Trading addition for cloth shrinkage needs defects in accounts or accounting method before books can be rejected.

A trading addition for alleged excessive shrinkage in cloth cannot be sustained where the books of account and accounting system are defect-free and the Assessing Officer has not shown circumstances attracting section 145(1) or 145(2). The assessee maintained stage-wise processing registers, no accounting defect was identified, and the shrinkage percentage was found to have been wrongly taken at 5.25% instead of not exceeding 4.9% for the relevant year. On that basis, a comparison with the earlier year alone was insufficient to justify rejection of the returned trading results, and the addition on account of shrinkage was not restored.

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Issues: Whether the addition made on account of alleged excessive shrinkage in cloth was sustainable in the absence of any defect in the books of account or the system of accounting under section 145 of the Income-tax Act, 1961.

Analysis: The assessee had maintained the relevant registers at each stage of processing, and no defect was pointed out in the accounts or in the accounting system. The record also showed that the shrinkage percentage had been wrongly taken at 5.25% instead of not exceeding 4.9% in the relevant year. In the absence of any material bringing the case within section 145(1) or 145(2), no trading addition could be sustained merely on a comparison with the earlier year's shrinkage.

Conclusion: The deletion of the addition was upheld and the Revenue's appeal failed.

Final Conclusion: The assessee's returned trading results were accepted, and the addition on account of shrinkage was not restored.

Ratio Decidendi: A trading addition cannot be made under section 145 of the Income-tax Act, 1961 unless the Assessing Officer first establishes defects in the accounts or in the method of accounting warranting rejection of the books.

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