Books rejection and gross profit estimation cannot stand without material showing bogus third-party transactions.

Where an addition was based on an incorrect assumption that the assessee had purchase and sales transactions with a third party, rejection of books under section 145(3) could not be sustained. The record showed no such transactions, the assessee had filed party-wise details, and there was no material of bogus or hawala entries attributable to the assessee. In the absence of valid confrontation of the statements relied upon, estimating profit by applying an arbitrary gross profit rate was unjustified. The books rejection and consequential profit addition were therefore not sustainable and were deleted.

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Issues: Whether the rejection of books of account and the consequential estimation of profit by applying a gross profit rate was justified on the basis of alleged transactions with a third party.

Analysis: The addition was founded on the premise that the assessee had purchase and sales transactions with the concerned entity, but the record showed that no such purchase or sales transactions existed. The assessee had furnished the relevant party-wise details, and the allegation rested on an incorrect factual assumption. In the absence of any material showing bogus or hawala entries attributable to the assessee, and without valid confrontation of the statements relied upon, there was no basis to invoke Section 145(3) of the Income-tax Act, 1961 or to estimate profits by applying an arbitrary gross profit rate.

Conclusion: The rejection of books of account and the addition based on estimated profit were not sustainable and were rightly deleted.

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