’ has to make a clean breast of all the facts within his knowledge concerning the credit entries in the accounts.

In the instant case, the department made an addition under section 68 of the income tax Act against the assesse, a Chartered Accountant on ground that he failed to prove the genuineness of the source the amount received by him during the relevant assessment year. The Assessing Officer noted that he had conducted inquiries the Banks in which the assesse had account to obtain the details of cheques which were issued by Assessee. These cheques were deposited in different bank accounts and these banks were further requested to provide the account opening forms of these concerned persons/beneficiaries to whom cheques were issued by the Assessee. After getting the addresses of these beneficiaries from their respective account opening forms, summons were issued to them. But almost all these beneficiaries were not found at the addresses given in their account opening forms.

Assessee contended that he was merely lending his name and providing accommodation entries and therefore, only the peak credit in the two bank accounts should be worked out taking into account both the cash and cheque transactions.

On second appeal, the ITAT quashed the assessment order finding that the if the companies were non-existent, there was no justification for the AO to treat the payments vis-a-vis the three companies as the income of the Assessee.

The department preferred an appeal before the High Court challenging the Tribunal order.

Before the High Court, Mr. Ruchir Bhatia, the senior standing counsel for the department, contended that ITAT has failed to appreciate that the Assessee had not provided an explanation for all the cheque deposits or even the cash deposits and the corresponding cheques issued from his account.

Based on the settled legal position that peak credit is not applicable where deposits remain unexplained under Section 68 of the Act, the bench accepted the departments’ contention and quashed the order.

If the Assessee as a self-confessed entry provider wanted to avail the benefit of the ‘peak credit’, he has to explain with sufficient detail the source of all the deposits in his accounts as well as the corresponding destination of all payments from the accounts. The assessee should be able to show that money has been transferred through banking channels from the bank account of creditors to the bank account of the assessee, the identity of the creditors and that the money paid from the accounts of the assessee has returned to the bank accounts of the creditors. The assessee has to discharge the primary onus of disclosure in this regard

It noted that basically, what an accommodation entry provider does is to accept cash from an Assessee and arranges to have a cheque issued from his own account or some other account, usually of ‘paper’ or fake entities, to make it appear to be a loan or an investment in share capital. “The accommodation entry provider usually charges a commission which is deducted upfront. Where the Assessee is unable to explain the source of such credit in his account – i.e. by demonstrating the identity of the provider of the credit, the creditworthiness of such entity, and the genuineness of the transaction – the credit entry is treated as unexplained and the income is treated under Section 68 of the Act as the income of the Assessee.”

“In the instant case, we are dealing with an Assessee who does not deny that he is an accommodation entry provider. He, in fact, makes no bones of the fact that he either owned or floated ‘paper companies’ only for that purpose. He also does not dispute the fact that he has not been able to explain the source of all the deposits in his accounts or the ultimate destination of all the outgo from his accounts,” the bench said.

Read the full text of the order below.

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