Gross profit addition cannot stand when books are accepted as correct and complete and no unrecorded transactions are found.

Where the assessee's books of account were accepted as correct and complete, a gross profit addition based on estimated sales and a higher gross profit rate could not be sustained. The ITAT noted that invoking the proviso to section 145(1) did not justify a trading addition in the absence of any finding that transactions were outside the books or that the entries were incorrect. Reliance on an earlier assessment year, without accounting for the time gap and rising prices, was held to be an unsound basis for estimation. The gross profit addition was deleted in favour of the assessee.

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Issues: Whether the gross profit addition made by estimating sales and applying a higher gross profit rate could be sustained when the assessee's books of account were treated as correct and complete.

Analysis: The assessment was made by invoking the proviso to section 145(1) of the Income-tax Act, 1961. Once the books were regarded as correct and complete, there was no basis for making a gross profit addition merely by estimating sales and substituting a higher gross profit rate. A comparison with an earlier assessment year, separated by a substantial time gap and affected by rising prices, was not a sound foundation for the addition. In the absence of any finding that transactions had occurred outside the books or that the book entries were incorrect, the trading addition could not be upheld.

Conclusion: The gross profit addition was deleted and the issue was decided in favour of the assessee.

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