Audited profit cannot be reduced by notional unrecorded claims without evidence or rejection of books.

Where an assessee has credited on-money receipts in an audited profit and loss account, those audited accounts cannot be diluted by claiming that only a notional portion represents profit or by asserting unproven unrecorded expenditure. In the absence of material showing additional expenditure, incorrect accounts, or a valid basis to reject the books under section 145(3) of the Income-tax Act, the audited profit figure must be accepted. A deduction unsupported by evidence is also inconsistent with section 37. The ITAT Rajkot held that the full net profit as reflected in the audited accounts was assessable and that the 30% estimate adopted by the first appellate authority could not stand.

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Issues: Whether the assessee could reduce the net profit shown in its audited profit and loss account by 80% of the on-money receipts and whether, in the absence of any material showing additional expenditure or incorrect accounts, the income from such receipts could be estimated by applying a profit rate instead of accepting the audited net profit.

Analysis: The assessee had itself credited the entire on-money receipts in the profit and loss account, which had been audited under section 44AB of the Income-tax Act, 1961. No material was found in search, or produced thereafter, to show that any expenditure over and above the recorded books had been incurred, or that the audited accounts were incorrect. In such a situation, the assessee could not discard its own audited accounts merely by asserting that only 20% represented profit. The provisions relating to computation of income and maintenance of correct books required acceptance of the audited profit figure unless the accounts were shown to be incorrect or liable to be rejected under section 145(3). The claim for deduction of the alleged unrecorded expenditure was also unsupported by evidence and inconsistent with section 37.

Conclusion: The entire net profit as shown in the audited profit and loss account was liable to be assessed, and the estimate of 30% adopted by the first appellate authority was unsustainable.

Ratio Decidendi: An assessee cannot unilaterally reduce audited business profit by claiming a notional percentage of unrecorded expenditure or profit sharing, unless the audited accounts are shown to be incorrect and the statutory basis for rejecting them is established.

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