Rejection of books and extrapolation of income: estimation reversed where AO relied on rejected figures and unsupported extrapolation.

Rejection of books followed by estimation of income cannot rest on figures derived from those same books; relying on the disclosed net profit rate in rejected accounts is legally unsustainable, therefore the AOs extrapolation is invalid. Admissions during survey cannot be extended beyond the specific period they cover without corroborative material, and mechanical extrapolation from a ten-month assumption to a twelve-month year is presumptive and unsupported. Estimation must have a rational nexus with facts; mathematical assumptions and uncorroborated computations do not justify additions, and the impugned addition was held unsustainable.

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Issues: (i) Whether the addition of Rs. 6,00,000 made by extrapolating a survey disclosure and applying an estimated net profit rate after rejecting the assessee's books of account is sustainable; (ii) Whether the Assessing Officer could rely on the net profit rate shown in rejected books and extend admissions made during a survey beyond the period to which they relate for estimating income.

Issue (i): Whether the addition of Rs. 6,00,000 based on extrapolation of survey disclosure and estimation after rejection of books of account is sustainable.

Analysis: The Tribunal examined whether the estimation had a rational nexus with material on record. It noted that the AO rejected the books of account under section 145(3) but used the net profit rate disclosed in those same books to compute estimated income and extrapolated a disclosure made during a survey to cover a longer period without independent corroborative evidence. The Tribunal assessed whether the impugned addition was based on seized material, suppressed invoices, or other supporting evidence, and considered settled principles that estimation must rest on reasonable and rational basis rather than mere mathematical assumptions or conjecture.

Conclusion: The addition of Rs. 6,00,000 is unsustainable and is deleted. This conclusion is in favour of the assessee.

Issue (ii): Whether the AO could rely on figures from rejected books and extend survey admissions beyond the survey period for estimating income.

Analysis: The Tribunal evaluated the legality of relying on figures from rejected accounts and extending admissions recorded during the survey beyond the period to which they related. It held that once books are rejected, figures derived from those books cannot be selectively adopted for estimation. It also held that admissions during survey cannot be extrapolated beyond their temporal scope without material support, and that the AO's extrapolation to twelve months lacked corroborative evidence and was purely presumptive.

Conclusion: The AO could not lawfully rely on net profit rates from rejected books nor extend the survey admission beyond its period for estimation. This conclusion is in favour of the assessee.

Final Conclusion: The Tribunal held that the impugned estimation lacked a rational and evidential basis and thereby deleted the addition; the appeal is allowed.

Ratio Decidendi: Where books of account are rejected under section 145(3), any estimation of income must be based on independent, rational and corroborative material and not on figures taken from the rejected books or by mechanically extrapolating survey admissions beyond their temporal scope.

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