Rejected books and estimated gross profit sustained where stock records were unreliable and valuation of trading results was impossible.

Books of account may be rejected under section 145(3) where stock records are unreliable, quantitative details are absent, and trading stock cannot be properly valued from the accounts. Here, the stock register did not distinguish qualities, types, or stages of processing, and the auditor noted that quantitative particulars were not furnished. These defects were treated as material because true trading results could not be deduced from the books. The ITAT also accepted estimation of income by reference to the assessee's own past results, holding that the gross profit rate applied by the Revenue was not shown to be excessive or arbitrary. Accordingly, rejection of accounts and estimation at 8.45% were sustained.

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Issues: Whether the assessee's books of account were rightly rejected under section 145(3) of the Income-tax Act, 1961, and whether the estimation of gross profit at 8.45% was justified.

Analysis: The books were found unreliable because the stock record produced was not shown to be maintained in the regular course of business, the auditor's report itself recorded that quantitative details were not furnished, and the stock register did not distinguish between different qualities, types, or stages of processing of hides and skins. The Court treated these defects as material, holding that proper valuation and true trading results could not be deduced from the accounts. It further held that estimation based on the assessee's own past results was a reasonable method, and the rate adopted by the Revenue was not shown to be excessive or arbitrary.

Conclusion: The rejection of accounts under section 145(3) was upheld, and the estimation of income by applying a gross profit rate of 8.45% was sustained.

Ratio Decidendi: Where books of account are not correct and complete, particularly because of defective stock records and unreliable valuation of trading stock, the accounts may be rejected and income reasonably estimated on the basis of material such as the assessee's own past profit results.

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