Rejection of books as precondition: estimated additions based on gross profit require prior rejection before invoking best judgment assessment.

An assessing officer may not resort to estimated additions by applying a gross profit rate to unrecorded sales without first rejecting the books of account and invoking best judgment assessment; the statutory precondition requiring rejection of accounts before proceeding to estimation must be observed, and selective estimation over entries recorded in the books is impermissible. Applying that legal principle, the estimation made without recording rejection of the books was unsustainable and was set aside in favour of the assessee, restoring reliance on the books for computation of income.

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Issues: Whether the Assessing Officer can make estimated additions by estimating gross profit/income without first rejecting the books of account under Section 145(3) and proceeding under Section 144 of the Income-tax Act, 1961.

Analysis: The Court examined Section 145(3) which empowers the Assessing Officer, if not satisfied about correctness or completeness of accounts, to make assessment in the manner provided in Section 144. The Court reviewed the factual position that the AO did not record any rejection of the books of account yet made an estimated addition by applying a gross profit rate to unrecorded sales. The Court relied on settled precedents establishing that rejection of books of account is a prerequisite before invoking best judgment/estimation under Section 144; absent such rejection the books must be accepted for computation and selective estimation over entries recorded in books is impermissible. Applying this legal framework to the present facts, the Court found the AO did not follow the statutory precondition in Section 145(3) and therefore the estimation made without rejecting books was not legally sustainable.

Conclusion: The appeal is allowed and the estimated addition made by the Assessing Officer without rejecting the books of account under Section 145(3) read with Section 144 of the Income-tax Act, 1961 is set aside in favour of the assessee.

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