📌 Powers of AO under Section 145(3), Income Tax Act, 1961 , Reject Books of Account If , unverifiable or bogus expenses

powers of the Assessing Officer (AO) under Section 145(3) of the Income Tax Act, 1961 in a clear way.

📌 Powers of AO under Section 145(3), Income Tax Act, 1961

1. Scope of Section 145

  • Section 145(1): Income chargeable under “Profits & Gains of Business/Profession” or “Income from Other Sources” shall be computed in accordance with:

    • Cash or Mercantile system of accounting regularly employed by the assessee, and

    • ICDS (Income Computation & Disclosure Standards) notified by CBDT.

  • Section 145(2): CBDT can notify accounting standards for compliance.

  • Section 145(3): If AO is not satisfied with the correctness/completeness of accounts, or with accounting method/standards, he may reject the books.

2. Powers Vested in AO u/s 145(3)

The AO has the power to:

a. Examine Books of Account

  • Scrutinize purchase/sale invoices, stock register, vouchers, ledgers, bank statements.

  • Verify compliance with notified accounting standards (ICDS).

b. Reject Books of Account If

  • Accounts are incomplete or incorrect.

  • Method of accounting (cash/mercantile) is not consistently followed.

  • ICDS not followed.

  • Books contain unverifiable or bogus expenses.

  • No proper stock register maintained (esp. for manufacturers/traders).

c. Best Judgment Assessment (Sec. 144 read with 145(3))

  • Once books are rejected, AO can estimate taxable income:

    • By applying Gross Profit (GP) / Net Profit (NP) ratio based on past records.

    • Using industry average margins.

    • Considering external evidence (stock statements to banks, audit reports, third-party confirmations).

  • AO is not bound to accept declared results of the assessee.

d. Additions & Adjustments

  • AO may make specific additions for unverifiable purchases/expenses.

  • AO can adjust closing stock valuation if found incorrect.

  • AO can disregard manipulated entries (e.g., bogus creditors, loans, or inflated expenses).

3. Limitations on AO’s Power

  • AO must give reasons in writing for rejecting books.

  • Power must be used in a reasonable, non-arbitrary manner.

  • Estimation of income must be based on cogent material, not on guesswork.

  • Courts have ruled:

    • CIT v. A. Krishnaswami Mudaliar (1964) – Rejection valid if accounts unreliable.

    • Kachwala Gems v. JCIT (2006, SC) – AO can estimate income if books unreliable, but estimate must be fair.

4. Practical Impact

  • Once books are rejected:

    • Declared profit may be substituted with higher profit estimation.

    • Leads to higher taxable income.

    • May attract penalties u/s 270A (for underreporting/misreporting).

✅ In summary:
The power vested in AO under Section 145(3) is the authority to reject books of account if they are incomplete, incorrect, or not compliant with law, and then determine income on best judgment basis under Section 144.


Comments

Post a Comment

Popular posts from this blog

Capital Gains Tax on Sale

  1. Capital Gains Tax on Sale of House Property vs. Land Criteria House Property (Building & Land) Vacant Land (Plot of Land) Holding Period for LTCG More than 24 months (Long-Term) More than 24 months (Long-Term) Holding Period for STCG ≤ 24 months (Short-Term) ≤ 24 months (Short-Term) STCG Tax Rate As per Slab Rate As per Slab Rate LTCG Tax Rate 20% with Indexation 20% with Indexation Indexation Benefit ✅ Available ✅ Available Exemptions Available Section 54 (Reinvestment in house) & Section 54EC (Bonds) Only Section 54F (Reinvestment in house) & Section 54EC (Bonds)   🔹 Key Difference in Exemptions House Property: Eligible for Section 54 , allowing reinvestment in another re...
Read more

What Is Incriminating Material in Income Tax Law?

  What Is Incriminating Material in Income Tax Law? Incriminating material refers to any document, record, statement, digital evidence, or seized item during a search or survey that directly indicates undisclosed income, transactions, or assets of the taxpayer, and can justify an addition in assessment or reassessment. 📚 Judicially Recognized Definition “Incriminating material” is any evidence unearthed during a search which: Relates to a specific assessment year , and Reveals income not disclosed in the original return or books of account 📂 Examples of Incriminating Material Type Examples 💵 Cash / Jewellery Unexplained cash or jewellery without proper source 📝 Documents Unaccounted invoices, promissory notes, loan ledgers 🖥️ Digital evidence Files/emails showing black money, hawala, or bogus transactions 📒 Books of account Parallel books of accounts 📄 Agreements Benami transactions, property undervaluation 💼 Diaries / slips Unrecorded business transac...
Read more

EEE Savings Scheme typically refers to tax-saving investment options that offer exemptions at three stages

Image
  In India, the EEE Savings Scheme typically refers to tax-saving investment options that offer exemptions at three stages: 1. Exemption at Investment Stage (Section 80C): Contributions to eligible schemes are deductible from taxable income. 2. Exemption from Interest or Dividend (Section 10): Interest or dividend earned on these investments is exempt from tax. 3. Exemption at Maturity or Withdrawal (Section 10): Maturity proceeds or withdrawals from these schemes are tax-free. Some popular EEE Savings Schemes in India: 1. Public Provident Fund (PPF): A long-term savings scheme with a lock-in period of 15 years. 2. National Savings Certificate (NSC): A fixed-income investment with a lock-in period of 5 or 10 years. 3. Life Insurance Corporation (LIC) Policies: Certain LIC policies, such as the LIC Jeevan Lakshya Plan, offer tax benefits. 4. Equity-Linked Savings Scheme (ELSS): A mutual fund scheme with a lock-in period of 3 years. 5. Unit-Linked Insurance Plan (ULIP): A life insura...
Read more