Rejection of books of account under s.145(3) overturned; gross profit accepted and additions deleted on explained decline.

Rejection of books of account under s.145(3) was unwarranted because the assessee adequately explained the decline in gross profit rate as attributable to reduced labour charges and other cost differentials; consequently the books are accepted and the estimated GP of 35% was disallowed. Comparison with an associate concern was found non-comparable due to differing product specifications, product mix and input costs, so juxtaposition was improper and related additions were deleted. Consistency with prior assessments where books were accepted was relied upon to accept the declared trading results and delete the additions for the year under consideration.

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Issues: Whether the rejection of the assessee's books of account and the consequent rejection of declared trading results under Section 145(3) of the Income-tax Act, 1961, and the resultant addition of Rs. 4,32,882 are justified.

Analysis: The adjudicatory analysis examines (a) the alleged defects in books of account and inventory/valuation, (b) the explanation offered for a fall in gross profit (GP) rateprincipally the reduction/elimination of labour/job-work incomeand (c) comparability with an associate unit. Evidence included quantitative inventory prepared through physical stocktaking, GP charts showing prior-year labour charges and corresponding GP rates, absence of a stock register but presence of physical stock statements, and the past history of GP rates for the assessee. The explanation that labour/job-work income decreased to nil, and that such income carried a higher profit element, was supported by year-on-year charts and prior years' figures. Differences between the sister concern and the assessee in product mix, input costs, and applicable incentives were material and undermined comparability. Authorities below did not identify specific substantiated defects in the books or inventory statements nor adequately address the explanations and supporting records, and relied on presumed inconsistencies without confronting the available physical stock evidence and historical GP data.

Conclusion: The rejection of books of account and the estimation of GP at 35% (with the addition of Rs. 4,32,882) are not sustainable. The declared GP rate for the year is accepted and the addition of Rs. 4,32,882 is deleted. The appeal is allowed in favour of the assessee.

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