1991 (5) TMI 108 - AT - Income Tax

Summary

Issues Involved:
1. Rejection of books of accounts under Section 145(2) of the IT Act.
2. Deduction of gratuity payment under Section 37 and Section 40A(7) of the IT Act.
3. Genuineness of cash credits in the names of employees.

Issue-wise Detailed Analysis:

1. Rejection of Books of Accounts under Section 145(2):
The Income Tax Officer (ITO) rejected the books of accounts maintained by the assessee, a registered firm, for the assessment year 1982-83. The ITO scrutinized the accounts seized during a search and found discrepancies in the salary payments and other allowances, leading to the conclusion that the books did not reveal a correct picture of the income earned. The CIT(A) overturned this decision, stating that the books were maintained properly as in previous years and the rejection under Section 145(2) was not warranted. The Appellate Tribunal agreed with CIT(A), noting that the books were accepted in the preceding assessment year (1981-82) and there were no fatal flaws justifying their rejection. However, the Tribunal acknowledged the presence of some inadmissible items and unexplained cash credits.

2. Deduction of Gratuity Payment:
The assessee claimed a deduction of Rs. 40,360 paid as gratuity to employees upon termination of their services when the business ceased on 31st March 1982. The ITO disallowed this, arguing that the claim fell under Section 40A(7) and did not meet the conditions therein. The CIT(A) allowed the deduction, stating that the gratuity payment was an actual liability incurred during the year and not a contingent liability, thus allowable under Section 37 and the second limb of Section 40A(7)(b). The Tribunal upheld CIT(A)'s finding, referencing Supreme Court decisions in Shree Sajjan Mills Ltd. vs. CIT and CIT vs. Gemini Cashew Sales Corporation, which supported the view that actual liabilities incurred during the year are deductible.

3. Genuineness of Cash Credits:
The ITO doubted the genuineness of cash credits totaling Rs. 55,300 in the names of employees, suspecting these were not genuine adjustments but unexplained credits. The CIT(A) accepted the assessee's explanation that these were adjustments of advance salary payments. However, the Tribunal found no supporting material for CIT(A)'s view and noted the absence of corresponding debit entries and deficits in cash balances, thereby modifying CIT(A)'s finding. The Tribunal concluded that the unexplained cash credits warranted a higher estimation of income.

Final Judgment:
Considering the allowable deduction of gratuity and the presence of unexplained cash credits, the Tribunal estimated the assessee's income at Rs. 3 lakhs for the assessment year under consideration. The ITO was directed to modify the assessment accordingly. The appeal was partly allowed.