“trade creditors”
The decision most relied on for trade creditors is Orient Trading Co. Ltd. v. CIT (49 ITR 723), cited in 123 judgments on BharatTax.
Leading authorities on trade creditors
When a cash credit is found, the assessee discharges the initial burden by proving the identity of the creditor and the genuineness of the transaction, shifting the burden to the Revenue. The assessee is not required to prove the source of the creditor's funds (source of source).
To discharge the onus under Section 68, an assessee must establish the identity of the creditor, the genuineness of the transaction, and the creditworthiness of the creditor. Merely providing basic documentary evidence or a file number is insufficient; each credit entry requires a separate, detailed explanation.
The mere rejection of an assessee's books of account under Section 145(3) does not automatically warrant an addition to the returned income. The Assessing Officer must consider the books alongside historical data and other collected material after confronting the taxpayer.
An addition under Section 68 cannot be made for genuine sundry creditors or trade payables merely carried forward from previous assessment years if there is no fresh credit in the relevant assessment year. Section 41(1) does not apply to acknowledged outstanding liabilities without actual remission or cessation.
An assessee discharges their onus under Section 68 for cash credits by proving the identity of the creditor, the genuineness of the transaction, and the creditor's creditworthiness. The assessee is not required to prove the source of the creditor's funds ('source of source'), unless evidence suggests the money originated from the assessee itself.
The court considers the evidentiary value of unaudited books and loose papers when assessing income, particularly concerning trade creditors and their verification.
For Section 41(1) of the Income Tax Act to apply, the mere expiry of the limitation period does not constitute cessation of liability; there must be an explicit act by the creditor, such as a release or admission of write-off, confirming that the liability has ceased without the possibility of revival.
Under Section 68, the assessee discharges the initial onus by producing sufficient material and explanation for cash credits. Once material is provided, the Assessing Officer must conduct a proper and thorough inquiry into it, as a half-hearted inquiry or overlooking materials is impermissible.
