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Issues involved:
1. Circumstances under which the assessee's books can be rejected under section 145(2). 2. Basis for making an addition if such an order is passed. Issue-wise detailed analysis: 1. Circumstances under which the assessee's books can be rejected under section 145(2): The judgment discusses the conditions under which the books of accounts maintained by the assessee can be rejected under section 145(2) of the Income Tax Act, 1961. The assessee's business involves buying raw turmeric, processing it, and selling it. The processing is done at a mill, and no records are maintained regarding the weight of the turmeric sent for processing. The dispute centers around the wastage claimed by the assessee, which was higher than in previous years. The Commissioner found the books defective due to the lack of corroborating evidence and physical verification by auditors, leading to doubts about the correctness or completeness of the accounts. The judgment states: "The correctness or the completeness of the assessee is in doubt. Accordingly, the impugned assessment orders passed by the ITO are considered to be erroneous in so far as they are prejudicial to the interest of the revenue." The assessee argued that the higher shortage was due to the inferior quality of raw turmeric purchased from Nizamabad and that the Commissioner had not questioned the gross profit shown. The assessee's counsel cited various legal precedents to argue that the rejection of books was unjustified without evidence of manipulation or specific defects. However, the judgment concluded that the rejection of books was justified due to a combination of factors, including the significant rise in shortage and the lack of independent verification of the weight of goods sent for processing. The judgment states: "The rejection of books in this case is justified... The above combination of factors is in our view, sufficient to reject the books and make an enquiry." 2. Basis for making an addition if such an order is passed: The judgment also addresses the basis for making an addition if the books are rejected. The Commissioner had calculated the value of the difference in wastage for the two years at Rs. 3,68,000 and Rs. 2,86,230, respectively, and directed the ITO to complete the assessments as per the provisions of section 145(2) after giving the assessee a proper opportunity to be heard. The assessee's counsel argued that the Commissioner's order was too specific regarding the additions to be made and left no option for the ITO. The judgment acknowledged this concern, stating: "The Commissioner's order goes too far and is too specific regarding the additions to be made... The assessee should have an opportunity to show to the ITO that the shortage claimed was justified." The judgment modified the Commissioner's order to allow the assessee to present evidence and submissions to justify the claimed shortage. It emphasized that the ITO should consider the evidence and allow a reasonable shortage. The judgment states: "The Commissioner's order should be read subject to the above modification... The assessee should have an opportunity to show to the ITO that the shortage claimed was justified and the ITO may then allow such reasonable shortage after considering the evidence and the submissions of the assessee." Conclusion: The appeals were partly allowed, with the judgment affirming the rejection of the books under section 145(2) but modifying the Commissioner's order to provide the assessee an opportunity to justify the claimed shortage before the ITO. The judgment ensures that the ITO conducts a proper enquiry and considers the evidence presented by the assessee before making any additions.
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