Section 145(3)

Section 145(3) — the law in short

What the courts have decided on section 145(3), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Sargam Cinema v CIT Supreme CourtHelps taxpayerSuperseded by amendment
  The AO has sent my cost of construction to the Departmental Valuation Officer without saying a word about my books. Can he do that?
  Not under the section as it then stood. The Supreme Court held the assessing authority could not have referred the matter to the Departmental Valuation Officer without the books of account being rejected, and where the Tribunal had recorded that the books were never rejected, reliance on the DVO's report was misconceived. The appeal was allowed and the Tribunal's order restored. Read this with the caution below: s.142A was substituted with effect from 1 October 2014 and the substituted section says a reference may be made whether or not the officer is satisfied about the correctness of the accounts.
• Kachwala Gems v JCIT Supreme CourtCuts both ways
  Once the books are rightly rejected, how much guesswork is the Assessing Officer allowed in a best judgment assessment?
  The assessee's books were rejected for defects including the absence of a stock register and the income was estimated. The Supreme Court upheld the rejection and confirmed that some guesswork is inevitable in a best judgment assessment, but the estimate must be honest and must bear a reasonable nexus to the available material and the circumstances of the case.
• CIT v Padamchand Ramgopal Supreme CourtHelps taxpayer
  The officer rejected my books without giving reasons and added half my interest receipts as concealed income for five years. Can he do that?
  No. The Supreme Court upheld the Calcutta High Court and held the additions bad. The officer gave no reason for rejecting the accounts. On appeal only two small errors were found, both in the first year, and nothing at all was found wrong with the accounts of the other four years. Adding half the gross interest receipts of each year as escaped income was, in the Court's words, arbitrary and the method highly capricious. Two insignificant mistakes in one year gave no basis for rejecting the books of the remaining years, and the Tribunal had simply adopted the first appellate authority's findings without examining the facts.
• State of Orissa v Maharaja Shri B.P. Singh Deo Supreme CourtHelps taxpayer
  The officer rejected my books and then simply picked a figure, and the appellate authority enhanced it without saying why. Can an estimate be made like that?
  No. The Supreme Court dismissed the State's appeals and upheld the Orissa High Court, which had set aside an enhancement made in a best judgment assessment. The Assistant Collector had found the assessee's material unreliable and had then enhanced the income without giving any reason and without disclosing the basis of the enhancement. The Court held that unreliability of the assessee's material does not empower the authorities to make an arbitrary order. The power to assess to the best of judgment is not an arbitrary power; the assessment must be based on some relevant material. The Tribunal had erred in affirming it without reasons.
• 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.
• PCIT v DSG Papers (P) Ltd High CourtHelps taxpayer
  The addition rests on statements of ex-employees and third parties I was never allowed to question. Is the assessment good?
  The additions were deleted, but read the High Court decision for what it is. The Chandigarh Tribunal directed deletion of the additions in all five years, holding that the assessee had not been allowed to cross-examine the persons on whose statements the Assessing Officer relied and that the evidence was internally contradictory - invoices said to have been destroyed were recovered from the residence of an ex-president against whom the company had filed an FIR before the search. The Punjab and Haryana High Court dismissed the revenue's appeal, but its order is two sentences long and gives no reasons of its own: it adopts a detailed judgment of even date in a companion appeal, ITA-38-2023, which is not on indiankanoon and is not available in a subscription case-law database.
• Pramod Kumar (Lajja Rice and Oils Mills) v CIT — a fall in gross profit is not the ground, but unexplained cost movement is High CourtHelps departmentNo later treatment found
  My client's books were rejected because the gross profit rate fell. Is a fall in gross profit by itself enough?
  By itself, no — and that is exactly what the assessee argued here. But the Punjab and Haryana High Court dismissed his appeal because the rejection did not rest on the fall in gross profit alone: the Assessing Officer had compared two years and found that the paddy milled was almost equal and sales had risen by 29 per cent while manufacturing expenses had risen by 45.93 per cent, which on the officer's finding showed that the assessee had either inflated the expenses or depressed the sales. The court held that the judgments the assessee relied on turned on their own facts, that no substantial question of law arose, and dismissed the appeal.
• Awadhesh Pratap Singh Abdul Rehman v CIT High CourtHelps department
  The officer rejected my books and made a best-judgment assessment because I kept no stock register. Is that enough on its own to reject?
  Not on its own — but it does not have to be. The absence of a stock register or cash memos may not by itself show that the accounts are false or incomplete; where it is coupled with unverifiable purchases and sales, missing vouchers for expenses and an implausibly low profit, the officer is justified in rejecting the books and assessing to the best of his judgment.
• Diach Chemicals and Pigments P Ltd v DCIT ITATHelps taxpayerNo later treatment found
  The department says my purchases are bogus. Do the suppliers' returns and the input credit allowed on those invoices count for anything in the income-tax assessment?
  They are part of the record, but they are not what carried this case. The addition was deleted on a much wider evidentiary base: notices the Assessing Officer himself issued under s.133(6) came back with direct confirmations from every supplier, the primary documents were complete, the books had been audited four ways with no defect pointed out, and actual production marginally exceeded the standard yield, so the raw material bought had demonstrably gone into the goods sold. The suppliers' returns and the input credit allowed on the purchases sit in that list of supporting facts; the operative paragraph rests on the addition being estimation and surmise with no substantive basis, and does not mention them.
• 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.
• Statutory position — section 44BBB: the 10 per cent turnkey power presumption, the international-aid condition dropped in 2003, and the lower-profit claim in sub-section (2) CBDT Circulars & InstructionsCuts both ways
  We are a foreign company erecting plant for a power project in India. The Assessing Officer wants to tax 10 per cent of our billings under section 44BBB although our audited books show much less. Can we claim the lower figure, and does it matter that our project is not funded by any aid programme?
  You can claim the lower figure, and the aid-funding point no longer matters. Section 44BBB(2), inserted by the Finance Act 2003 with effect from 1 April 2004, provides that notwithstanding sub-section (1) an assessee may claim lower profits and gains than the 10 per cent, if he keeps and maintains books of account and other documents as required under s.44AA(2) and gets his accounts audited and furnishes the audit report as required under s.44AB — whereupon the Assessing Officer must proceed to make an assessment of the total income or loss under s.143(3). The same Finance Act 2003 omitted, with effect from the same date, the words "and financed under any international aid programme" which until then had confined the section to aid-funded turnkey power projects; what remains is the requirement that the turnkey power project be approved by the Central Government in that behalf.

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.