There are a number of cases where the assessing officers reject accounts for some reason or the other usually for lack of stock check. Sales are sometimes estimated where there is no check over the sales made in cash as in the case of retail dealers. In some cases, purchases are not properly supported. It is not unusual for the assessing officer to estimate the sales and add the additional sale as income. But in case of unproved purchases, the entire purchases are added. Usually, both turnover and the profits are estimated. There is no uniform method followed. What will be the correct position in law?

There can be no uniform method in estimate of taxable income, where the assessee’s books have been found to be unreliable in some respect or the other so that the estimate becomes inevitable. Where the purchases are clearly established, sales, subject to adjustment of stock, cannot exceed the aggregate cost of goods sold and reasonable gross profits in the line of business carried on by the assessee.

It may not, therefore, be possible to add the entire additional sales estimated except where the addition of such sales does not enhance the gross profit beyond reasonable limits.

Where purchases are unproved, they may be added back, except where the assessee is able to show that the accounted sales, subject to stock adjustment, could not have been made out of remaining purchases. It may also be possible to show that the disallowance of entire purchases would lead to abnormal gross profit, which is not possible at all. In such cases, reasonable extent of purchases with reference to the quantity, which should have been necessarily acquired to meet sales will have to be allowed at average market price. Alternatively, purchases to the extent that would be commensurate with reasonable gross profits margin can be allowed.

Where both purchases and sales are not subject to check, the estimate of reasonable turnover at normal gross profit cannot be avoided.

There are a number of decisions supporting either addition for gross profit or the addition on entire sales or the entire unproved purchases depending upon the facts of each case.

Discrepancies of stock reported to the bank and the stock as per books also causes rejection of accounts, except where the stock discrepancy is reconciled. Where the assessee is unable to reconcile, some addition may well be warranted with reference to the excess stock disclosed to the bank or by requiring an estimate of income or with reference to other facts of the case.

Taxpayers resorting to case law to support their case are more likely to lose. The better course is to show that there is no justification to warrant rejection, where such a stand is possible. Where it is not possible, effort should be made to show that the addition made is unreasonable with reference to facts. Low gross profit by itself, as has been universally accepted, cannot be a justification for rejection of accounts, unless there is something more to show that the accounts are not reliable, as for example decided in Yakub Ali Gopal Singh and Party v Dy. CIT (2007) 295 ITR 129 (Raj).

S. RAJARATNAM