Rejected books require fair income estimation, with past history and turnover changes guiding gross profit adjustments.

Accounts may be rejected under section 145(3) where defects such as inadequate labour-payment evidence, absence of a day-to-day stock register, and inconsistent record-keeping show that the books are unreliable. Once rejection is sustained, any income estimate must still be fair and rational, taking account of turnover changes, the assessee's explanation for lower profit margins, past profit history, and whether departmental comparables were properly confronted. On the stated facts, rejection of books was upheld, but the trading addition based on a higher gross profit rate was deleted.

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Issues: (i) Whether rejection of books of account under section 145(3) was justified; (ii) whether the trading addition made by applying a higher gross profit rate was sustainable.

Issue (i): Whether rejection of books of account under section 145(3) was justified.

Analysis: The accounts were found to suffer from defects and omissions such as inadequate direct evidence of labour payments, lack of a proper day-to-day stock register, and inconsistencies in the maintenance of records. In such circumstances, the statutory conditions for invoking section 145(3) were satisfied.

Conclusion: Rejection of the books of account was upheld and the issue was decided against the assessee.

Issue (ii): Whether the trading addition made by applying a higher gross profit rate was sustainable.

Analysis: Once the books were rejected, a fair estimation was required, but the estimation had to be based on the cumulative effect of relevant facts. The turnover had increased substantially, the assessee had explained the fall in profit rate by reference to higher purchase costs and lower margins, and the past history showed better net profit results in several years. The comparable cases relied upon by the Department were not shown to have been confronted to the assessee. On this material, the higher gross profit estimate adopted by the Assessing Officer and the reduced rate adopted by the first appellate authority were both found unjustified.

Conclusion: The addition sustained on estimation was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The rejection of accounts was sustained, but the trading addition based on the estimated gross profit rate was deleted, resulting in partial relief to the assessee.

Ratio Decidendi: After rejection of books of account, estimation of income must be fair and rational and must consider all relevant factors, including past history, turnover changes, and specific explanations affecting profit rate.

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