The illusion of the ten-lakh-rupee man

A trader keeps a rotating fund of Rs. 1 lakh in cash outside his books to manage daily operations. Through the year he deposits it to clear a supplier's invoice, collects an equivalent amount from a customer, and puts it back in. He repeats the cycle ten times, because that is how his working capital moves.

At assessment, the Assessing Officer reads the bank statement and finds ten cash deposits of Rs. 1 lakh each with no recorded source. The addition proposed is Rs. 10 lakhs.

The distortion is obvious once stated. The trader never had Rs. 10 lakhs. He had Rs. 1 lakh that ran a marathon through his account. What the Department has taxed is the number of times money crossed a counter, not the capital he actually deployed.

Peak credit is the correction. It is not in the statute. It is a computational safeguard the Tribunals and High Courts have built up over decades to ensure the addition reflects the unaccounted capital involved and not an inflated figure produced by rotation.

Rotation logic and the rule that breaks most workings

Peak credit is an evidentiary method applied when quantifying additions under the unexplained credit provisions, Sections 68, 69, 69A and 69C of the 1961 Act, or Sections 102 to 106 of the 2025 Act.

The logic is that where an account shows repeated cycles of deposit and withdrawal, aggregating every credit is a fundamental error. What has to be identified is the highest net balance the account reached at any single moment in the year.

The sequencing rule. The common practitioner error is netting annual totals. Peak credit is time-sensitive. A withdrawal can explain only a subsequent deposit. Cash taken out on 5 July cannot explain a deposit made on 18 June, because on 18 June that cash was still in the bank. A working that ignores the sequence gets rejected, and it costs the assessee credibility on everything else in the reply.

The consolidation rule. Where a client runs several accounts and moves money between them, there must be one merged chronological statement and one combined peak. A separate peak per account invites the charge of understatement. Leaving inter-account transfers inside the working inflates the figure against the client's own interest.

The Revenue targets the aggregate of Rs. 34 lakhs. The peak restricts the addition to Rs. 12 lakhs, the balance on 12 September. Every deposit after that date was funded by money already withdrawn from the same account.

The doctrine of disclosure: you cannot have it both ways

Peak credit carries a price. In Bhaiyalal Shyam Bihari v. CIT (2005) 276 ITR 38, the Allahabad High Court held that the factual foundation has to be laid by the assessee, who must own the cash credit entries before the plea can be raised at all.

You cannot hold two positions on the same credit. Arguing that it is a genuine third-party loan is an assertion that the money is not yours. You cannot then plead that the same credit was your own cash rotating back in.

Sorting into buckets. Before a word of the reply is drafted, every credit has to go into one bucket or the other. Genuine and explained, in which case it is carved out of the peak working and evidenced on its own. Or owned and rotational, in which case it goes into the peak.

What can safely run alongside a peak plea is any ground that does not assert genuineness. The wrong-provision objection, absence of books, defective notice, limitation, breach of natural justice. Those survive untouched. What cannot run alongside it is a genuineness case on the very credits you are asking to be peaked.

The jurisdictional limit of Section 68: what counts as "books"

Section 68 of the 1961 Act, and Section 102 of the 2025 Act, apply to sums credited in the books of the assessee.

In CIT v. Bhaichand N. Gandhi [1983] 141 ITR 67, the Bombay High Court held that a bank passbook is a record maintained by the bank, not a book of the assessee. The foundation is the Supreme Court's observation in Baladin Ram v. CIT 71 ITR 427 that the banker-customer relationship is one of debtor and creditor. The passbook is the bank's account of what it owes you. The Delhi High Court followed the same reasoning in CIT v. Ms. Mayawati 338 ITR 563.

Where an assessee maintains no books, Section 68 may be jurisdictionally inapplicable altogether. Two cautions before relying on it. A later line of Bombay authority has taken a contrary view, so argue it on your own facts rather than as settled law. And the officer can pivot to Section 69A, or Section 104 of the 2025 Act, so this is an objection to the provision invoked rather than a defence on quantum.

Raise it in the reply and carry it into the grounds of appeal. It stands independently of the peak.

Where the theory stops

Two limitations are routinely run together. They are answered by different evidence, so keep them apart.

Credits in other people's names. In CIT v. Vijay Agricultural Industries (2007) 294 ITR 610, the Allahabad High Court held that the principle cannot apply in the case of different depositors where there has been no transaction of deposit and repayment between that depositor and the assessee, and that peak credit is available only for squared-up accounts. A deposit in A's name cannot be explained by a withdrawal in B's name.

