The Assessing Officer has disallowed forty per cent of my client's purchases on an estimate, but has not rejected the books. Is that open to him?
No. The Delhi High Court held that it is the settled position of law that the books of account have to be necessarily rejected before the Assessing Officer proceeds to a best judgment assessment on fulfilment of the conditions in the Act, and that any pick and choose method of rejecting certain entries while accepting others, without appropriate justification, is arbitrary. Since the additions in question had been made on an estimate basis without rejecting the books, no substantial question of law arose and the Revenue's appeals were dismissed.
Decided by the High Court (Yashwant Varma J and Purushaindra Kumar Kaurav J) on 2024-03-01, reported as ITA 862/2019 and ITA 863/2019 (Delhi High Court), judgment reserved 13 February 2024 and pronounced 1 March 2024; Assessment Years 2013-14 and 2014-15. It bears on section 145, section 145(1), section 145(2), section 145(3), section 144, section 153A, section 132, section 133A, section 2(22)(e), section 260A of the Income Tax Act 1961, in Assessment & Scrutiny and Evidence & Burden of Proof matters.
This is the cleanest recent statement of the rule and it is a Division Bench of the Delhi High Court collecting the authority from four other High Courts. Two things make it usable at the assessment stage rather than only on appeal. First, the court set out the whole of s.145(3) as it now stands, including the third limb added by the Finance Act 2016 — income not computed in accordance with the standards notified under s.145(2) — so the gateway conditions are on the face of the judgment. Second, it identified the practical vice: an officer who disallows a percentage of purchases while accepting the sales produces an absurd result, and the Tribunal's finding that the assessee's profit would have been 32.9 per cent and 56.09 per cent on the Revenue's approach was upheld as a good reason to delete. The court also distinguished the two decisions the Revenue relied on: Unit Construction Co Ltd was decided in the context of unexplained investments under s.69, and Paradise Holidays concerned a challenge to the rejection of books itself.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee deals in gift items and novelties, pet treat products, market survey and research and commission business, and provides corporate gifting solutions. A search, seizure and survey operation under s.132 and s.133A was conducted on 15 February 2014 on the AMQ group of companies including the assessee's office premises, and a notice under s.153A followed. For AY 2014-15 the assessee filed a return on 30 November 2014 declaring income of Rs.66,53,882. By order under s.143(3) dated 27 December 2016 the Assessing Officer assessed the income at Rs.11,11,66,320, making additions of Rs.42,53,909 on account of estimation of unaccounted profit, Rs.19,05,653 on account of disallowance of expenses, Rs.9,30,49,222 on account of inflated purchases, Rs.51,72,955 as deemed dividend under s.2(22)(e), and Rs.1,00,000 on account of cash found and seized. The Commissioner (Appeals), noting that the Assessing Officer had raised no objection to the genuineness of the audited books, deleted the disallowance of expenses and the inflated purchases addition and deleted the protective addition of Rs.1,00,000. The Tribunal dismissed the Revenue's appeal, upholding the deletions in the absence of any defect brought on record by the Assessing Officer, and observing that although the Assessing Officer had the complete addresses of the parties he did not call for any information from them, and that a 40 per cent disallowance of purchases was not justified when the books were not rejected. The Revenue appealed under s.260A. Questions A, E, F and G were disposed of by earlier orders of 21 July 2023 and 24 January 2024, leaving questions B, C and D.
The Revenue's appeals were dismissed. Since the additions the subject of questions B, C and D had admittedly been made on an estimate basis without rejecting the books of account, no substantial question of law arose and there was no reason to interfere with the view taken by the Tribunal (paras 29 and 30).
