Section 145(1)

Section 145(1) — the law in short

What the courts have decided on section 145(1), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• PCIT v Forum Sales Pvt Ltd — an estimate cannot be made without first rejecting the books under s.145(3) High CourtHelps taxpayer
  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.
• The Chamber of Tax Consultants v UOI High CourtHelps taxpayerSuperseded by amendment
  Can the CBDT use ICDS notified under s.145(2) to override a Supreme Court or High Court decision on how income is computed?
  No. The Delhi High Court read s.145(2) down so that the power to notify income computation and disclosure standards cannot be used to override binding judicial precedent or a provision of the Act, and struck down several ICDS provisions that did exactly that — including part of ICDS III on construction contracts and part of ICDS VI on foreign exchange. Parliament's answer was the Finance Act 2018, which put much of the struck-down material into the Act itself.
• Commissioner of Income-Tax v Banwari Lal Banshidhar High CourtHelps taxpayer
  The officer rejected my books and estimated my income by applying a gross profit rate, and then also disallowed my cash purchases under section 40A(3). Can he do both?
  No. The Allahabad High Court held that where the books are rejected and income is computed by applying a gross profit rate on the sales shown, no deduction is allowed to the assessee on account of purchases, so there is nothing to disallow under section 40A(3). Applying the gross profit rate takes care of everything, and there is no need for the officer to scrutinise the amount spent on purchases or to look at section 40A(3) and rule 6DD(j) at all. The disallowance of Rs 91,926 was rightly deleted by the Tribunal. Having agreed on that primary ground, the Court declined to go into the Tribunal's alternative finding on rule 6DD(j) and returned that question unanswered.
• ADIT (International Taxation) v Shandong Tiejun Electric Power Engineering Co. Ltd — where s.44BBB(2) is complied with, the officer cannot reject the books under s.145(3) and fall back on the 10 per cent ITATHelps taxpayerNo later treatment found
  We are a foreign company on an approved turnkey power project. We keep books, they are audited, and we recognise revenue on percentage of completion under AS-7. The Assessing Officer has rejected the books under section 145(3) and taxed 10 per cent of our billings under section 44BBB(1). Can he do that?
  The Ahmedabad Bench of the Tribunal held he could not, on these facts, and dismissed the Revenue's appeal. Section 44BBB(2) gives the assessee an option to be assessed on lower profits on two conditions only — that it keeps and maintains books and other documents as required under s.44AA(2) and that it gets its accounts audited and furnishes the s.44AB report — and where those are satisfied and a recognised method of accounting under AS-7 has been regularly followed and disclosed, the officer's action in rejecting the books under s.145(3) and assessing under s.44BBB(1) on a presumptive basis is not justified.
• Statutory position — what the ICDS actually govern: s.145(2), s.145(3) and the preamble limits CBDT Circulars & InstructionsCuts both ways
  The Assessing Officer says my client's accounts must be redone under the ICDS. How far do the ICDS actually reach?
  Not as far as the notice usually assumes. The ten ICDS notified under s.145(2) apply only to a person following the mercantile system of accounting, and only for computing income under "Profits and gains of business or profession" and "Income from other sources" — the preamble to every ICDS says in terms that they are "not for the purpose of maintenance of books of accounts", and that where an ICDS conflicts with the Act, the Act prevails to that extent. They do not apply to an individual or Hindu undivided family whose accounts are not required to be audited under s.44AB, and they do not apply to a person on the cash system at all.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.