Rejection of books and fair profit estimation: unreliable records justify rejection, but profit must be estimated on a reasonable basis.

Unreliable accounts supported only by self-made vouchers, without verifiable labour records, third-party confirmations, project-wise details or reconciliations, justify rejection of books under section 145(3). Once the books are rejected, income must be estimated on a fair and reasonable basis, and section 44AD cannot be applied mechanically or through unsuitable comparables. On the facts discussed, an 8% profit rate was found excessive and a 5% rate was adopted, resulting in partial relief.

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Issues: (i) Whether the books of account were rightly rejected under section 145(3) of the Income-tax Act, 1961; (ii) Whether the estimation of profit at 8% of turnover was justified, or whether a lower rate was warranted.

Issue (i): Whether the books of account were rightly rejected under section 145(3) of the Income-tax Act, 1961.

Analysis: The assessee did not produce verifiable labour records, third-party confirmations, project-wise details, or reconciliations. The major expenditure claims were supported only by self-made vouchers, which were found to lack credibility. The assessee also did not respond adequately to the show cause notice. In these circumstances, the accounts were not reliable for proper computation of income.

Conclusion: The rejection of books of account under section 145(3) was upheld, and this issue was decided against the assessee.

Issue (ii): Whether the estimation of profit at 8% of turnover was justified, or whether a lower rate was warranted.

Analysis: Once the books were rejected, estimation of income was necessary, but the rate had to be fair and reasonable. The comparables relied upon by the Assessing Officer were not truly comparable in scale and operations, and section 44AD could not be mechanically applied. At the same time, the declared profit rate was not dependable because the accounts were rejected. Considering the nature of the business, the deficiencies in the records, and the variability in margins, 8% was found to be excessive.

Conclusion: Profit was reasonably estimated at 5% of turnover, and this issue was decided partly in favour of the assessee.

Final Conclusion: The addition was sustained in principle through rejection of the books, but the profit rate was substantially moderated, giving the assessee partial relief.

Ratio Decidendi: Where the accounts are unreliable due to lack of verifiable supporting evidence, the books may be rejected, but any consequential profit estimation must be based on a reasonable and comparable benchmark rather than a mechanical or excessive rate.

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