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M/S O.S. FACTORY. versus C.I.T.

High Court of Judicature at Allahabad

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M/S O.S. Factory. v. C.I.T. - INCOME TAX REFERENCE No. 142 of 1992 [2005] RD-AH 1237 (4 May 2005)


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M/S Omax Shoe Factory, Agra. ... Applicant.


Commissioner of Income-tax, Agra.  Respondent.


Hon'ble R. K. Agrawal, J.

Hon'ble Rajes Kumar, J.

                                            (Delivered by Hon'ble. Rajes Kumar, J.)

The Income Tax Appellate Tribunal, New Delhi has referred the following question of law under section 256 (1) of the Income Tax Act, 1961 (hereinafter referred to as " Act") for opinion to this Court.

"1. Whether the learned ITAT was legally correct in upholding the addition of Rs.4,85,000/- in the Trading Account and holding that report to the provisions of Sections 145 (1) of the Act was justified?

The brief facts of the case giving rise to the present case are that the applicant/assessee (hereinafter referred to as "assessee") was carrying on the business of manufacture and export of leather shoes.  The assessee's turnover in the year was Rs.107.65 Lacs.  The profit shown thereon wasRs.15.60 Lacs giving a gross profit rate of 14.5%.  The gross profit for the immediately preceding assessment year was 17.6%.  During the course of assessment proceeding, Assessing Authority made an enquiry about gross profit, assessee had submitted that the exports in the year had been more on which the profitability was less.  Assessing Officer noticed that the assessee did not maintain any production register, day today consumption of raw material was also found not properly maintained.  Assessing Officer, thereafter, considered the case of M/S Mahesh Shoe Factory whose turnover was more than that of the assessee and the profit rate also was 19%.  Assessing Officer also found that certain employees were paid very low while certain others were drawing little over Rs.2,000/- for the similar work.  Contention of assessee was that the higher wages were received by some persons on behalf of several others, was rejected by the Assessing Officer.  Assessee has also debited wages and labour of Rs.10,58,551/-.  The wage register was produced and it was found that while some employees had been paid Rs,2000/- wages of only few hundred per week and others had been paid Rs.2000/- or more for similar work.   When confronted with this anomaly, the Accountant explained that the higher wages were received by one person on behalf of several others as the Factory Act and Labour Laws forbid the assessee to employee labours more than a certain; number (about 8 or 10) without incurring additional liability, the wages claimed to have  been paid by the assessee, can not be, therefore, be accepted as actually paid to the labourers and the assessee's books have additional reason for rejection.  Assessing Authority after rejecting the books of account, estimated the gross income after applying the gross profit rate @ 19%.  In First Appeal, C.I.T. (Appeal) up-held the order of Assessing Authority rejecting the books of account and addition of Rs.4,85,000/-.  Assessee filed Second Appeal before the Tribunal.  Tribunal vide impugned order, up held the rejection of books of account and the addition..

We have heard Sri V. Gulati, learned Counsel for the assessee and Sri A. N. Mahajan, learned Counsel for the Revenue.

Learned Counsel for the Assessee submitted that the Tribunal has wrongly invoked the proviso to Section 145 (1) and confirmed the rejection of books of account and the addition.  He submitted that merely because, day today record of production and consumption had not been maintained, the proviso to Section 145 (1) can not be invoked.   He further submitted that the books of account have been maintained consistently since long and it had always been accepted and therefore, for the year under consideration, also it should be accepted.  

Having heard learned Counsel for the parties and we have perused the order of Tribunal and the authorities below.  We do not find any error in the order of Tribunal.  Section 145 (1) of the Act reads as follows:-

Section 145 (1)- Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall be computed in accordance with the method of accounting regularly employed by the assessee:

Provided that in any case where the accounts are correct and complete to the satisfaction of the (Assessing) Officer but the method employed is such that, in the opinion of the (Assessing) Officer, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the (Assessing) Officer may determine:

Provided further that where no method of accounting is regularly employed by the assessee, any income by way of interest on securities shall be chargeable to tax as the income of the previous year in which such interest is due to the assessee:]  

[Provided also that nothing contained in this sub section shall preclude on assessee from being charged to income tax in respect of any interest on securities received by him in a previous year if such interest had not been charged to income tax for any earlier previous year.]

