Rejected books require income estimation on gross profit basis, not a separate addition for unverifiable purchases.

Once books of account are rejected under section 145(3) for alleged unverifiable purchases, income must be estimated on a best-judgment basis rather than through a separate addition to the trading result. The note states that where sales are accepted and the purchases from certain parties are treated as non-genuine, the proper approach is to compute income by applying an appropriate gross profit rate with reference to past history and the average gross profit accepted in earlier years. On that approach, a percentage disallowance confined to the impugned purchases is not justified, and recomputation on gross profit basis becomes the operative method.

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Issues: Whether, after rejection of the books of account for alleged unverifiable purchases, the addition could be sustained by applying a percentage disallowance to the purchases or the income had to be estimated on the basis of gross profit / past history.

Analysis: The assessee's sales were not disputed, but the purchases from three parties were treated as non-genuine and the books were rejected under section 145(3) of the Income-tax Act, 1961. Once the books are rejected, the assessment has to proceed on estimate and best judgment basis. In such a situation, a separate addition to the trading result on account of the impugned purchases was held to be not justified. The proper course was to determine income by applying an appropriate gross profit rate with reference to past history and the average gross profit declared and accepted in earlier years.

Conclusion: The addition restricted to 15% of the unverifiable purchases was set aside and the Assessing Officer was directed to recompute income on the basis of the average gross profit rate; the issue was decided in favour of the assessee and against the Revenue.

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