PEAK CREDIT AND TELESCOPING THEORIES IN ASSESSMENT PROCEEDINGS UNDER INCOME TAX

Theories of ‘Peak Credit’ and ‘Telescoping’ are not alien to the Income Tax assessment proceedings. Both the theories are logical and are acceptable to the tax department also. Such tactics are often adopted by the counsel to defend their client against the huge addition made by the A.O. during the course of assessment of search and survey cases. Let us understand the concept of the ‘Peak Credit’ and ‘Telescoping’.

Theory of Peak Credit

In those cases where there are a large number of unexplained credit and debit entries of a person/Bank account standing then in such case the AO may tend to add all the aggregate entries as unexplained income. However, in such case if the assessee does not have any explanation for every credit or debit entry of a person/Bank account standing in his books of account then one of the most commonest defence which an assessee may take is that, the entries should be so arranged in serial order, that a credit following a debit entry should be treated as referable to the latter to the extent possible and that, not the aggregate but only the `peak’ of the credits should be treated as unexplained. Such an explanation is called as applying peak credit theory to the case of the assessee. It is also called as Money Circulation Benefit Theory/ Highest Credit Theory/ Rotation Theory/ Recycling Theory/ Chain Theory. When the same money is rotated in business, addition can only be made of peak amount. However, there should be both inflow and outflow of funds. If there is only inflow of funds, peak credit theory cannot be applied

It can be explained with the help of an example:

In the above example, the A.O. may tend to consider Rs 33,000 (10000+8000+15000) as unexplained income of the assessee. But since the same money is circulating in the business, the maximum balance during the period can only be added i.e. Rs. 15,000. Rest of the balance was only deposited and

withdrawn from business. However, if there were only deposits and no withdrawal, then peak theory cannot be applied.

This plea is generally accepted as it is logical (whether the creditor is a genuine or not), provided there is no contrary  material on record to show that a particular withdrawal/repayment has flown out of some other source or such withdrawal/repayment could not have been available on the date of the subsequent credit.

Even if the genuineness of all such persons is disbelieved and all the credits appearing in the different accounts are held to be assessee’s own moneys, the assessee still will be entitled to a set off the amount withdrawn earlier with the amount subsequently deposited as per the peak credit theory after arranging all the credits in chronological order. It is to be noted hereby that the above concept cannot be treated as propositions of law. These are only the inferences which can be drawn based upon the normal probabilities. These inferences can also be displaced by any material on record which may indicate to the contrary. The said arguments were placed by the assessee before Rajasthan High Court in case of Swaroop Chand Kojuram vs Commissioner of Income-Tax ( 1999) 235 ITR 732 Raj.

Thus before taking the plea of peak credit theory before the assessing officer, it is necessary to understand the facts of the case. The basic idea behind the peak credit theory is to avoid double addition and to bring only the actual income of the assessee to suffer tax, where there are large numbers of unexplained credit and debit entries. A bogus credit and debit may cancel out each other unless there are circumstances to indicate that withdrawal is utilized for purposes other than re-introduction.

The peak credit theory should normally be applied to non-genuine entries and not to genuine ones. Where there are many credits, all treated as non-genuine, withdrawal from one account should be treated as available for credit in another. In Bhaiyalal Shyam Behari v CIT (2005) 276 ITR 38 (All.) the High court upheld the view of the Tribunal that working of the peak should be confined to credits and withdrawals in accounts admittedly non-genuine.

The Income Tax Appellate Tribunal , Bench “A”, Kolkata in case of Dilip Kumar Nahata vs. Department of Income Tax in its order dated 09.05.2012  held that when there are six undisclosed bank accounts, while assigning the peak credit the proper method is to make a consolidated fund flow statement by taking into account of all the undisclosed bank accounts and after setting off contra entries, if any, and then the peak credit of these consolidated bank transactions should be taken as undisclosed income of assessee. The ld. CIT(A) ought to have accepted the consolidated peak of all the bank accounts taken together as undisclosed income of assessee instead of aggregate of the separate peak of the individual bank accounts.

Theory of Telescoping:

This theory states that source of investment can be explained by realization of another investment/ cash credit. In such a situation double addition should not be made.

Example:

Money borrowed Rs. 15 lacs and invested in stock. AO made addition as follows: – 

 Cash credit u/s. 68     Rs. 15 lacs

 Stock found u/s. 69A  Rs. 15 lacs

                                      Rs. 30 lacs

 This theory prevents double addition. Thus once addition is made for cash credit, source of stock is explained by cash credits. No addition for stock found can be then be made.

Another example- there may be a case where there is an unexplained income of an assessee in the first part of a year and also a corresponding unexplained investment of somewhat similar amount in the later part of the year, in such case unless there is evidence to the contrary, it may be treated that the unexplained investment has been made out of the unexplained income. Thus in such case instead of adding both unexplained income as well as unexplained investment to the income of the assessee, it would be wise to add one of them, as both represent only one income. This is called telescoping. Telescoping has even had judicial recognition in Anantharam Veerasinghaiah & Co. v CIT (1980) 123 ITR 457 (SC.)

Telescoping theory may also extend to number of years income, where the unexplained income of previous year is being used in an unexplained investment in the subsequent year.

Conclusion:

It should be well understand that both the theories of peak credit as well as telescoping should be applied with some degree of caution, because it is available only in such cases, where an earlier addition could be available for a later investment. If there is some intervening unrecorded expenditure in between such period then the theory of telescoping may not be available.

It is therefore requested that readers should keep in mind that both the peak credit and telescoping theories have to be applied after appreciating the facts of each case and neither of the theory is readily available in every case as these are not the propositions of the law. The basic principle behind the theories is that there should not be overlapping additions and only the actual and real income of the assessee is taxed.

*Note: This article is contributed by our member and he can be reached at :manoj_nahata2003@yahoo.co.in