Rejection of book profit: tribunal's unverifiable-sales finding held arbitrary, book profits restored and costs awarded to assessee.

Rejection of book profits under the proviso to the accounting rule is permissible only where accounts are incorrect, no bona fide method of accounting is employed, or the method prevents proper deduction of income; absent any finding that entries were incorrect or accounting method irregular, trading results verifiable from books must be accepted, and a tribunal may not reject book profits based on suspicion, surmise or irrelevant material. The unverifiability finding was arbitrary, entitling the assessee to acceptance of book profits and costs.

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Issues involved:
The judgment involves the rejection of book profit shown by the assessee and the estimation of profit, as well as the verifiability of sales made by the assessee during the relevant year.

Relevant Details:

Rejection of Book Profit:
The assessee, deriving income from the sale of country liquor, filed a return for the assessment year 1966-67 showing a total turnover of Rs. 12,90,678 and a net profit of Rs. 22,218. The Income-tax Officer rejected the book profits due to unverifiable sales, noting transactions in lump sums, and inadequate personal expenses. The Appellate Assistant Commissioner upheld this decision. The Tribunal dismissed the assessee's appeal, citing defects from the previous year. The Tribunal's rejection was based on suspicion and surmises rather than concrete evidence, as the sales were verifiable with complete data available. The Tribunal's reliance on previous year's defects was deemed erroneous as the current year's accounts were not found to have the same issues.

Estimation of Profit:
The Income-tax Officer estimated sales at Rs. 12,95,000 and assessed a flat rate of 2.5% on net profit of Rs. 29,875. The Tribunal's decision to uphold this estimation was found to be arbitrary and not based on the materials on record. The assessee's argument that sales were verifiable due to control by the excise department and fixed sale prices was not considered by the Tribunal. The rejection of book profits was not u/s 145(2) but u/s 145(1) of the Income-tax Act, and the method of accounting employed by the assessee was not found to be irregular.

Conclusion:
The High Court held in favor of the assessee, stating that the Tribunal's finding upholding the rejection of book profit was vitiated by reliance on suspicion and irrelevant material. The Tribunal's conclusion that the sales were unverifiable was deemed arbitrary and not supported by the evidence. The assessee was awarded costs for the reference.

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