Commissioner Of Income Tax v. D. K. Garg

$~R29 *IN THE HIGH COURT OF DELHI AT NEW DELHI+ITA 115/2005 COMMISSIONER OF INCOME TAX ..... Appellant Through:Mr. Ruchir Bhatia, Senior StandingCounsel. Versus D. K. GARG ..... Respondent Through:Dr. Rakesh Gupta, Advocate withMr.AshwaniTaneja,Mr.RohitKumar Gupta, Mr. Lakshya Goyal, Advocate. CORAM:JUSTICE S.MURALIDHARJUSTICE PRATHIBA M. SINGH O R D E R%04.08.2017 Dr. S. Muralidhar, J.: 1. This appeal by the Revenue under Section 260A of the Income Tax Act,1961 (‘Act’) is against an order dated 12[th]February, 2004 passed by theIncome Tax Appellate Tribunal (‘ITAT’) in ITA No. 4514/Del/2003 for theAssessment Year (‘AY’) 1995-96. Question of law 2. While admitting this appeal on 28[th]November, 2008, the followingquestion of law was framed: “Whether the Income Tax Appellate Tribunal wascorrect in law in restricting the addition made onaccount of unexplained deposits in the bank accountsof the assessee to Rs 5,87,374/- as against Rs 72,08,996/- on the basis of peak credit theory ?” Background facts 3. The Respondent/Assessee is a Chartered Accountant. For the AY inquestion, he filed his return of income on 10[th]October, 1996 declaring histaxable income at Rs. 49,880 which comprised his gross professionalreceipts of Rs. 1,91,050. The Assessing Officer (‘AO’) noted that theAssessee was holding two current accounts in the Union Bank of India,Karol Bagh, wherein sufficient cash and cheque deposits were made duringthe relevant period. It was also noted that the Assessee had floated onecompany viz., M/s Prem Chand Plantation Private Limited and purchasedtwo other companies viz., M/s Anuradha Pharmaceuticals Pvt. Ltd. and M/sSai Fisheries Pvt. Ltd. The AO further noted that the said three companiesand other two companies viz., Zamindar Plantation Pvt. Ltd. and KisanPlantation Pvt. Ltd. were all sold to M/s James Group. 4. Notice was issued to the Assessee on 29[th]April, 1999 under Section 148of the Income Tax Act (‘the Act’) regarding his income that escapedassessment.TheAssesseedidnotparticipateinthere-assessmentproceedings for a long time. Thereafter, on 5[th]February, 2002, the Assesseeinformed the AO that the return already filed by him on 10[th]October, 1996should be treated as his return in response to the notice under Section 148 ofthe Act. Before the AO the Assessee gave a statement in writing in whichhe, inter alia, stated thus: "I have already stated to your honour on the statement recorded andthe subsequent note on the activities carried by me that I was indulgedin the business of providing entries to the parties who are in need for the same. The entries were routed thru agriculture companies. I haveearned an income of Rs. 1,91,168/- from the said business during theyear 1994-95 and in the subsequent year I could not earn the incomebecause the demand for fresh entries were negligible. The calculationand the detail how I have earned income are enclosed herewith forboth the years. The entries consists of loan entries and loan entries forapplying shares in public issues. I was getting merely 1 %commission / services charges and 0.25% on amount utilized in publicissues. The name of the companies are also enclosed herewith givingthe quantum of entries provided as loan and for subscription in publicissues." Assessment order the same. The entries were routed thru agriculture companies. I haveearned an income of Rs. 1,91,168/- from the said business during theyear 1994-95 and in the subsequent year I could not earn the incomebecause the demand for fresh entries were negligible. The calculationand the detail how I have earned income are enclosed herewith forboth the years. The entries consists of loan entries and loan entries forapplying shares in public issues. I was getting merely 1 %commission / services charges and 0.25% on amount utilized in publicissues. The name of the companies are also enclosed herewith givingthe quantum of entries provided as loan and for subscription in publicissues." Assessment order 5. In the assessment order dated 28[th]March, 2002, the AO noted that theAssessee was not in a position to prove the source of deposits made in hisbank accounts. Inquiries were made with the Union Bank of India, KarolBagh, to obtain the details of cheques which were issued by Assessee. Thesecheques were deposited in different bank accounts and these banks werefurther requested to provide the account opening forms of these concernedpersons/beneficiaries to whom cheques were issued by the Assessee. Aftergetting the addresses of these beneficiaries from their respective accountopening forms, summons were issued to them. But almost all thesebeneficiaries were not found at the addresses given in their account openingforms. As regards the credit entries in the said accounts of the Assessee areconcerned, wherever the Assessee was able to show that the correspondingissuance of cheque therefrom was to the same person, the benefit of theprinciple of 'peak credit' was given to him by the AO. Where, however, thesource