Estimated income from unreliable books must use a fair gross profit rate, not an excessive one.

Where an assessee failed to maintain quantitative records and a stock register, the books were treated as unreliable and income could be estimated under the proviso to section 145(1) of the Income-tax Act, 1961. The article states that estimation of profits was therefore justified in principle. However, the gross profit rate had to be fair and reasonable on the facts, and the 10% rate adopted by the lower authorities was considered excessive in light of the branch's higher sales, small place of business, and trade in coarse cloth. A 9% gross profit rate was held to be appropriate on the estimated sales, reducing the trading addition accordingly.

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Issues: Whether the trading addition made by estimating sales and applying a 10% gross profit rate was justified where the assessee had not maintained proper quantitative details or a stock register.

Analysis: The absence of quantitative details and a stock register attracted the proviso to section 145(1) of the Income-tax Act, 1961, justifying estimation of income. At the same time, the sales at the branch had substantially increased over the earlier year, the branch was at a small place, and the business dealt mainly in coarse cloth. In these circumstances, the 10% gross profit rate adopted by the lower authorities was considered excessive, and a 9% rate was held to be reasonable on the estimated sales.

Conclusion: The addition was not sustained at the higher rate of 10% and was directed to be reduced by applying a 9% gross profit rate; the assessee succeeded only partly.

Final Conclusion: The assessment was upheld in principle on estimated profits, but the trading addition was reduced to reflect a lower gross profit rate.

Ratio Decidendi: Where books are unreliable for want of quantitative records or a stock register, income may be estimated, but the adopted gross profit rate must be fair and reasonable on the facts of the case.

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