Estimated income from rejected books may follow past history, permit telescoping of capital additions, and wipe out separate disallowances.

Where books of account are rejected and income is estimated, the proper profit rate may be fixed from the assessee's past history rather than by applying a statutory presumptive rate beyond the turnover threshold; here, the rate was taken at 4.16% instead of 8% or 12%. An unexplained capital introduction was not accepted as separately explained, but the estimated trading addition could be used as the source, so telescoping applied. Once income was computed on a gross profit basis after rejection of books, the separate disallowance under section 43B could not survive and was deleted.

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Issues: (i) Whether, after rejection of books of account, the profit rate should be estimated at 12%, 8%, or on the basis of the assessee's past history; (ii) whether the addition for unexplained introduction of capital could be sustained in full or telescoped against the trading addition; and (iii) whether the disallowance made under section 43B could survive once income was estimated.

Issue (i): Whether, after rejection of books of account, the profit rate should be estimated at 12%, 8%, or on the basis of the assessee's past history.

Analysis: The books of account had been rejected and income was assessed on estimation. The lower appellate authority had reduced the rate from 12% to 8% by invoking section 44AD of the Income-tax Act, 1961, but the assessee's turnover exceeded the statutory threshold for that provision. In such a situation, the past history of the assessee provided the proper basis for estimation. The earlier years showed rates around 4%.

Conclusion: The estimated profit rate was directed to be applied on the basis of past history at 4.16%, and not at 8% or 12%, in favour of the assessee.

Issue (ii): Whether the addition for unexplained introduction of capital could be sustained in full or telescoped against the trading addition.

Analysis: No evidence was produced to support the claim of past savings, so the capital introduction could not be separately accepted as explained. However, the addition made on account of estimated trading income constituted real income and could be used to explain the source of the capital introduction. The principle of telescoping was therefore applicable.

Conclusion: The addition for unexplained capital introduction was ordered to be telescoped against the trading addition, in favour of the assessee.

Issue (iii): Whether the disallowance made under section 43B could survive once income was estimated.

Analysis: Once income is determined by applying a gross profit rate after rejection of books, separate disallowances of the kind covered by the estimation cannot be sustained independently.

Conclusion: The disallowance under section 43B was deleted, in favour of the assessee.

Final Conclusion: The appeal succeeded in part: the profit rate was reduced on the basis of past history, the capital addition was telescoped, and the separate disallowance under section 43B was deleted.

Ratio Decidendi: Where books are rejected and income is estimated, the proper profit rate may be determined from the assessee's past history; estimated trading additions may be telescoped against unexplained capital introductions; and separate disallowances inconsistent with the estimated profit cannot ordinarily survive.

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