s.145(3) — Rejection of books of account
When the Assessing Officer may decline to accept the books, and what follows once he does.
Income-tax Act, 1961
s.145(3)
Income-tax Act, 2025
s.276(3), routed to s.271
In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.
In short
Section 145(3) of the Income-tax Act, 1961 permits the Assessing Officer to make a best judgment assessment under section 144 where he is not satisfied about the correctness or completeness of the accounts, or where the prescribed method of accounting or income computation standards have not been followed. Rejection requires reasons that go to the reliability of the accounts — a specific defect, not dissatisfaction with the result they show. Once the books are rejected the assessment becomes an estimate, which opens both the rate applied and the base it is applied to. The corresponding provision in the Income-tax Act, 2025 is section 276(3), which routes to best judgment assessment under section 271.
What the provision does
Allows the accounts to be set aside where they cannot be relied on, and requires the assessment then to be made to the best of the Assessing Officer's judgment.
Threshold questions
- Has a specific defect in the books been identified, and is it recorded
- Are the accounts audited, and were the auditors' observations dealt with
- Were stock records, bills and vouchers actually examined and found wanting
- Is the rejection founded on the accounts themselves, or on the profit they disclose
- Once rejected, is the estimate itself supported by comparable material
In practice
The recurring disputes.
Rejection without a specific defect
Where books are audited, stock records maintained, and no particular entry is shown to be wrong, a rejection resting on generalities is vulnerable. Low profit, by itself, is not a defect in the accounts.
Rejection followed by reliance on the same books
Orders frequently reject the books and then use figures from them to compute the addition. The inconsistency is worth pressing: the accounts cannot be unreliable for one purpose and reliable for another.
The estimate itself
Rejection does not license any figure. The rate adopted must have some basis — the assessee's own history, comparable cases, or industry norms — and whether gross receipts or net margin is the right base is a distinct question with large consequences.