Rejection of book results requires unreliable accounts, not conjecture; unverifiable sales finding was unsupported by the record.

Where the assessee's accounts were not found to be incorrect, incomplete, or maintained by an unreliable method, rejection of book results and estimation of profit under the proviso to section 145(1) of the Income-tax Act was impermissible. The record did not support a finding that the sales were unverifiable, as the assessee had produced books of account and relevant trading data, and the authorities had not shown that the accounting entries were unacceptable. The estimation of income was therefore unsupported by germane material and was set aside as based on conjecture rather than the statutory conditions for rejecting regularly maintained accounts.

---

---

Issues: (i) Whether the Tribunal was justified in rejecting the assessee's book results and upholding estimation of profit under the proviso to section 145(1) of the Income-tax Act, 1961 on the material before it. (ii) Whether the finding that the sales made during the relevant year were unverifiable was supported by the record or was an arbitrary finding.

Issue (i): Whether the Tribunal was justified in rejecting the assessee's book results and upholding estimation of profit under the proviso to section 145(1) of the Income-tax Act, 1961 on the material before it.

Analysis: The relevant inquiry under the proviso to section 145(1) is whether the assessee's accounts are correct and complete and whether the method of accounting regularly employed is such that income, profits and gains cannot properly be deduced therefrom. In the absence of a finding that the accounts were incorrect, incomplete, or maintained by an irregular method, book results could not be brushed aside merely on suspicion or on considerations unrelated to the acceptability of the accounting method. The rejection of the trading results was therefore not supported by germane material.

Conclusion: The rejection of the book results and the estimate of profit were not justified and were vitiated; this issue is answered in favour of the assessee.

Issue (ii): Whether the finding that the sales made during the relevant year were unverifiable was supported by the record or was an arbitrary finding.

Analysis: The record showed no adequate basis for treating the sales as unverifiable. The assessee had produced books of account and relied on complete data relating to purchases, sales, opening stock and closing stock, while the authorities below had not recorded a finding that the sales entries or the method of accounting were unacceptable. The finding of unverifiability was therefore founded on insufficient material and rested on an erroneous assumption that earlier defects necessarily persisted in the relevant year.

Conclusion: The finding that the sales were unverifiable was not based on the materials on record and was arbitrary; this issue is answered in favour of the assessee.

Final Conclusion: The reference was answered against the Revenue and the assessee succeeded on both referred questions, with the rejection of the book results and the estimate of income set aside as unsupported by the requisite findings under the accounting provisions.

Ratio Decidendi: Where the assessee's accounts are correct and complete and no finding is recorded that the regular method of accounting is unreliable or incapable of yielding true income, profits and gains cannot be rejected on conjecture, and estimation of income under the proviso to section 145(1) is impermissible.

---