of the deposit and the issuance of the cheque was unexplained andcould not be 'squared off', the AO treated the deposits as the Assessee’s income and added it to the returned income. From the Assessee’s books itwas found that cheques worth Rs. 90 lakhs were received by the Assesseefrom three companies viz., M/s Anuradha Pharmaceuticals, M/s SaiFisheries and M/s Premchand Plantations. The unexplained peak credit ofthe cheques deposited in the Assessee’s bank accounts were considered anda sum of Rs.20,91,882 was added to the total income of the Assessee underSection 68 of the Act. Likewise, the unexplained cash deposits in his bankaccounts amounting to Rs.51,17,114 were also added to his total income.The total income was, therefore, revised to Rs.72,58,880 under Section143(3) read with Section 147 of the Act. Before the CIT (A) 6. The Assessee then went in appeal before the Commissioner of IncomeTax (Appeals) [‘CIT (A)’] against the aforementioned order of assessment.Before the CIT (A), it was pointed out by the Assessee that he was merelylending his name and providing accommodation entries. Accordingly, it waspleaded before the AO on behalf of the Assessee that only the peak credit inthe two bank accounts should be worked out taking into account both thecash and cheque transactions. It was argued on behalf of the Assessee thatthe additions made by the AO should be restricted to the extent of peakcredit only. The Assessee worked out the peak credit as Rs.5,87,374. 7. On this, the CIT (A), asked for a Remand Report from the AO. On 8[th]July 2003, the AO submitted a remand report wherein the peak balance inthe two bank accounts, as worked out by the Assessee at Rs.5,87,374, as on6[th]December, 1995, was accepted. However, the AO reiterated his stand that the additions made separately, for the cash deposits as well as for the peakcredit on account of cheque transactions with the three companies viz., M/sAnuradhaPharmaceuticals,M/sSaiFisheriesandM/sPremchandPlantations, were justified. 7. On this, the CIT (A), asked for a Remand Report from the AO. On 8[th]July 2003, the AO submitted a remand report wherein the peak balance inthe two bank accounts, as worked out by the Assessee at Rs.5,87,374, as on6[th]December, 1995, was accepted. However, the AO reiterated his stand that the additions made separately, for the cash deposits as well as for the peakcredit on account of cheque transactions with the three companies viz., M/sAnuradhaPharmaceuticals,M/sSaiFisheriesandM/sPremchandPlantations, were justified. 8. By the order dated 21[st]August 2003, the CIT (A) dismissed theAssessee’s appeal and upheld the assessment order. It was categoricallynoted by the CIT (A) that the Assessee could not substantiate his standthrough documentary evidence. The AO tried to locate the concernedpersons/beneficiaries through the addresses given in their account openingforms, however, to no avail as, most of these addresses were found to beincorrect. It was noted that the Assessee was involved in the activity ofproviding cheques by accepting deposits in cash. In the circumstances,noting that the AO had duly accounted for squared off transactions andmade additions only to the extent to which there was no convincingexplanation given by the Assessee, for cash or cheque transactions, the CIT(A) dismissed the Assessee’s appeal. Impugned order of the ITAT 9. The Assessee went in further appeal before the ITAT. The Assesseechallenged the two additions made by the AO i.e. of Rs.51,17,114 on accountof unexplained cash deposits and of Rs. 20,91,882 representing the peakamounts in respect of the cheques in the three accounts i.e. M/s AnuradhaPharmaceuticals,M/sSaiFisheriesandM/sPremchandPlantations.According to the ITAT, “the method of working out the addition adopted bythe AO and sustained by the CIT (A) wherein the cash entries and cheque entries have been treated differently is absolutely illogical and irrational andcannot be upheld”. It was noted that while dealing with the cash deposits,the AO had worked out the difference between the total deposits and thetotal withdrawals in regard to the two accounts whereas with regard to thecheque transactions, the AO had worked out the peak separately relatingonly to the three companies i.e. M/s Anuradha Pharmaceuticals, M/s SaiFisheries and M/s Premchand Plantations. 