Books rejection under section 145(3) fails where defects are unproved, and ad hoc gross profit addition cannot stand.

Books of account supported by quantitative details cannot be rejected under section 145(3) unless the stated defects are actually established on record. Here, the alleged excess purchases from a sister concern did not justify rejection because the sister concern's sales had been accepted in its own assessment and deduction under section 80IC had been granted; the rejection was therefore bad in law. Once rejection failed, an ad hoc gross profit addition based on the surrender of excess stock could not be sustained, and the surrendered stock had to be reflected in trading results in accordance with accepted accounting principles. The estimated addition was accordingly deleted.

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Issues: (i) Whether rejection of books of account and book results under section 145(3) of the Income-tax Act, 1961 was justified. (ii) Whether an ad hoc gross profit addition could be sustained after treating surrendered excess stock as income.

Issue (i): Whether rejection of books of account and book results under section 145(3) of the Income-tax Act, 1961 was justified.

Analysis: The material on record showed that the assessee had furnished quantitative details, and the supposed basis for rejection that purchases from a sister concern were excessive did not survive where the sister concern's sales had been accepted in its own assessment and deduction under section 80IC had been granted. The reasons recorded for invoking section 145(3) were therefore not supported by the facts established on record.

Conclusion: The rejection of books of account and book results was not justified and was held to be bad in law, in favour of the assessee.

Issue (ii): Whether an ad hoc gross profit addition could be sustained after treating surrendered excess stock as income.

Analysis: Once the books were not liable to rejection, there was no foundation for estimating income by applying a differential gross profit rate. The surrendered excess stock had to be reflected in the trading results and closing stock in accordance with accepted accounting principles, and the revenue could not make a uniform or arbitrary gross profit estimate merely because a survey had resulted in disclosure of additional income.

Conclusion: The ad hoc gross profit addition was unsustainable and was deleted, in favour of the assessee.

Final Conclusion: The assessment addition based on rejection of books and estimated gross profit was set aside, and the assessee succeeded on the substantive issues.

Ratio Decidendi: Where books of account are supported by quantitative details and the stated defects are not established, rejection under section 145(3) cannot be upheld, and once such rejection fails, an estimated gross profit addition on an ad hoc basis is not permissible.

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