Labour expense disallowance after books rejection must rest on a reasonable estimate, with partial relief granted.

Where an assessee failed to keep reliable day-to-day production, stock movement and voucher records for labour expenditure in rough diamond processing, the books were rejected under section 145(3) and income was estimated. The disallowance of labour-related was upheld in principle because the supporting records were insufficient, but the estimate made by the Assessing Officer was found excessive on the facts and business nature. The addition was therefore reduced from 20% to 10% of karigars mazdoori expenses, granting partial relief while confirming the power to estimate on a reasonable basis.

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Issues: Whether the disallowance of 20% of the claimed labour and related expenses was justified after rejection of the books of account, and whether the addition required reduction on estimation.

Analysis: The assessee failed to maintain and produce proper day-to-day production records, stock movement details, piece-wise manufacturing records, and reliable vouchers to substantiate the labour expenditure claimed in processing rough diamonds. The books were therefore rejected under section 145(3) of the Income-tax Act, 1961. However, on the facts and nature of business, the estimation made by the Assessing Officer was found to be excessive, and a lower estimate was considered appropriate.

Conclusion: The disallowance was upheld in principle, but reduced from 20% to 10% of the karigars mazdoori expenses, resulting in partial relief to the assessee.

Ratio Decidendi: Where the assessee fails to maintain reliable production and expenditure records, books may be rejected and income estimated, but the estimate must be reasonable having regard to the nature of the business and available material.

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