Facts of the Case

The assessee, a partnership firm engaged in civil contract work, filed its return of income for the relevant assessment year. During scrutiny assessment, the Assessing Officer observed deficiencies in the books of accounts and supporting documents. Considering the accounts to be unreliable, the books were rejected under Section 145(3) of the Income-tax Act.

After rejecting the books, the Assessing Officer estimated the income of the assessee by applying a higher profit rate and made additions to the declared income. The Commissioner of Income Tax (Appeals) confirmed the assessment order, leading the assessee to file an appeal before the Income Tax Appellate Tribunal.

Issues Involved

  1. Whether the rejection of books of accounts under Section 145(3) was justified.
  2. Whether the profit rate applied for estimating income was excessive and arbitrary.
  3. Whether the additions made to the declared income were reasonable in the circumstances of the case.

Petitioner’s (Assessee’s) Arguments

  • The books of accounts were properly maintained and supported by records.
  • The alleged defects were not substantial enough to justify rejection of accounts.
  • The profit rate applied by the Assessing Officer was unrealistically high and not based on past results or comparable cases.
  • The estimation resulted in an inflated and unjustified assessment of income.

Respondent’s (Revenue’s) Arguments

  • The assessee failed to maintain complete and reliable records necessary for accurate determination of income.
  • The discrepancies in accounts warranted rejection under Section 145(3).
  • Once the books were rejected, estimation of income was permissible under law.
  • The estimation made by the Assessing Officer was reasonable and should be upheld.

Court / Tribunal Findings & Order

The Tribunal evaluated the nature of defects in the books and the methodology adopted for estimation of income. It observed that while rejection of books may be justified where accounts are unreliable, the estimation of profit must be fair, reasonable, and supported by material evidence.

The Tribunal held that the profit rate applied by the Assessing Officer was excessive in the facts of the case. Accordingly, relief was granted to the assessee by reducing the additions to a reasonable level consistent with principles governing best-judgment assessments.

Important Clarification by the Tribunal

  • Rejection of books under Section 145(3) does not confer unfettered discretion to estimate income arbitrarily.
  • Profit estimation must be grounded in facts, past performance, or comparable industry standards.
  • Additions should reflect a reasonable assessment of real income rather than punitive enhancement.

Link to download the order –

https://itat.gov.in/public/files/upload/1606992114-M.K.%20Agrawal%20&%20Co.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.