Whether the withdrawn money remained available. This is the actual ratio of CIT v. D.K. Garg (Delhi High Court, ITA 115/2005, decided 4 August 2017), and the case is often mis-described.

The assessee was a chartered accountant and a self-confessed accommodation entry provider. All deposits and cheques were in his own two current accounts, so this was not a case of third-party names in his books. The officer had in fact allowed the peak wherever the assessee could show that the cheque issued out of the account went back to the same person who had deposited into it. Where the source of a deposit and the destination of the corresponding cheque could not be squared off, additions followed, coming to about Rs. 72.09 lakhs against a composite peak of about Rs. 5.87 lakhs claimed by the assessee. Summons to the beneficiaries came back unserved because the addresses in their account opening forms were wrong.

The Tribunal restricted the addition to the composite peak on accountancy logic. The High Court set that aside and restored the assessment, holding that an entry provider seeking the benefit of the peak must make a clean breast of all facts within his knowledge, explaining the source of every deposit and the destination of every payment out, and showing that money paid from his accounts returned to the creditors' accounts.

For an ordinary assessee rotating his own cash through his own account, the lesson is not that a running peak is unavailable. It is that the peak must be supported by an account of what each withdrawal was used for. Withdrawals traceable to a property purchase or a loan repayment recorded elsewhere are gone and cannot fund a later deposit. Prepare the utilisation statement before the officer asks for it.

Two extensions worth carrying into every submission

Bearer cheques as cash. Bearer cheque payments can be brought into the cash pool for peak computation where a bank certificate shows the payees encashed them and handed the cash back to the assessee. A 2025 Delhi Tribunal decision accepted exactly this reconstruction.

Accepted income as a buffer. Where the assessee has an independently accepted source, whether agricultural income, declared business profit, or opening cash in hand evidenced by an earlier return, that income is set off against the computed peak and only the residue is taxable.

When peak credit is the wrong tool

Where the credits represent suppressed business turnover rather than rotated capital, pleading the peak is a tactical error.

In Rohit Goel v. ACIT (ITA No. 1209/Del/2024, ITAT Delhi, order dated 20 June 2025), the officer had taxed the credits as unexplained money and the excess supplier payments as unexplained expenditure. The Tribunal held this taxed the same amount twice under different heads, reasoning that if the debits were being treated as purchases then the credits in the same account had to be treated as sales, and directed that a gross profit rate of 7.99 per cent be applied to the total credits as business income.

Why that is stronger where the facts support it. It re-characterises the receipt rather than merely reducing the quantum. And once the income is ordinary business income, the special rate has no occasion to apply, which takes the penalty keyed to that rate away with it.

The two arguments cannot both be led as the primary case, since one says the money is rotated capital and the other says it is turnover. Test the turnover route first.

The 2025 Act paradox: lower rate, heavier penalty

The transition raises the stakes on quantum rather than lowering them.

Section 195 reduces the base rate on unexplained income from 60 per cent to 30 per cent with effect from tax year 2026-27. Surcharge and cess continue to apply, so the effective burden is about 39 per cent against 78 per cent earlier.

But the separate penalty in Section 443 has been omitted, and these cases now fall inside the misreporting framework of Section 439, where penalty is 200 per cent of the tax payable on the under-reported income. Settling under Section 440 calls for additional tax at 120 per cent of the tax in lieu of penalty. Under the old law the penalty was 10 per cent of the tax charged under Section 115BBE(1), which came to 6 per cent of the income.

On the figures in the table above, a peak defence worth about Rs. 18.5 lakhs under the old law is worth about Rs. 25.7 lakhs under the 2025 Act. The halved rate is a decoy. The penalty multiplier makes every rupee of the peak computation more valuable to defend, not less.

The burden of reconstruction

Peak credit is a shield, not a right the Revenue is obliged to hand over. Officers do sometimes allow it, as in D.K. Garg itself, but only for entries the assessee has already squared off on the record.

The chronological statement, the consolidated fund flow across every account, the utilisation of each withdrawal and any alternative characterisation of the receipts all belong on record while the assessment is still open. Evidence produced for the first time at the appellate stage faces severe restrictions on admission and rarely survives. A working produced first before the Tribunal usually earns nothing better than a remand.

The relief is real, and under the new penalty framework it is larger than it has been in a decade. It goes to the client who does the arithmetic before the assessment order is signed.

This note is for general information and is not professional advice. Every position should be tested against the facts of the individual case.