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Issues: (i) Whether rejection of books of account under section 145(3) and estimation of net profit at 8% on the ground of non-maintenance of stock register were justified. (ii) Whether interest on fixed deposits and miscellaneous receipts were taxable separately as income from other sources.
Issue (i): Whether rejection of books of account under section 145(3) and estimation of net profit at 8% on the ground of non-maintenance of stock register were justified.
Analysis: The books were regularly maintained and supported by bills and vouchers, and the nature of the civil construction business explained why a stock register was not maintained in the conventional sense. The Assessing Officer did not find defects in purchases, sales, opening or closing work-in-progress, or the accounting method. Mere absence of a stock register, without any finding that the accounts were incorrect or incomplete, was held to be insufficient for invoking section 145(3). On the facts, the estimated net profit addition was also found unsustainable.
Conclusion: Rejection of books of account and estimation of net profit at 8% were not justified and the addition was deleted in favour of the assessee.
Issue (ii): Whether interest on fixed deposits and miscellaneous receipts were taxable separately as income from other sources.
Analysis: The fixed deposits were pledged for obtaining bank guarantees required for the contract business, and the funds were linked with the assessee's business borrowing arrangements. The interest income therefore had a direct nexus with the business operations. The miscellaneous receipts were from sale of scrap and were also found to be part of the business receipts. On these facts, separate taxation under the head income from other sources was held to be unwarranted.
Conclusion: Interest on fixed deposits and miscellaneous receipts were to be assessed as business income and the separate addition was deleted in favour of the assessee.
Final Conclusion: The appeal succeeded in full, with all disputed additions deleted and the assessment relief granted to the assessee.
Ratio Decidendi: Absence of a stock register by itself does not justify rejection of books unless the accounts are shown to be incorrect or incomplete, and receipts having a direct nexus with the business are assessable as business income rather than income from other sources.
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