Section 68 cash credits: assessee need not prove sub-creditors' sources, and adverse addition cannot rest on that failure alone.

In an inquiry into cash credits under section 68 of the Income-tax Act, the assessee must prove the identity of the creditor, the genuineness of the transaction, receipt through banking channels, and the creditor's creditworthiness for the transaction with the assessee. The assessee is not required to prove the source of funds of the creditor's sub-creditors or the genuineness of transactions between them. Revenue may examine the source of the credit, but an adverse addition cannot rest only on the sub-creditors' inability to explain their own funds unless there is clinching evidence that the money actually belonged to the assessee. The burden is discharged once the primary ingredients are proved.

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Issues: Whether, in an inquiry under section 68 of the Income-tax Act, 1961, the assessee must prove the creditworthiness and source of funds of the creditor's sub-creditors, and whether an adverse inference could be drawn against the assessee for failure to do so.

Analysis: Section 68 permits the Revenue to inquire into the source of a cash credit and, where necessary, into the creditor's own source of funds. However, the assessee's burden under section 106 of the Indian Evidence Act, 1872 is confined to proving the source from which he received the credit, the identity of the creditor, the genuineness of the transaction, and the creditor's creditworthiness vis-a -vis the transaction with the assessee. The assessee is not required to establish the genuineness of transactions between the creditor and sub-creditors or the sub-creditors' creditworthiness. A failure by sub-creditors to explain their own sources cannot, without clinching evidence that the money belonged to the assessee, justify addition in the assessee's hands as undisclosed income.

Conclusion: The assessee's burden stood discharged on proof of identity, cheque-based receipt, and creditor creditworthiness; the adverse addition based solely on the sub-creditors' failure was unsustainable.

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