The court set out s.145(3), which permits an assessment in the manner provided in s.144 where the Assessing Officer is not satisfied about the correctness or completeness of the accounts, or where the method of accounting provided in sub-section (1) has not been regularly followed, or income has not been computed in accordance with the standards notified under sub-section (2), and set out s.144 itself (paras 17 and 18). It held that on a plain reading the Assessing Officer may make additions on estimation only on fulfilment of the conditions in s.145(3), and framed the question whether such an addition must be made only after rejection of the books (para 19). It then collected the authority: Pr. CIT v. Swananda Properties Pvt Ltd (Bombay), where the rejection did not specify the defect and the court held that rejection of the books should precede the best judgment assessment; CIT v. Anil Kumar & Co (Karnataka), where an estimation without rejecting the books and without framing an assessment under s.144 was held unsustainable; Pr. CIT v. Marg Ltd (Madras), holding it a sine qua non that the Assessing Officer conclude the books are incorrect, incomplete or unreliable and reject them before making his own assessment; and CIT v. Gian Chand Labour Contractors (Punjab and Haryana) on the effect of a best judgment estimate (paras 20 to 23). Concluding, it held that the series of judgments alludes to the settled position that the books have to be necessarily rejected before the Assessing Officer proceeds to best judgment assessment, the rationale being the standards of correct computation, and that any pick and choose method of rejecting certain entries while accepting others without appropriate justification is arbitrary and may lead to an incomplete, unreasonable and erroneous computation of income (para 24). On the facts it noted the Tribunal's categorical finding that the Assessing Officer had been provided with the bills, vouchers and addresses of the transacting parties and made no effort to confirm the veracity of the allegedly bogus or inflated bills (para 25), and distinguished the Revenue's authorities as decided in different contexts (para 27).
The series of judgments referred to hereinabove clearly allude to the settled position of law that the books of account have to be necessarily rejected before the AO proceeds to the best judgment assessment upon fulfilment of conditions mentioned in the Act.
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Handle my notice → Ask a CA on WhatsAppNo. The Delhi High Court held that it is the settled position of law that the books of account have to be necessarily rejected before the Assessing Officer proceeds to a best judgment assessment on fulfilment of the conditions in the Act, and that any pick and choose method of rejecting certain entries while accepting others, without appropriate justification, is arbitrary. Since the additions in question had been made on an estimate basis without rejecting the books, no substantial question of law arose and the Revenue's appeals were dismissed. This was decided by the High Court (Yashwant Varma J and Purushaindra Kumar Kaurav J) and bears on section 145, section 145(1), section 145(2), section 145(3), section 144, section 153A, section 132, section 133A, section 2(22)(e), section 260A of the Income Tax Act 1961. It is reported as ITA 862/2019 and ITA 863/2019 (Delhi High Court), judgment reserved 13 February 2024 and pronounced 1 March 2024; Assessment Years 2013-14 and 2014-15. This is the cleanest recent statement of the rule and it is a Division Bench of the Delhi High Court collecting the authority from four other High Courts. Two things make it usable at the assessment stage rather than only on appeal. First, the court set out the whole of s.145(3) as it now stands, including the third limb added by the Finance Act 2016 — income not computed in accordance with the standards notified under s.145(2) — so the gateway conditions are on the face of the judgment. Second, it identified the practical vice: an officer who disallows a percentage of purchases while accepting the sales produces an absurd result, and the Tribunal's finding that the assessee's profit would have been 32.9 per cent and 56.09 per cent on the Revenue's approach was upheld as a good reason to delete. The court also distinguished the two decisions the Revenue relied on: Unit Construction Co Ltd was decided in the context of unexplained investments under s.69, and Paradise Holidays concerned a challenge to the rejection of books itself. If it applies to you, the first step is this: Read the assessment order for a recorded rejection of the books under s.145(3). If there is none, take the point first and independently of the merits of the addition.