10. The ITAT disapproved of the AO having worked out the peak creditseparately for the cheques issued by the three companies and, according toITAT, “the entire approach adopted by the revenue authorities betrays lackof understanding of basic accounting principles.” The ITAT also found thatthere was a contradiction in the findings of the AO and CIT (A) inasmuchas, even after finding that the three companies were non-existent, the peakcredits have been worked out separately for cash deposits and chequesissued by the companies. The ITAT then observed that if the companieswere non-existent, there was no justification for the AO to treat thepayments vis-a-vis the three companies as the income of the Assessee. Itwas further observed by the ITAT that the Assessee had himself depositedthe unaccounted money in these accounts and issued cheques. It was alsoobserved by the ITAT that the additions could not be made twice, once onthe basis of cash deposits and again on the basis of cheque transactions. Thiswould amount to double addition which could not be upheld. The ITAT,thereafter, restricted the addition to peak credit as worked out by theAssessee as Rs. 5,87,374 as against Rs. 72,08,996. Submissions of learned counsel for the Revenue Submissions of learned counsel for the Revenue 11. Mr. Ruchir Bhatia, learned Senior Standing counsel for the Revenue,submitted that the approach of the ITAT was erroneous inasmuch as theITAT has failed to appreciate that the Assessee had not provided anexplanation for all the cheque deposits or even the cash deposits and thecorresponding cheques issued from his account. According to him, theconcept of working out the peak credit would arise only if it was possible tosquare off the deposits made in an account against the cheques issuedtherefrom. If ‘A’ made a deposit in the account and the ultimate paymentwas made to ‘A’ either in A’s account by cash or cheque then to that extent,the peak credit can be worked out. However, where a source of deposit isnot explained and the corresponding outgo is also unexplained, the questionof giving the Assessee the benefit of peak credit would not arise. He placedreliance on the decision of the Allahabad High Court in CIT v. VijayAgriculturalIndustries (2007) 294 ITR 610 which in turn followed itsearlier decision in Bhaiyalal Shyam Bihari v. CIT (2005) 276 ITR 38 (All). Submissions of learned counsel for the Assessee 12. Dr. Rakesh Gupta, learned counsel for the Assessee, on the other handsubmitted that the issue in the present appeal under Section 260 A of the Actis confined only to working out of the peak credit. He pointed out that theAO had himself accepted the peak credit as worked out by the Assessee.There was no justification for the CIT (A) in sustaining the order of the AOand not restricting the addition to the peak credit as worked out by theAssessee. After the CIT (A) and the AO had both accepted that the Assesseewas an accommodation entry provider, there was no justification in working out the peak credit separately for the cash and the cheque transactions. Hisargument was that all the cheque and cash credits in his own accountsshould be consolidated and adjusted against all the entries reflecting theoutgo, either by cash or cheque. The peak credit, thus, worked out shouldalone be taxed as that alone was the Assessee's income. According to him,the issue should not be seen from the point of view of ‘ethics’ but only fromthe point of view of ‘accountancy’. Analysis and reasons 13. There have been numerous cases before the AO, CIT (A), the ITAT andfor that matter even before this Court, where the question involved concernsthe treatment of 'accommodation entries'. Basically, what an accommodationentry provider does is to accept cash from an Assessee and arranges to havea 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 inshare capital. The accommodation entry provider usually charges acommission which is deducted upfront. Where the Assessee is unable toexplain the source of such credit in his account - i.e. by demonstrating theidentity of the provider of the credit, the creditworthiness of such entity, andthe genuineness of the transaction - the credit entry is treated as unexplainedand the income is treated under Section 68 of the Act as the income of theAssessee. 14. In cases where the Assessee discharges the initial onus of establishingthe identity and creditworthiness of the credit provider and the genuinenessof the transaction, be it one of loan or subscribing to share capital, the onus shifts to the revenue to show the contrary. Where, for instance, an Assesseefurnishes thecomplete details of the entity like itscertificate ofincorporation, PAN number, income tax returns, bank accounts, names andaddresses of the directors and so on, the Courts have insisted on the AO tomake a proper enquiry to examine the identity and creditworthiness of suchcompanies and the genuineness of the transactions in question. Where theAO fails to make such an enquiry, a Court might delete the additions madeby the AO. 14. In cases where the Assessee discharges the initial onus of establishingthe identity and creditworthiness of the credit provider and the genuinenessof the transaction, be it one of loan or subscribing to share capital, the onus shifts to the revenue to show the contrary. Where, for instance, an Assesseefurnishes thecomplete details of the entity like itscertificate ofincorporation, PAN number, income tax returns, bank accounts, names andaddresses of the directors and so on, the Courts have insisted on the AO tomake a proper enquiry to examine the identity and creditworthiness of suchcompanies and the genuineness of the transactions in question. Where theAO fails to make such an enquiry, a Court might delete the additions madeby the AO. 15. The present case, however, is of a different nature. Here, we are dealingwith an Assessee who does not deny that he is an accommodation entryprovider. He, in fact, makes no bones of the fact that he either owned orfloated 'paper companies' only for that purpose. He also does not dispute thefact that he has not been able to explain the source of all the deposits in hisaccounts or the ultimate destination of all the outgo from his accounts. 