Rejection of unreliable books and estimated income upheld where assessment rested on relevant material, not mere suspicion.

In an assessment under section 23(3), the officer may reject unreliable, incomplete or false book results and estimate income on relevant material without specifically invoking the proviso to section 13, because that proviso governs defects in the accounting method rather than rejection of untrue accounts. The assessment order itself may show such rejection if its substance is clear. The estimated additions were also sustained because the claimed wastage, production figures and explanations for low output were unsupported by verifiable records, while comparative production history and unexplained disparities provided sufficient material. The estimate was therefore based on evidence and not mere suspicion, and the Revenue's position was upheld on both issues.

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Issues: (i) Whether, in an assessment under section 23(3), the Income-tax Officer could reject the assessee's book results and estimate income without specifically invoking the proviso to section 13; (ii) Whether there was material on record to sustain the estimated additions made for the three assessment years.

Issue (i): Whether, in an assessment under section 23(3), the Income-tax Officer could reject the assessee's book results and estimate income without specifically invoking the proviso to section 13.

Analysis: Section 13 governs the method of accounting, but it does not control the power under section 23(3) to assess on the evidence produced and to reject unreliable, false, incomplete, or incorrect books. The proviso to section 13 is attracted where the method of accounting is itself defective or does not permit proper deduction of profits, whereas rejection of books as untrue or incomplete is referable to section 23(3). A specific formal invocation of the proviso to section 13 was therefore not necessary where the assessment order itself showed rejection of the book results.

Conclusion: The Income-tax Officer was competent to estimate income under section 23(3) without specifically invoking the proviso to section 13, and the issue was decided against the assessee.

Issue (ii): Whether there was material on record to sustain the estimated additions made for the three assessment years.

Analysis: The assessee's claimed wastage and production figures were not supported by verifiable records, the explanation for excessive wastage was not accepted, and the low output was not satisfactorily explained by the age of machinery, labour inefficiency, financial constraints, or inferior cotton. The authorities relied on comparative production history and the unexplained disparity in wastage and output. The estimate was not founded on mere suspicion, but on relevant material bearing on the reliability of the books and the true production figures.

Conclusion: There was sufficient material to sustain the estimated additions, and this issue was also decided against the assessee.

Final Conclusion: The reference was answered in favour of the Revenue on both questions, upholding the estimated additions and the rejection of the book results.

Ratio Decidendi: In an assessment under section 23(3), unreliable or incomplete accounts may be rejected and income estimated on relevant material without invoking the proviso to section 13, and such an estimate must be supported by more than bare suspicion.

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