Holding

Findings of bogus purchases and rejection of books of accounts are factual determinations not amenable to appellate interference, and the best‑judgment assessment was not arbitrary.

Summary

Mis. Kachwala Gems, a dealer in precious stones, was assessed under the Income Tax Act after the Assessing Officer found serious deficiencies in its books of accounts, including lack of stock registers and unverified purchase entries amounting to about Rs. 42 lakh. The AO rejected the books, invoked Section 144 for a best‑judgment assessment and fixed the gross profit at 40%, later reduced to 35% by the Commissioner of Income Tax (Appeals) and to 30% by the Income Tax Appellate Tribunal. The assessee challenged the findings of bogus purchases and the rejection of its books, arguing that the assessment was arbitrary. The Supreme Court held that the determination of bogus purchases and the rejection of books are factual findings that cannot be interfered with on appeal, and that the best‑judgment assessment, though involving some guesswork, was not arbitrary. The Court found that the assessee’s failure to maintain proper accounts justified the authorities' actions. Consequently, the appeal was dismissed.

Issues considered

Whether the finding of bogus purchases and the rejection of the assessee's books of accounts can be interfered with on appeal.
Whether the best‑judgment assessment under Section 144 was arbitrary or violative of principles of natural justice.

Legislation cited

Income Tax Act, 1961s. 144, s. 145(3)

Subjects

Income TaxBest judgment assessmentBogus purchasesBooks of accountsSection 144Section 145(3)Gross profitArbitrarinessAppellate jurisdiction

Judgment

A MIS. KACHWALA GEMS, JAIPUR
v.
JOINT COMMISSIONER OF INCOME TAX, JAIPUR

DECEMBER 14. 2006

B (S.B. SINHA AND MARKANDEY KA TJU, JJ.]

Income Tax Act, 1961:

C .s. I 44-Best judgment assessment-Books ofaccounts ofassessee rejected
as being defective-Tax authorities recording finding of bogus purchases-
Held, such finding cannot be interfered with in instant appeal-Cogent
reasons given for rejection ofbooks ofaccounts-In best judgment assessment
there is always a certain degree of guess work, but there is no arbitrariness
on part of income tax authorities warranting interference.
D
Books of accounts of the appellant-assessee were found defective and
the purchases shown were held to be bogus by the Assessing Officer. He
assessed assessee's gross profit u/s 144 of Income Tax Act at the rate of
40% on the basis of comparable cases, which was reduced to 35% by
Commissioner (Appeals) and further to 30% by Income. Tax Appellate
E Tribunal.

In the present ap.peal the assessee challenged the finding of bogus
purchl;lses and rejection of books of accounts.

Dismissing the appeal, the Court
F
HELD:l. Whether there were bogus purchases or not, is a finding
of fact, and this Court cannot interfere with the same in the instant appeal.
As regards the rejection of the books of accounts, cogent reasons have been
given by the Income Tax Authorities for doing so, and there is no reason to
take a different view. [994-F-G]
G
2. No doubt, the authorities concerned should try to make an honest
and fair estimate of the income even in a best judgment assessment, and
should not act totally arbitrarily, but there is necessarily some amount of guess
work involved in such a case and it is the assessee himself who is to·blame as

H 992
KACHWALA GEMS, JAIPUR t•. JOINT COMMNR. OF INCOME TAX, JAIPUR [MARKANDEY KATJU, J. J 993

he did not submit proper accounts. There was no arbitrariness in the instant A
case on the part of the Income Tax Authorities. [994-H; 995-A)

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 5809 of2006.

From the final Judgment and Order dated 25.8.2004 of the High Court
of Judicature for Rajashthan ·at Jaipur Bench, Jaipur in D.B. LT.A. No. 80/2004. B
Pankaj Jain, Abhay Jain and K.C. Dua for the Appellant.

Dr. A.E. Chelliah, Arijit Prasar, B.V. Balaram Das and Venanthakumar
chelliah for the Respondent.

The Judgment of the Court was delivered by
c
MARKANDEY KATJU, J. Leave granted.

This appeal has been filed against the impugned judgment of the
Rajasthan High Court dated 25.8.2004 in Income Tax Appeal No.80 of2004. D
Heard learned counsel for the parties and perused the record.

The facts of the case are in a short compass. The appellant assessee
deals in precious and semi precious stones. In the course of assessment the
Assessing Officer noticed the following defects in the books of accounts of E
the assessee :

"I. The assessee has not maintained and kept any quantitative details/
stock register for the goods traded in by the assessee.

2. There is no evidence on record or document to verify the basis of F
the valuation of the closing stock shown by the assessee. The
assessee is not able to prepare such details even with the help of
books of accounts maintained, purchase bills & Sale Invoices.

3. Provisions of Section 145(3) are clearly attracted in this case.

4. The genuineness of purchases to the extent ofRs.42 lakhs (approx.) G
is not proved without any doubt.

5. The GP rate declared by the assessee at 13.49% during the
assessment year is not a match to the result declared by the itself in
the previous assessment years.
H
994 SUPREME COURT REPORTS (2006] SUPP. IO S.C.R.

A 6. Mis. Gem Plaza, engaged in local sales of similar goods declared
voluntarily rate of 35% in its assessment for the assessment year
1997098.

7. Mis. Dhadda Exports, another assessee dealing in same items, but
doing export business declared GP ra~e of 43.8% (even without
B considering the value of export incentives) in assessment year 1997-
98."

Thereafter the books of accounts of the assessee were rejected by the
Assessing Officer and he resorted to best judgment assessment under Section
144 of the Income Tax Act. The Assessing Officer in the assessment order
C mentioned some comparable cases and was of the view that the case of the
assessee is more or less having similar facts as that of Mis. Gem Plaza where
•
the Gross Profit has been taken as 35.48%. The Assessing Officer estimated
the Gross Profit of the assessee as 40%.

D The Assessing Officer further held that the assessee has shown bogus
purchases in order to reduce the Gross Profits.

In appeal, the Commissioner of Income Tax (Appeals) upheld most of
the findings of the Assessing Officer, but reduced the Gross Profit from 40%
to 35%.
E . In further appeal, the Tribunal had given further relief to the assessee
and reduced the Gross Profit rate to 30%.

The counsel for the assessee has submitted before us that the Income
Tax Authorities wrongly held that appellant has shown bogus purchases, and
F the books of accounts were wrongly rejected.

In our opinion, whether there were bogus purchases or not, is a finding
of fact, and we cannot interfere with the same in this appeal. As regards the
rejection of the books of accounts, cogent reasons have been given by the
Income Tax Authoritie!; for doing so, and we see no reason to take a different
G view.

It is well settled that in a best judgment assessment there is always a
certain degree of guess work. No doubt the authorities concerned should try
to make an honest and fair estimate of the income even in a best judgment
assessment, and should not act totally arbitrarily, but there is necessarily
H
KACHWALA GEMS, JAIPUR v. JOINT COMMNR. OF INCOME TAX, JAIPUR [MARKANDEY KATJU, J.] 995

some amount of guess work involved in a best judgment assessment, and it A
is the assessee himself who is to blame as he did not submit proper accounts.
In our opinion there was no arbitrariness in the present case on the part of
the Income Tax Authorities. Thus, there is no force in this appeal, and it is
dismissed accordingly. No costs.

RP. Appeal dismissed. B