Rejection of books and estimated gross profit addition fail where no specific defect is found; purchase issue sent back for reconsideration.

Under section 145 of the Income-tax Act, books of account should not be rejected merely because the declared gross profit appears low or because materials and expenses cannot be fully correlated in a large contract job, where receipts are from a government-owned body, payments are made by cheque, and no specific defect in the books is identified. On those facts, a trading addition based on an estimated gross profit rate was not sustainable. The separate issue of alleged non-genuine purchases required fresh examination because the appellate record was inadequate and the matter was remitted for reconsideration after hearing both sides.

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Issues: (i) Whether the trading addition made by rejecting the books of account and applying an estimated gross profit rate could be sustained under section 145 of the Income-tax Act, 1961; (ii) Whether the addition relating to alleged non-genuine purchases should stand or be restored for fresh consideration.

Issue (i): Whether the trading addition made by rejecting the books of account and applying an estimated gross profit rate could be sustained under section 145 of the Income-tax Act, 1961.

Analysis: The books reflected contract receipts from a government-owned body, payments were made by cheque, and no specific defect in the books of account was found. Mere inability to correlate materials and expenses for a work of sizeable magnitude, or reliance only on a low gross profit rate, was held insufficient to reject the books. The gross profit results declared by the assessee were also to be viewed in the context of comparable work of similar magnitude.

Conclusion: The trading addition was not justified and the deletion of that addition was upheld, in favour of the assessee.

Issue (ii): Whether the addition relating to alleged non-genuine purchases should stand or be restored for fresh consideration.

Analysis: The record did not contain a sufficient discussion by the first appellate authority to sustain the deletion, and the assessee accepted that the matter could be re-examined by the Assessing Officer. In these circumstances, the issue was sent back for reconsideration after giving both sides an opportunity of hearing.

Conclusion: The addition issue was remanded for fresh adjudication, in favour of Revenue for procedural purposes.

Final Conclusion: The revenue appeal succeeded only in part: the trading addition did not survive, while the purchase-related issue was restored for fresh decision.

Ratio Decidendi: In the absence of identified defects in the books of account, a low gross profit rate or difficulty in correlating expenses by itself does not justify rejection of the books and substitution of the declared results.

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