Books rejection and profit estimation must rest on reliable records and rational past results, not arbitrary percentages.

Defects in salary and wage records, including inconsistent signatures, unverifiable cash payments, and missing worker details, justified rejection of the books under section 145(3) because they cast doubt on the completeness and genuineness of the accounts. Once the books were rejected, income had to be estimated on a rational basis; an 8% net profit rate was found arbitrary where past results were around 1% to 2% and no comparable material supported a higher margin. The estimation was therefore reduced to 3% of turnover, giving the assessee partial relief while sustaining the rejection of accounts.

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Issues: (i) Whether the rejection of the books of account under section 145(3) was justified on account of discrepancies in the salary and wage records; (ii) Whether estimation of net profit at 8% of turnover was sustainable, and if not, what rate was .

Issue (i): Whether the rejection of the books of account under section 145(3) was justified on account of discrepancies in the salary and wage records.

Analysis: The authorities found serious defects in the wage and salary registers, including inconsistent signatures, identical handwriting in multiple signatures, different signatures against the same employee name, absence of names and addresses of workers, no dates of payment, and cash payments that could not be properly verified. These defects created doubt about the correctness and completeness of the accounts and the genuineness of the salary expenditure claimed.

Conclusion: The rejection of the books of account was upheld and this issue was decided against the assessee.

Issue (ii): Whether estimation of net profit at 8% of turnover was sustainable, and if not, what rate was .

Analysis: After rejecting the books, the profit had to be estimated on a reasonable basis. The adopted rate of 8% was found to be unsupported and arbitrary, particularly when the assessee's past net profit history was only about 1% to 2% and no material showed a higher comparable margin. On that factual basis, a 3% net profit rate was considered more appropriate.

Conclusion: The estimation at 8% was set aside and substituted with 3% of turnover, so this issue was decided in favour of the assessee in part.

Final Conclusion: The accounts were validly rejected, but the profit estimation was reduced to a reasonable level, resulting in partial relief to the assessee.

Ratio Decidendi: When defects in account records render them unreliable, income may be estimated, but the estimation must be based on a rational and non-arbitrary assessment of the facts and past results.

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