Peak Cash Credit – A Fair Method to Determine Unexplained Cash Under the Income-tax Act

 

The concept of Peak Cash Credit is a judicially recognised method used by tax authorities and courts to determine the real unexplained income where there are multiple cash deposits and withdrawals, especially in unrecorded bank accounts or cash books. Although the Income-tax Act does not expressly mention this concept, courts have consistently upheld it as a logical and equitable rule of evidence.

 

Why Peak Credit?

In many assessments under sections 68, 69, 69A and related provisions, the same cash is withdrawn and re-deposited repeatedly. If the Revenue adds every deposit as unexplained, it results in double or multiple taxation of the same circulating cash. Peak Credit prevents this distortion.

 

The method identifies the highest unexplained balance (the peak) in a running cash or bank account, assuming earlier withdrawals could have funded later deposits. This peak balance reflects the maximum actual unexplained investment at any point of time.

 

Judicial Support – Verified Case Law

The principle is now firmly grounded in jurisprudence:

CIT v. Kulwant Rai (2007) 291 ITR 36 (Delhi High Court)

The Court held that where the assessee establishes a pattern of deposits and withdrawals in a running account, the Revenue must adopt the peak credit instead of taxing each deposit.

CIT v. Sharraf Trading Co (Kerala High Court)

The Court accepted that if rotation of the same funds is evident and a nexus is shown, only the peak balance represents the real unexplained amount.

 

Multiple ITAT rulings have followed these judgments, applying peak theory wherever the cash flow indicates recycling of funds.

 

When Peak Theory Applies

There is a running account with continuous deposits and withdrawals.

Withdrawals and later deposits are part of the same cycle.

A reasonable nexus between them is demonstrated.

The Revenue cannot prove that withdrawals were used elsewhere.

 

When Peak Theory Does Not Apply

Peak credit may be rejected when deposits represent fresh funds, where no link exists with withdrawals, or where withdrawals were clearly used for another purpose.

 

Continuing Relevance

Even after the introduction of section 115BBE (higher tax rate for unexplained income), the method of determining the quantum of unexplained cash remains governed by peak theory. Section 115BBE affects the rate, not the computation method.

 

Conclusion

Peak Cash Credit is a judicial tool of fairness that ensures only actual unexplained income is taxed, preventing repeated taxation of circulating funds. While beneficial to taxpayers, its application requires demonstrating a consistent pattern of rotation and a clear link between deposits and withdrawals.


AI Generated Precautions to Be Taken by Professionals (Summary)

  1. Prepare a complete cash-flow or bank-flow statement to demonstrate rotation of funds.

  2. Establish a clear nexus between withdrawals and subsequent deposits.

  3. Maintain chronological reconstruction of transactions to identify the correct peak.

  4. Ensure withdrawals were not used for unrelated purposes; otherwise, peak theory may fail.

  5. Document all explanations and working papers to substantiate the claim before the AO or CIT(A).

  6. Highlight relevant judicial precedents during representation.

  7. Reconcile discrepancies between books and bank accounts to avoid adverse inference.

  8. Avoid multiple accounts with unlinked cash flows, which weaken the peak claim.

  9. Maintain consistency—do not shift between different explanations for different periods.

  10. Prepare alternative submissions (peak computation + telescoping) when beneficial.