The burden of the assessee under Section 68 is limited to proving the source from which he received the loan, and the assessing officer is free to inquire into the source(s) of the creditor and/or sub-creditor. The genuineness and credit-worthiness of a creditor have to be judged vis-a-vis the transactions between the assessee and the creditor, and failure of the sub-creditors to prove their credit-worthiness cannot be stretched to mean that the loan amount formed the income of the assessee from undisclosed sources.

This appeal has been heard on the following substantial question of law: -

"Whether on the facts and circumstances of the case, the learned Tribunal was justified in demanding the proof regarding the credit worthiness of the sub-creditor and in drawing an adverse inference against the appellant on his alleged failure to satisfy the respondents regarding the credit worthiness of the sub-creditors?"

2. In a short compass, the facts leading to the present appeal may be put as follows :

(i) The appellant carries on the business of supply of bamboo in the name of M/s Bamboo Bagicha as its proprietor. For the assessment year 1992-93, the appellant filed his return of income and the same was processed under Section 143(2) of the Income Tax Act, 1961. During the course of the assessment, the Assessing Officer examined the relevant books of accounts and various other particulars and completed the assessment vide order, dated 30.03.95. In course of the assessment so made, the Assessing Officer found that the assessee had taken loans from M/S Nemichand Nahata & Sons (HUF) amounting to Rs. 4,35,000/- and from one Sri Pawan Kumar Agarwalla amounting to Rs. 5,00,000/- during the previous year ending on 31.3.92. The Assessing Officer declined to treat the loan of Rs. 4,35,000/- claimed to have been taken by the appellant from M/S Nemichand Nahata & Sons (HUF) and added the entire amount of Rs. 4,35,000/- in the assessee's total income from undisclosed sources under Section 68' of the Income Tax Act, 1961. As regards the loan from Sri -Pawan Kumar Agarwalla amounting to Rs. 5,00,000/-, the Assessing Officer declined to treat the loan amount to the extent of Rs. 4,25,000/- as genuine and added the said amount of Rs. 4,25,000/- to the total income of the assessee as income from undisclosed sources. As regards the first creditor, namely, M/S Nemichand Nahata & Sons (HUF), the Assessing Officer, in course of the assessment, examined the HUF under Section 131 of the Income Tax Act. In his statement so recorded, Sri Nemichand confirmed to have advanced the loan of Rs. 4,35,000/- to the appellant on two different dates by cheques. Explaining the source' from which he had received the said amount of Rs. 4,35,000/-, Sri Nemichand stated that HUF had taken loans from three different persons, namely, 1. Smti Jhumku Devi Nahata, 2. Smti Shanti Devi Nahata and 3. Smti Madhu Devi Nahata amounting to Rs. 1,20,000/-, 1,25,000/ - and 1,20,000/- respectively. Sri Nemichand further claimed that out of the said amount of Rs. 4,35,000/- advanced to the assessee, a sum of Rs. 70,000/- was from his own source and that the said three loans amounting to Rs. 3,65,000/- had been taken from the said 3 (three) different sub-creditors by the HUF by means of account payee cheques. It was also clarified, during the course of this assessment proceeding, that M/S Nemichand Nahata & Sons (HUF) and all the three sub-creditors were income-tax assesses. The Assessing Officer, upon examining the assessment records of the three sub-creditors, namely, 1. Smti Jhumku Devi Nahata, 2. Smti Shanti Devi Nahata and 3. Smti Madhu Devi Nahata, found that all the three sub-creditors had submitted their return of income tax for the first time, on 17.2.92, showing that the said income had been derived by them from seasonal business without, however, mentioning the amounts involved in purchase, sales, etc. The Assessing Officer held that the returns of income submitted by the creditor as well as the sub-creditors were actually submitted by them merely for enabling them to advance the loan of the said loan amounts to the appellant. The Assessing Officer also held that no genuine loan had been taken by the creditor, namely, M/S Nemichand Nahata & Sons (HUF) from the three sub-creditors amounting to Rs. 3,65,000/- and the creditor had no fund of his own amounting to Rs. 70,000/- to advance the loan to the appellant and, therefore, declined to accept the loan of Rs. 4,35,000/- as genu