Gross-profit estimation requires proven defects in accounts, not a mere decline from the preceding year's margin.

A disclosed gross-profit rate cannot be replaced with the preceding year's rate merely because it has declined. Book results may be rejected and profits estimated only where substantive material establishes defects in the accounts, unreliable purchases, spurious entries, or other grounds undermining their reliability. General allegations concerning stock records, closing-stock valuation, bought-note purchases, and invisible loss were insufficient, particularly where no enquiry tested the explanation that changes in input prices and cotton mix caused the lower margin. The gross-profit additions were therefore unsustainable, and the Tribunal's order was set aside in favour of the assessee.

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Issues: Whether the Revenue could reject the disclosed gross-profit rate and substitute it with the preceding year's rate without substantive material or verification of the assessee's explanation for the decline.

Analysis: The accounts were not rejected on any established defect. The absence of day-to-day stock records, inventory-based closing stock, unverifiable bought-note purchases and increased invisible loss were treated only as general allegations. The assessee had explained that increased kappas prices were not matched by cotton prices and that the cotton mix had changed; yet no enquiry was undertaken to test those explanations or to establish that the accounts, purchases or book results were unreliable. A lower gross-profit rate, without supporting material demonstrating defects in the accounting system or spurious entries, could not justify rejection of the book results and estimation of profit.

Conclusion: The gross-profit additions for both assessment years were unsustainable; the Tribunal's order was set aside in favour of the assessee.

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