Inter-Bank Transfers and Peak Credit: Lessons from Surendra Pal Singh Sahni Vs ACIT (ITAT Jaipur)

1. Background of the Dispute

The appeals in Surendra Pal Singh Sahni Vs ACIT (ITAT Jaipur) arose in the second round of proceedings for Assessment Year 2005-06. The controversy centred on:

  • Determination of peak credit on four undisclosed bank accounts, and
  • Taxability of an alleged undisclosed rental income of ₹72,000 (net addition ₹50,400 after 30% standard deduction).

The matter reached a Third Member under Section 255(4) of the Income Tax Act 1961 owing to a difference of opinion between the Accountant Member and the Judicial Member on the correct manner of applying the peak credit theory in the consolidated working of these bank accounts.

The final outcome:

  • The peak addition was reduced from ₹29,18,784 to ₹11,97,484, and
  • The separate rental income addition of ₹50,400 was deleted as already concluded in the first round of litigation.

2. Facts: Undisclosed Bank Accounts and Earlier ITAT Directions

The assessee had four undisclosed bank accounts. These accounts and related deposits came to light during earlier proceedings and were considered in the first round of appellate litigation.

In that first round, the Jaipur Bench of the ITAT held:

  • The assessee had deposited unaccounted cash in these undisclosed bank accounts.
  • As a matter of accounting principle, where undisclosed bank accounts contain cash deposits, the Assessing Officer (AO) must determine the income by computing peak credit after merging all undisclosed bank accounts for the relevant year, rather than merely relying on closing balances.
  • The AO was directed to recast the working by consolidating all four accounts and compute the peak of such merged transactions.
  • The assessee was instructed to cooperate, produce ownership evidences for properties, and furnish details of deposits/withdrawals.

Pursuant to those directions, the AO redid the assessment for AY 2005-06, determined a consolidated peak credit of ₹29,18,784 on 05.02.2005 and added this amount as unexplained income. He also added ₹50,400 as rental income. Both additions were confirmed by the CIT(A), leading to the second round of appeals before the ITAT Jaipur.

3. AO’s Working of Consolidated Peak Credit

In the set-aside assessment order, the AO:

  • Ignored opening balances in the undisclosed accounts.
  • Arranged deposits and withdrawals across all four accounts chronologically.
  • Treated withdrawals as potential sources for subsequent deposits.
  • Applied the peak credit theory on merged accounts, and
  • Identified a peak balance of ₹29,18,784 on 05.02.2005 on the basis of entries in the consolidated sheet.

The AO specifically recorded that:

  • The peak of ₹29,18,784 represented the maximum balance during the year after considering all deposits/withdrawals across the four bank accounts.
  • No telescoping benefit was granted, on the reasoning that the ITAT’s earlier order did not explicitly direct such telescoping.
  • Consequently, an amount of ₹29,18,784 was added as unexplained income (u/s 68 as referred in the assessment order).

4. Assessee’s Objection: Inter-Account Transfers Counted as Fresh Credits

In the second round, the assessee’s primary grievance was that the AO had overstated the peak balance by treating certain inter-account transfers as if they were independent fresh deposits.

Specifically, the assessee pointed out two entries on 05.02.2005:

  • ₹10,28,000
  • ₹5,49,500

According to the assessee:

  • These were contra entries, i.e., transfers between the assessee’s own undisclosed accounts within the consolidated group.
  • The AO had effectively considered only one leg of these transfers in the computation, ignoring the other side, thereby inflating the consolidated peak.
  • A correct working, recognising both sides of the transfers, would yield a peak of ₹11,97,484 instead of ₹29,18,784.

Separately, the assessee argued that:

  • Undisclosed income of ₹8,71,000 and rental income aggregating ₹6,20,000, together with interest income, had already been offered and should be set off against the assessed peak.
  • The rental addition of ₹50,400 should not have been reintroduced in the second round since the rental issue had already attained finality in the first round before the ITAT.

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