16. The Assessee's plea that he should be taxed only on a composite 'peakcredit' is based entirely on principles of accountancy. He questions the logicbehind allowing peak credits for some of the credit entries by way ofcheques and denying it for the other entries in cash. He also questions thepractice of working out separate peak credits for cheque and cashtransactions. 17. The premise underlying the concept of peak credit is the squaring up ofthe deposits in the account with the corresponding payments out of theaccount to the same person. In Bhaiyalal Shyam Bihari v. CIT (supra), the Allahabad High Court explained that benefit of peak can be given only whenthe assessee owns up all the cash credits in the books of accounts. It wasfurther held: "For adjudicating upon the plea of peak credit the factual foundationhas to be laid by the assessee. He has to own all cash credit entries inthe books of account and only thereafter can the question of peakcredit be raised." 18. In that case, it was held that as the amount of cash credits stood in thenames of different persons which the Assessee had all along been claimingto be genuine deposits, withdrawals/payments to different persons during theprevious years, the Assessee was, therefore, not entitled to claim the benefitof peak credit. Later in CIT v. Vijay Agricultural Industries (supra), it wasreiterated that: "The principle of peak credit is not applicable in case wherethe deposits remained unexplained under Section 68 of the Act. It cannotapply in a case of different depositors where there has been no transaction ofdeposits and repayment between a particular depositor and the assessee." Onthe facts of that case it was held that peak credit could be applied only in thecase of squared up accounts. In other words, where an Assessee was unableto explain the sources of deposits and the corresponding payments then hewould not get the benefit of 'peak credit'. 19. The legal position in respect of an accommodation entry providerseeking the benefit of 'peak credit' appears to have been totally overlookedby the ITAT in the present case. Indeed, if the Assessee as a self-confessedaccommodation entry provider wanted to avail the benefit of the 'peakcredit', he had to make a clean breast of all the facts within his knowledge concerning the credit entries in the accounts. He has to explain withsufficient detail the source of all the deposits in his accounts as well as thecorresponding destination of all payments from the accounts. The Assesseeshould be able to show that money has been transferred through bankingchannels from the bank account of creditors to the bank account of theAssessee, the identity of the creditors and that the money paid from theaccounts 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. concerning the credit entries in the accounts. He has to explain withsufficient detail the source of all the deposits in his accounts as well as thecorresponding destination of all payments from the accounts. The Assesseeshould be able to show that money has been transferred through bankingchannels from the bank account of creditors to the bank account of theAssessee, the identity of the creditors and that the money paid from theaccounts 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. 20. While the AO in the present case did not question the working out of thepeak credit by the Assessee, he, at the same time, insisted that the additionsmade by him to the returned income of the Assessee should be sustained.The peak credit worked out by the Assessee was on the basis that theprinciple of peak credit would apply, notwithstanding the failure of theAssessee to explain each of the sources of the deposits and thecorresponding destination of the payment without squaring them off. That isnot permissible in law as explained by the Allahabad High Court in theaforementioned decisions which, this Court concurs with. Conclusion 21. As already noted, the ITAT went merely on the basis of accountancy,overlooking the settled legal position that peak credit is not applicable wheredeposits remain unexplained under Section 68 of the Act. The question oflaw framed by this Court, is accordingly, answered in the negative i.e. infavour of the Revenue and against the Assessee. The impugned order ofITAT is, accordingly, set aside and the order of the AO is restored to file. 22. The appeal is allowed in the above terms with no order as to costs. S. MURALIDHAR, J. AUGUST 4, 2017 j PRATHIBA M. SINGH, J.