JUDGMENT
1. The Tribunal, Allahabad, has referred the following two questions of law under Section 256(2) of the IT Act, 1961, hereinafter referred to as the Act, for opinion to this Court :
“1. Whether, on the facts and circumstances of the case the proviso to Sub-section (1) of Section 145 or Sub-section (2) of Section 145 of the Indian IT Act, 1961, were attracted in the present case ?
2. Whether, on the facts and circumstances of the case, the IT authorities as well as the Tribunal were justified in drawing adverse inference by the issue of the three post-dated cheques in order to pacify the Karigars on their pressing demand, the amount of which were actually paid to them and the certificates to that effect were filed ?”
2. The present reference relates to the asst. yr. 1978-79 from the case of the assessment proceedings.
3. The ITO found that the assessee, who was following mercantile system of accounting and who did the business of purchase and export of wall hangings, declared sales of about Rs. 15 lakhs, but the. gross profit declared was negligible (.01 per cent only). In the immediately preceding year, the gross profit was declared @ 13.4 per cent on sales of about Rs. 10,58,000. On enquiry from the assessee, the ITO could know that, according to the assessee, the sales this year were made practically at cost price to avail of the cash incentives and to increase the turnover. The ITO also found that the sale rates were higher this year. The explanation of the assessee was that purchase cost had also gone up. The ITO scrutinised the purchases and could know that the assessee had made payments to Karigars amounting to Rs. 75,000 by three post-dated cheques of Rs. 25,000 each. These cheques were encashed either by the assessee’s representative or by one of the partners of the assessee-firm. He, therefore, added the amount of Rs. 75,000 in the assessment order mentioning that there was no stock register and that replies of the Karigars who had confirmed the receipts, were identically worded, which showed that the reply was drafted by common source. The ITO held that the book results were not acceptable. He added Rs. 75,000 to the income, as according to him, the cost of the goods was inflated.
4. The assessee filed appeal before the CIT(A). The CIT(A) felt on the facts of the case that cash incentive received should be taken into account for deciding the reasonableness of the profits and that an overall rate of profits of 12/1/2 per cent would be a fair estimate. On this basis, he sustained the addition of Rs. 32,000 and deleted the balance of Rs. 43,000.
5. The assessee and the Department both filed second appeals against the order of the CIT(A) before the Tribunal. The Tribunal vide order dt. 18th Sept., 1982 agreed with the CIT(A) and dismissed both the appeals of the assessee and of the Department.
6. We have heard Sri K.M. Sahai, learned counsel for the applicant, and Shri A.M. Mahajan, learned counsel appearing for the Revenue.
7. Sr. K.M. Sahai, learned counsel, appearing for the applicant, submitted that the applicant was maintaining its books of account on mercantile system and, therefore, if three post-dated cheques have been entered into a particular date in the cash book, it would not make any difference, therefore, provisos to Sub-sections (1) and (2) of Section 145 of the Act were (sic-not) attracted.
8. Sri Mahajan, learned counsel appearing for the Revenue, submitted that it is not in dispute that the applicant had issued three post-dated cheques and had entered the same in cash book maintained by it on the date other than the date of cheques and, therefore, the ITO had rightly held that the result as shown by the books of accounts cannot be believed. Thus, the provisos to Sub-sections (1) and (2) of Section 145 are clearly attracted in the present case.
9. Having heard the learned counsel for the parties, we find that the applicant no doubt is maintaining its books of accounts on 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 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 date when the actual payment was not made, the payment having been made by post-dated cheques, books of account maintained by it were clearly unreliable and, therefore, the ITO was justified in invoking the provisos to Sub-sections (1) and (2) of Section 145 of the Act.
10. In view of the foregoing discussion, we are of the considered opinion that there is no illegality in the order passed by the Tribunal. We answer both the questions referred to us in the affirmative, i.e., in favour of Revenue and against the assessee.