Section 145(3) — Rejection of Books of Account

Section 145(3) of the Income-tax Act, 1961 empowers the Assessing Officer to reject the books of account maintained by a taxpayer if he is not satisfied with their correctness or completeness. This section is invoked when the method of accounting employed by the taxpayer is not regularly followed or does not provide a true and fair view of the profits. The significance of this section lies in its ability to ensure that taxpayers maintain accurate and reliable financial records. When invoked, the Assessing Officer may proceed to make an assessment in the manner provided in section 144, which involves a best judgment assessment. The burden of proof lies on the taxpayer to demonstrate the accuracy and completeness of their accounts. In practice, this section is crucial for maintaining the integrity of financial reporting and ensuring that tax liabilities are accurately determined.

Common Litigation Flashpoints

1. Discrepancies in inventory valuation
2. Inconsistent application of accounting methods
3. Unexplained cash transactions
4. Non-disclosure of material financial information

Judgments on Section 145(3) — Rejection of Books of Account

• Vodafone International Holdings B.V. vs Union of India & Anr. — SC,
  Section 9 of the Income Tax Act does not cover indirect transfers of capital assets situated in India.
• Union of India & Anr. vs M/s. Ganpati Dealcom Pvt. Ltd. — SC,
  The 2016 Amendment Act cannot be applied retrospectively as it creates new offences and substantive changes, which cannot be applied to past transactions.
• Aditya Birla Nuvo Limited vs The Deputy Director of Income-tax — HC,
  The beneficial ownership of shares, despite being registered in the name of a permitted transferee, determines the taxability of capital gains in India.
• ACIT vs M/s Majestic Properties (P) Ltd. — ITAT,
  Mere jottings on loose papers without corroborative evidence cannot form the basis for assessing undisclosed income.
• DCIT, Circle 13(1) vs M/s. National Fertilizers Ltd. — ITAT,
  Demurrage and wharfage charges are compensatory and not penalties, and accrued interest is not taxable until it is realized.
• Commissioner of Income Tax, Bangalore vs B. C. Srinivasa Setty — SC,
  Goodwill generated in a newly commenced business cannot be described as an 'asset' within the terms of Section 45 and therefore its transfer is not subject to income-tax under the head 'capital gains'