The assessee deals in gift items and novelties, pet treat products, market survey and research and commission business, and provides corporate gifting solutions. A search, seizure and survey operation under s.132 and s.133A was conducted on 15 February 2014 on the AMQ group of companies including the assessee's office premises, and a notice under s.153A followed. For AY 2014-15 the assessee filed a return on 30 November 2014 declaring income of Rs.66,53,882. By order under s.143(3) dated 27 December 2016 the Assessing Officer assessed the income at Rs.11,11,66,320, making additions of Rs.42,53,909 on account of estimation of unaccounted profit, Rs.19,05,653 on account of disallowance of expenses, Rs.9,30,49,222 on account of inflated purchases, Rs.51,72,955 as deemed dividend under s.2(22)(e), and Rs.1,00,000 on account of cash found and seized. The Commissioner (Appeals), noting that the Assessing Officer had raised no objection to the genuineness of the audited books, deleted the disallowance of expenses and the inflated purchases addition and deleted the protective addition of Rs.1,00,000. The Tribunal dismissed the Revenue's appeal, upholding the deletions in the absence of any defect brought on record by the Assessing Officer, and observing that although the Assessing Officer had the complete addresses of the parties he did not call for any information from them, and that a 40 per cent disallowance of purchases was not justified when the books were not rejected. The Revenue appealed under s.260A. Questions A, E, F and G were disposed of by earlier orders of 21 July 2023 and 24 January 2024, leaving questions B, C and D. The matter was decided on 2024-03-01 by the High Court (Yashwant Varma J and Purushaindra Kumar Kaurav J). On those facts the High Court held as follows. The Revenue's appeals were dismissed. Since the additions the subject of questions B, C and D had admittedly been made on an estimate basis without rejecting the books of account, no substantial question of law arose and there was no reason to interfere with the view taken by the Tribunal (paras 29 and 30).
The court set out s.145(3), which permits an assessment in the manner provided in s.144 where the Assessing Officer is not satisfied about the correctness or completeness of the accounts, or where the method of accounting provided in sub-section (1) has not been regularly followed, or income has not been computed in accordance with the standards notified under sub-section (2), and set out s.144 itself (paras 17 and 18). It held that on a plain reading the Assessing Officer may make additions on estimation only on fulfilment of the conditions in s.145(3), and framed the question whether such an addition must be made only after rejection of the books (para 19). It then collected the authority: Pr. CIT v. Swananda Properties Pvt Ltd (Bombay), where the rejection did not specify the defect and the court held that rejection of the books should precede the best judgment assessment; CIT v. Anil Kumar & Co (Karnataka), where an estimation without rejecting the books and without framing an assessment under s.144 was held unsustainable; Pr. CIT v. Marg Ltd (Madras), holding it a sine qua non that the Assessing Officer conclude the books are incorrect, incomplete or unreliable and reject them before making his own assessment; and CIT v. Gian Chand Labour Contractors (Punjab and Haryana) on the effect of a best judgment estimate (paras 20 to 23). Concluding, it held that the series of judgments alludes to the settled position that the books have to be necessarily rejected before the Assessing Officer proceeds to best judgment assessment, the rationale being the standards of correct computation, and that any pick and choose method of rejecting certain entries while accepting others without appropriate justification is arbitrary and may lead to an incomplete, unreasonable and erroneous computation of income (para 24). On the facts it noted the Tribunal's categorical finding that the Assessing Officer had been provided with the bills, vouchers and addresses of the transacting parties and made no effort to confirm the veracity of the allegedly bogus or inflated bills (para 25), and distinguished the Revenue's authorities as decided in different contexts (para 27). In the words reproduced by the source cited on this page: "The series of judgments referred to hereinabove clearly allude to the settled position of law that the books of account have to be necessarily rejected before the AO proceeds to the best judgment assessment upon fulfilment of conditions mentioned in the Act." The decision followed or applied Principal Commissioner of Income-tax v. Swananda Properties Pvt. Ltd. [2019 SCC OnLine Bom 13359] — relied on; CIT v. Anil Kumar & Co. [2016 SCC OnLine Kar 8512] — relied on; Principal Commissioner of Income-tax v. Marg Ltd. [2017 SCC OnLine Mad 37852] — relied on; CIT v. Gian Chand Labour Contractors [2007 SCC OnLine P&H 1577] — relied on; Unit Construction Co. Ltd. v. Joint CIT [2003 SCC OnLine Cal 756] — distinguished; CIT v. Paradise Holidays [2010 SCC OnLine Del 1753] — distinguished.
