Accommodation billing and rejected books justify reasonable income estimation, with limited ad hoc expense relief allowed.

Where books are rejected and purchases and sales are found to be accommodation entries, income may be estimated on a reasonable basis reflecting the likely benefit from passing on VAT credit and issuing purchase and sale bills. The ITAT upheld estimation at 1% of the aggregate of purchases and sales because the assessee produced no material to show the rate was excessive. Although the rejected books could not be relied on for exact expense claims, a limited ad hoc allowance was still justified for unavoidable sundry expenses incidental to bill-raising activity, resulting in partial relief to the assessee.

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Issues: (i) Whether, on rejection of the books and a finding that the purchase and sale transactions were accommodation entries, the assessee's income could be estimated at 1% of the aggregate of purchases and sales. (ii) Whether some expenditure could still be allowed on an ad hoc basis despite rejection of the books.

Issue (i): Whether, on rejection of the books and a finding that the purchase and sale transactions were accommodation entries, the assessee's income could be estimated at 1% of the aggregate of purchases and sales.

Analysis: The trading losses and the surrounding circumstances showed that the transactions were not genuine and that the assessee was engaged in accommodation billing activity rather than actual trading. Once the books stood rejected, the question was only of making a reasonable estimation of income. The basis of estimation had to reflect the likely benefit earned from passing on VAT credit and from raising both purchase and sale bills. Estimation on the aggregate of purchases and sales was found to be a reasonable refinement, and the assessee did not place material to show that the rate adopted was excessive.

Conclusion: The estimate of income at 1% of the aggregate of purchases and sales was upheld and was against the assessee.

Issue (ii): Whether some expenditure could still be allowed on an ad hoc basis despite rejection of the books.

Analysis: Although reliance on the rejected books was impermissible, the activity of bill raising would still involve some unavoidable expenses. The claim could not be accepted as made, but a reasonable allowance was warranted on estimate to cover sundry expenses incidental to such activity.

Conclusion: A limited ad hoc allowance of expenditure was granted in favour of the assessee.

Final Conclusion: The assessment was sustained in principle on estimated income from accommodation entries, but the assessee obtained partial relief by way of limited allowance of expenses, and the appeals were partly allowed.

Ratio Decidendi: Where books are rejected and the assessee is found to be engaged in accommodation billing, income may be estimated on a reasonable basis having regard to the likely sharing of tax-related benefit, and a limited ad hoc allowance may still be made for unavoidable expenses.

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