Unexplained cash credits: assessee must prove nature and source, or the sums may be taxed as undisclosed income.

Unexplained cash credits in an assessee-firm's books may be assessed as income from undisclosed sources when the assessee fails to prove their nature and source satisfactorily. The mere fact that the entries stand in the names of third persons does not shift the initial burden to the department; the assessee must explain the credits and establish their genuineness. If the explanation is rejected and the surrounding material indicates that the named persons were only a cloak, the taxing authorities may treat the sums as the assessee's income. The principle accords with the later statutory recognition of this burden under section 68 of the Income-tax Act, 1961.

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Issues: Whether cash credits standing in the names of third persons in the assessee-firm's books could be treated as income from undisclosed sources when the assessee failed to offer a satisfactory explanation of their nature and source.

Analysis: In respect of cash credits appearing in the books of an assessee, the assessee bears the burden of explaining the entries and establishing their nature and source. The mere fact that the credits stand in the names of third persons does not, by itself, shift the onus to the department. Where the explanation is rejected and the material on record supports the inference that the named persons were used as a cloak, the taxing authorities are entitled to treat the amount as the assessee's income from undisclosed sources. The principle is consistent with the position later given statutory recognition in section 68 of the Income-tax Act, 1961.

Conclusion: The cash credits were rightly treated as income of the assessee-firm from undisclosed sources; the question was answered in the affirmative and in favour of the Revenue.

Ratio Decidendi: Where an assessee's books contain unexplained credits, the assessee must satisfactorily prove the nature and source of the sums credited, and failing such explanation the department may assess them as income of the assessee.

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