2004 (8) TMI 24 - HC - Income Tax

Rejection of books of accounts by ITO by invoking the provisos to sub-section (1) and subsection (2) of section 145 - applicant no doubt is maintaining its books of account on the mercantile system and further it has entered the payment to three karigars by post-dated cheques which were issued, not on the date of the cheque but on the date when these were handed over. This entry was made in the cash book which obviously was false and as payment is to be recorded when it is actually made even if it is either by way of cash or by way of cheque or draft. In the present case as the applicant had made entries on a date when the actual payment was not made, the payment having been made by post-dated cheques, the books of account maintained by it were clearly unreliable and, therefore, the Income-tax Officer was justified in invoking the provisos to sub-section (1) and subsection (2) of section 145 assessee s appeal dismissed

Summary

Issues:
1. Interpretation of provisos to sub-sections (1) and (2) of section 145 of the Income-tax Act, 1961.
2. Justification of adverse inference drawn by the income-tax authorities based on post-dated cheques issued by the assessee.

Analysis:
The case involved a reference from the Income-tax Appellate Tribunal, Allahabad, regarding two questions of law under section 256(2) of the Income-tax Act, 1961. The first question revolved around the applicability of the provisos to sub-sections (1) and (2) of section 145 of the Act in the given circumstances. The second question raised concerns the validity of the adverse inference drawn by the income-tax authorities based on the issuance of three post-dated cheques by the assessee to pacify karigars. The assessment year in question was 1978-79.

The Income-tax Officer found discrepancies in the declared sales and gross profit of the assessee, who followed the mercantile system of accounting. The officer observed that the sales were made at cost price to avail cash incentives, leading to negligible gross profit. Additionally, the officer noted higher sale rates and payments made to karigars via post-dated cheques. Consequently, the officer added the cheque amounts to the income, citing inflated cost of goods due to unreliable book results.

Upon appeal, the Commissioner of Income-tax (Appeals) upheld a partial addition to the income, considering the reasonableness of profits and cash incentives received. Both the assessee and the Department filed second appeals before the Appellate Tribunal, which affirmed the Commissioner's decision.

During the hearing, the applicant's counsel argued that maintaining books on the mercantile system justified the cheque entries in the cash book. In contrast, the Revenue's counsel contended that entering post-dated cheques on a different date rendered the books unreliable, warranting the application of the provisos to section 145.

The court analyzed the situation and concluded that the applicant's practice of recording cheque payments on a date other than the actual payment date rendered the books unreliable. Consequently, the Income-tax Officer's invocation of the provisos to section 145 was deemed justified. The court upheld the Tribunal's order, ruling in favor of the Revenue and against the assessee on both questions referred.

In summary, the judgment clarified the interpretation of the provisos to sub-sections (1) and (2) of section 145 of the Income-tax Act, emphasizing the importance of accurate bookkeeping and timely recording of transactions. The decision highlighted the significance of genuine financial records to ensure fair assessment and deter misleading practices in tax matters.