Rejection of books and gross profit estimation failed where audited records showed no specific defect or reliable comparable basis.

Rejection of audited books of account under section 145(3) was not justified where the assessee produced regular books, vouchers and job-work payment details, and the record showed no specific defect, suppression of sales, inflation of , or manipulation. In a fabric job-work business with varying margins driven by market and operating conditions, the absence of independent inquiry or reliable comparable material meant the average gross profit rate could not be adopted as a basis for estimation. The consequential addition made on estimated gross profit was therefore deleted in favour of the assessee.

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Issues: Whether the rejection of books of account under section 145(3) of the Income-tax Act, 1961 and the consequential estimation of gross profit by adopting an average rate, resulting in addition to income, were justified.

Analysis: The assessee had produced regular audited books of account, supporting vouchers, and details of job-work payments, including payments to related persons and outsiders. The business involved multiple stages of fabric-related job-work, and the assessee explained that margins varied with fashion trends, labour cost, electricity, transportation, and market competition. No specific defect, suppression of sales, inflation of expenditure, or manipulation in the books was brought on record, and no independent inquiry or reliable comparable material was cited to support the rejection of results. In these circumstances, the basis adopted for rejecting the books and estimating gross profit was not supported by material evidence.

Conclusion: The rejection of books of account and the gross profit estimation were not sustainable, and the addition made on that basis was deleted in favour of the assessee.

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