Facts of the Case

The assessee filed his return of income declaring total income of ₹1,59,280. The assessment was completed under Sections 147/143(3) of the Income-tax Act, 1961, determining total income at ₹27,18,685. An addition of ₹25,59,405 was made on account of cash deposits in the assessee’s bank accounts maintained with State Bank of India and ICICI Bank.

During assessment proceedings, the Assessing Officer required the assessee to explain the source of cash deposits. The assessee, an employee of GSJS Public School, explained that the cash deposits represented school fees collected from students. The Assessing Officer disbelieved the explanation and made the addition.

Issues Involved

  1. Whether cash deposits made in the assessee’s bank accounts were unexplained income.
  2. Whether the explanation supported by confirmation from the school management and affidavits could be rejected merely on suspicion.
  3. Whether application of peak credit theory by the CIT(A) was justified in the facts of the case.

Petitioner’s (Assessee’s) Arguments

The assessee submitted that the bank accounts were used for depositing school fees collected from students on behalf of the school. It was further submitted that the Manager of the school appeared before the Assessing Officer and confirmed the same.

The assessee also explained that the bank account was used for personal purposes, including deposits of agricultural income and cash proceeds from sale of land belonging to his wife. An affidavit of the assessee’s wife was furnished to substantiate the claim.

Respondent’s (Revenue’s) Arguments

The Revenue relied upon the assessment order and the order passed by the CIT(A). It was contended that the assessee failed to satisfactorily explain the cash deposits, justifying the addition and partial relief granted by the CIT(A) by applying peak credit theory.

Court Order / Findings

The Tribunal observed that the assessee had produced the Manager of the school, who confirmed that the assessee’s bank account was used for depositing school fees. The assessee had also furnished an affidavit of his wife explaining deposits of agricultural income and sale proceeds of land.

The Tribunal held that the Assessing Officer and the CIT(A) disbelieved the explanation merely on suspicion, doubt, and conjecture, despite evidence placed on record. In the specific facts and circumstances of the case, the explanation furnished by the assessee was found to be acceptable.

Accordingly, the Tribunal set aside the impugned order of the CIT(A) and directed the Assessing Officer to delete the entire addition of ₹25,59,405, including the amount of ₹15,95,205 sustained by applying peak credit theory.

Important Clarification

The Tribunal clarified that additions on account of cash deposits cannot be sustained merely on suspicion or conjecture. Where the assessee furnishes a plausible explanation supported by evidence, such explanation must be accepted, and arbitrary application of peak credit theory is not permissible.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1770710658_SUDHIRKUMARSHARMAALLAHABADVS.ITO23ALLAHABAD.pdf  

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.