Best judgment assessment requires material-based expenditure disallowance after account rejection, preventing arbitrary additions where receipts remain accepted.
Rejection of books of account under section 145(3) is permissible where primary books, bills and vouchers are not produced and the correctness or completeness of accounts cannot be verified. An audit report does not replace underlying records. Best judgment assessment after such rejection requires an honest estimate with a reasoned nexus to supporting material; rejection alone does not justify an arbitrary expenditure disallowance. Where no specific bogus or inflated expenditure, basis for the selected rate, or corroborative material exists, the quantum requires verification. Audited financial statements from adjacent years may be admitted as additional evidence for verification under the applicable appellate rules.
Issues: (i) Whether rejection of the books of account under section 145(3) for failure to produce books, bills and vouchers was valid; (ii) Whether the ad hoc disallowance of 25% of expenditure following that rejection was sustainable.
Issue (i): Whether rejection of the books of account under section 145(3) for failure to produce books, bills and vouchers was valid.
Analysis: Section 145(3) permits rejection where the Assessing Officer is not satisfied about the correctness or completeness of the accounts. Despite repeated opportunities and penalty for non-compliance, no books, bills or vouchers were produced. An audit report could not substitute the primary records required for verification, and the explanation concerning electronic notices did not cure the default.
Conclusion: Rejection of the books of account under section 145(3) was valid and stands confirmed, against the assessee.
Issue (ii): Whether the ad hoc disallowance of 25% of expenditure following that rejection was sustainable.
Analysis: A best judgment assessment following rejection of books requires an honest estimate having a reasonable nexus to material; rejection does not itself require an addition. The 25% rate lacked identified bogus or inflated expenditure, a stated basis for selecting that rate, or other supporting material, while the disclosed receipts were accepted. The audited financial statements of adjacent years were admitted as additional evidence under Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963, but required verification before the appropriate income-tax authority. Complete non-production of the primary records nevertheless precluded outright deletion of the addition.
Conclusion: The 25% disallowance is set aside, and the quantum of disallowance, if any, is to be determined afresh after verification, in favour of the assessee to that extent.
Final Conclusion: The rejection of the accounts remains binding, but any expenditure disallowance must be founded on verified material and determined anew.
Ratio Decidendi: Rejection of accounts authorises a best judgment assessment but does not, without material and a reasoned nexus, itself justify an addition or arbitrary expenditure disallowance.