Sundry creditors as trade liabilities: section 68 addition fails when purchases and books are not doubted.

Sundry creditors arising from credit purchases were treated as trade liabilities and not as cash credits for section 68 purposes where the books were not rejected and the corresponding purchases or business expenditure were not disbelieved. On those facts, the cash credit enquiry could not be applied in the same manner as for unexplained cash receipts, because the liability was already recorded in the books and linked to genuine business transactions. The addition under section 68 was therefore held unsustainable and deleted.

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Issues: Whether the addition made under section 68 of the Income-tax Act, 1961, on account of increase in sundry creditors was sustainable when the liabilities represented trade creditors arising from credit purchases and the corresponding purchases had not been disbelieved.

Analysis: The liability reflected in the books was in the nature of sundry creditors arising from business transactions and not a cash credit in the sense contemplated by section 68. The books of account were not rejected, the trading transactions were not disturbed, and the revenue had not disallowed the corresponding purchases or supply-related expenditure. Once the confirmed trade liability remained recorded in the books and the underlying purchase transaction was not doubted, the three ingredients applicable to a cash credit enquiry under section 68 could not be insisted upon in the same manner for sundry creditors.

Conclusion: The addition under section 68 was held unsustainable and was deleted in favour of the assessee.

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