It is very useful to quote the relevant part of Tribunal order for invoking the proviso to Section 145 (1) of the Act:-

"The rival submissions have been heard and necessary papers on the record, in this connection, have been perused.  The Income Tax Authorities are right in observing that in the absence of day today record of production and consumption, the books of account could not be said to be maintained in a manner from which declared results could be verified.  We are, therefore, of the view that the resort by the ITO to the proviso to Section 145 (1) was justified."

Admittedly, assessee is the manufacturer and exporter of leather shoes, therefore, it was necessary to maintain production register and day today record of production and consumption register of raw-material.  Unless the consumption register for raw-material and the production register relating to the manufactured goods are maintained, the production can not be verified.

Apart from non-maintenance of production register and the raw-material consumption register, Assessing Authority also found that proper accounts relating to the payment of wages have also not been maintained.  In our view, the aforesaid reasons are sufficient to invoke the proviso to Section 145 (1) of the Act.  

In the case of Raza Textiles Ltd. Vs. Commissioner of Income Tax reported in 86 ITR page 673, the Division Bench of this Court up held the rejection of books of account in the absence of production register.  The Division Bench held as follows:-

"In the absence of a register indicating the supply of yarn issued from the spinning department to the weaving department it is plain that there is no possibility of co-relating the supply of yarn and the production of cloth.  Therefore,  there was no way of checking whether the production of cloth shown in the books of represents the true figure of production.  The system of records adopted by the assessee is inadequate and does not afford an effective method of determining the true income, profits and gains so far as the production of cloth is concerned."

In the case of Bharat Milk Products Versus Commissioner of Income Tax reported in 128 ITR page 682, the Division Bench of this Court in the absence of day today manufacturing or production account, justified the applicability of the proviso to Section 145 (1) of the Act. The Division Bench of this Court observed as follows:-

"The proviso further says that even if the accounts are correct and complete but the method employed in such that the income cannot properly be deduced therefrom, the ITO can compute the income upon such basis and in such manner as he may determine.  In the instant case it has been found as a fact and it was not disputed before us that the assessee did not maintain any day-to-day manufacturing and production account and the question is whether on account of this defect the accounts of the assessee could be rejected.  In our opinion, the answer to this question has to be in the affirmative."

In the case of Arya Confectionary Works Versus Commissioner of Income Tax reported in 143 ITR page 814, the Madhya Pradesh High Court also held applicability of the proviso to Section 145 (1) of the Act in the absence of non-maintenance of day-to-day record of consumption of the raw-materials and production of finished goods.  It has been further held that mere maintenance of quantitative details did not establish the fact that the assessee had maintained a day-to-day stock account of raw-material and finished goods.  The Court up held the view of Tribunal that the income could not be properly deduced from the accounts maintained by the assessee, therefore, application of proviso to Section 145 (1) of the Act has been held justified.

In the case of Awadhesh Pratap Singh Abdul Rehman and brothers Versus Commissioner of Income Tax reported in 210 ITR page 406, the Division Bench of this Court has up held the rejection of books of account on the ground that neither the stock register was maintained nor sales were found verifiable in the absence of cash memo.

In the case of Bastiram Narayan das Maheshwari Versus Commissioner of Income Tax reported in 210 ITR page 438, the Division Bench of Bombay High Court has up held the rejection of books of account and the application of the proviso to Section 145 in the absence of day-to-day manufacturing account of Bidi including quantity of Bidi manufactured daily, figures of Bidi leaves consumed per day in the factory.

In the case of Commissioner of Sales Tax, U. P. Lucknow Versus Girja Shanker Awanish Kumar reported in Supreme Court (1996) 11 SCC page 648, books of account of the dealer was rejected for non maintenance of manufacturing account as required under Section 12 (2) of the U. P. Sales Tax Act.  Section 12 (2) requires to maintain stock register in respect of raw-materials as well as products obtained at every stage of production.  Apex Court held that if a stock book as contemplated under Section 12 (2) of U. P. Sales Tax Act, is not maintained, it leads to the conclusion that the account books are not reliable or that particulars are not properly verifiable.  Though, the judgment is under the U. P. Sales Tax Act but is relevant in the context of the present case.

The decision cited by the learned counsel for the assessee reported in 26 ITR page 159, 38 ITR 152 and 83 ITR 484 are not applicable to the present case. They were the cases of traders and not the manufacturer. It may be mentioned here that there is nothing on record to show that in the previous year, assessee has maintained books of account in the similar fashion and its books of account have been accepted.

In view of foregoing discussions, question referred above, is answered in affirmative in favour of revenue and against the assessee.  There shall be no order as to cost.

Dt: 04. 05.2005.



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