It was decided by the High Court on 2024-03-01 and is reported as ITA 862/2019 and ITA 863/2019 (Delhi High Court), judgment reserved 13 February 2024 and pronounced 1 March 2024; Assessment Years 2013-14 and 2014-15. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 145, section 145(1), section 145(2), section 145(3), section 144, section 153A, section 132, section 133A, section 2(22)(e), section 260A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Revenue's appeals were dismissed. Since the additions the subject of questions B, C and D had admittedly been made on an estimate basis without rejecting the books of account, no substantial question of law arose and there was no reason to interfere with the view taken by the Tribunal (paras 29 and 30). It arises in Assessment & Scrutiny and Evidence & Burden of Proof matters, on section 145, section 145(1), section 145(2), section 145(3), section 144, section 153A, section 132, section 133A, section 2(22)(e), section 260A of the Income Tax Act 1961, and was decided by Yashwant Varma J and Purushaindra Kumar Kaurav J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Where the officer has made a percentage disallowance of purchases while accepting the sales, work out the gross profit rate his approach implies and put the absurdity on record. If the officer had the parties' names and addresses and made no enquiry, say so — the failure to verify is what carried this case through three forums. Meet the Revenue's usual authorities: Unit Construction Co Ltd is a s.69 case and Paradise Holidays is about the justification for a rejection that was actually made. Remember that rejection is the gateway, not the answer: once the books are validly rejected the estimate still has to be honest and based on material, and the Revenue-side authorities on that are separate.
Still good law. citedby:110904610 returns nothing, but a content search for "Forum Sales" with "145(3)" returns 91 documents: the judgment, reported at [2024] 160 taxmann.com 93 (Delhi), is in regular use across the Kolkata, Delhi, Lucknow and Chandigarh Tribunal benches. The application is confirmed in Vista Tie Up Pvt Ltd v ITO, Ward-1(1), Kolkata (Income Tax Appellate Tribunal, Kolkata, 14 November 2025), where the Bench's own finding at para 6 adopted the ratio and deleted the addition. Readers should not rely on S. Balaji Mech-Tech Pvt Ltd v ITO (Tribunal, Delhi, 25 September 2024) as an application: there the judgment appears only in the assessee's written submissions under Ground 9.1 and the Bench decided on other grounds. Nothing overruling or doubting it was found and no Supreme Court matter surfaced. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment was read in full in a single transcription; it runs to 30 numbered paragraphs and para 30 contains the disposal. Paragraphs 20 to 23 and 26 reproduce extracts from other decisions — Swananda Properties (Bombay), Anil Kumar & Co (Karnataka), Marg Ltd (Madras), Gian Chand Labour Contractors (Punjab and Haryana) and the Tribunal's own order at its para 25 — and the paragraph numbers appearing inside those extracts belong to those decisions. The court's own conclusions are at paras 24, 29 and 30. Note that CIT v. Gian Chand Labour Contractors, quoted at para 23, is already in this library as a separate entry. Two of the seven proposed questions were disposed of by earlier orders recorded at paras 9 and 10, leaving only questions B, C and D for decision. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Revenue's appeals were dismissed. Since the additions the subject of questions B, C and D had admittedly been made on an estimate basis without rejecting the books of account, no substantial question of law arose and there was no reason to interfere with the view taken by the Tribunal (paras 29 and 30).
TaxSphere, “PCIT v Forum Sales Pvt Ltd — an estimate cannot be made without first rejecting the books under s.145(3)”, https://taxnotice.vittsphere.com/caselaw/case/pcit-v-forum-sales-no-estimate-without-first-rejecting-the-books/ (validity last checked 2026-09-08)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
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