Rejection of unreliable accounts may disallow business loss, but statutory depreciation cannot be refused merely for disbelieving the books.

Accounts not shown to have been regularly maintained may be rejected under the Income-tax Act where the cash book is not a book of original entries and appears to have been prepared later; on that basis, the loss claimed from the pottery business was properly disallowed. Depreciation, however, is a statutory allowance in computing business profits and cannot be refused merely because the books are disbelieved, so long as the necessary particulars are furnished. The books were therefore upheld as rejectable for the loss claim, but the denial of depreciation was set aside.

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Issues: (i) Whether there was material to reject the assessee's books of account and disallow the loss claimed for the pottery business for the assessment year 1947-48. (ii) Whether depreciation allowance could be refused merely because the books of account were rejected.

Issue (i): Whether there was material to reject the assessee's books of account and disallow the loss claimed for the pottery business for the assessment year 1947-48.

Analysis: The cash book was found not to be a book of original entries and there was material suggesting that it had been prepared subsequently rather than written from day to day. On that basis, the accounts were not accepted as genuinely and regularly maintained. Under section 13 of the Income-tax Act, where no method of accounting has been regularly employed, or where the method employed does not permit proper deduction of income, the Income-tax Officer is entitled to act under the proviso and reject the accounts.

Conclusion: The rejection of the books of account and the disallowance of the loss were justified and were upheld.

Issue (ii): Whether depreciation allowance could be refused merely because the books of account were rejected.

Analysis: Depreciation under section 10(2) is a statutory allowance in computing business profits and does not depend upon the acceptance of the books of account. Once the necessary particulars for depreciation were furnished, the allowance could not be denied merely because the cash book or other accounts were treated as unreliable.

Conclusion: The refusal to allow depreciation was incorrect and was set aside.

Final Conclusion: The reference was answered partly against the assessee on the loss issue and in favour of the assessee on the depreciation issue, with no order as to costs.

Ratio Decidendi: If accounts are not shown to be regularly maintained, they may be rejected under section 13, but a statutory depreciation allowance under section 10(2) cannot be refused merely because the books are disbelieved.

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