Mandatory manufacturing account and reasoned best judgment turnover estimate control rejection of books and reassessment

Non-maintenance of a mandatory manufacturing account under section 12(2) justified rejection of the books of account because the defect was treated as substantive, not merely technical, and the absence of supporting purchase details reinforced that result. After rejection, however, any best judgment estimate of taxable turnover had to rest on relevant material and recorded reasons. An estimate made without disclosing the basis for the figure adopted, and without considering the previous year's turnover, was held unsustainable. The books rejection was upheld, but the turnover estimate was set aside and remanded for fresh determination on a reasoned, material-based basis.

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Issues: (i) Whether the books of account were liable to be rejected for maintenance of the manufacturing account as required under the Act; (ii) whether the estimate of taxable turnover could be sustained when no reasons or material basis were recorded.

Issue (i): Whether the books of account were liable to be rejected for non-maintenance of the manufacturing account as required under the Act.

Analysis: The requirement of maintaining a manufacturing account under section 12(2) of the Act was treated as mandatory. Non-maintenance was held to be more than a mere technical defect and, in the absence of the required account and supporting purchase details, rejection of the books of account was justified.

Conclusion: The rejection of the books of account was upheld and this issue was decided against the assessee.

Issue (ii): Whether the estimate of taxable turnover could be sustained when no reasons or material basis were recorded.

Analysis: After rejection of the books, the turnover had to be estimated on a best judgment basis founded on material on record and supported by rational nexus. The order did not disclose any reason for the figure adopted, and the previous year's turnover was also not considered. The estimate was therefore found to be unsustainable for want of a reasoned basis.

Conclusion: The turnover estimate was set aside and the matter was remanded for fresh determination; this issue was decided in favour of the assessee.

Final Conclusion: The judicial finding on rejection of accounts was sustained, but the turnover determination was invalidated for absence of a reasoned and material-based estimate, requiring reconsideration by the Tribunal.

Ratio Decidendi: Where books are rejected for non-maintenance of a mandatory manufacturing account, the ensuing best judgment estimate of turnover must still be founded on relevant material and supported by cogent reasons.

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