Bulk expense postings do not by themselves prove bogus expenditure; unreliable books may still justify estimated profit.

Bulk expense entries arising from aggregation, ledger misclassification, year-end transfers and unreversed provisions were not, by themselves, enough to treat the entire expenditure as bogus under section 37. On the facts, the work was actually executed, internal vouchers and disbursement sheets supported part of the claim, and the cash wage and coolie payments did not attract sections 40A(3) or 40(a)(ia). At the same time, the books were found incomplete and unreliable because of bulk postings, self-made vouchers and accounting mismatches, justifying rejection under section 145(3). Once estimation became necessary, a net profit rate of 10% of contractual receipts was considered reasonable.

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Issues: (i) Whether the bulk expense entries debited in the books of account were bogus expenditure liable to be disallowed in full under section 37 of the Income-tax Act, 1961, and whether the alternative disallowance under sections 40A(3) and 40(a)(ia) of the Income-tax Act, 1961 was sustainable; (ii) whether the books of account were liable to be rejected under section 145(3) of the Income-tax Act, 1961 and, if so, what profit rate should be applied.

Issue (i): Whether the bulk expense entries debited in the books of account were bogus expenditure liable to be disallowed in full under section 37 of the Income-tax Act, 1961, and whether the alternative disallowance under sections 40A(3) and 40(a)(ia) of the Income-tax Act, 1961 was sustainable.

Analysis: The bulk entries were found to be an accounting anomaly arising from aggregation of transactions, misclassification between ledger heads, year-end transfer entries, and year-end provisions not reversed in the immediately succeeding year. The entries did not justify treating the entire expenditure as bogus, especially where the work was actually executed, some entries were supported by internal vouchers and disbursement sheets, and the corresponding credits to other ledger accounts or party accounts were explained. The cash payments towards coolie and wages were also held not to attract section 40A(3) of the Income-tax Act, 1961 on the facts found, and the nature of the expenditure did not bring it within section 40(a)(ia) of the Income-tax Act, 1961. The retracted statements recorded during search were not treated as conclusive against the assessee.

Conclusion: The entire bulk disallowance was unsustainable, and no further disallowance under sections 37, 40A(3) or 40(a)(ia) of the Income-tax Act, 1961 survived on the facts.

Issue (ii): Whether the books of account were liable to be rejected under section 145(3) of the Income-tax Act, 1961 and, if so, what profit rate should be applied.

Analysis: Although the complete disallowance was not upheld, the manner of maintaining books through bulk postings, self-made vouchers, non-contemporaneous recording, and accounting mismatches meant that the accounts were not fully correct and complete and income could not be properly deduced from them. Rejection of books was therefore justified. However, once estimation was required, the rate adopted by the lower authority was found excessive in the context of the assessee's road construction business and comparable industry indicators. A net profit rate of 10% of contractual receipts was considered reasonable.

Conclusion: Rejection of books was upheld, but the profit estimate was reduced to 10% of contractual receipts.

Final Conclusion: The assessee succeeded in resisting full disallowance of the impugned expenditure, while the rejection of books was sustained and the income was directed to be computed on an estimated net profit rate of 10%.

Ratio Decidendi: An accounting anomaly or bulk posting of expenses, even with deficient supporting vouchers, does not by itself establish the entire expenditure as bogus; where the accounts are nevertheless unreliable, the proper course is rejection of books and estimation of income rather than wholesale disallowance of the full expenditure.

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