Books Rejection Needs Proven Defects; blanket expense disallowance failed for lack of specific material.

Rejection of books under section 145(3) requires identifiable defects that render the profit results unreliable; on the facts, quantitative records, tax audit material, and the assessee's explanation for lower gross profit showed no sound basis for estimation, so the gross profit addition was deleted. An ad hoc disallowance of expenses cannot stand without specific material showing bogus or non-business expenditure; as the disallowance was made on a blanket, suspicion-based basis, it was also deleted. The substantive additions were therefore set aside, and the challenge to consequential interest did not survive.

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Issues: (i) Whether the books of account could be rejected under section 145(3) and the gross profit could be enhanced on estimation. (ii) Whether the ad hoc disallowance of expenses was justified.

Issue (i): Whether the books of account could be rejected under section 145(3) and the gross profit could be enhanced on estimation.

Analysis: The declared wastage and turnover figures showed that the Assessing Officer had proceeded on an incorrect appreciation of facts. The quantitative records and tax audit material reflected raw material and finished goods details, and the fall in gross profit was explained by the assessee through higher raw material cost and reduced turnover. In the absence of reliable defects affecting correctness of profit, and especially where prior and subsequent years had accepted results, rejection of books and estimation of gross profit had no sound basis.

Conclusion: The rejection of books of account and the gross profit addition were deleted, in favour of the assessee.

Issue (ii): Whether the ad hoc disallowance of expenses was justified.

Analysis: The disallowance was made on a blanket basis without identifying any specific bogus expenditure or any item shown to be for non-business purposes. No concrete material supported the estimated percentage disallowance, and a mere suspicion-based reduction of business could not be sustained.

Conclusion: The ad hoc disallowance of expenses was deleted, in favour of the assessee.

Final Conclusion: The appeal succeeded on the substantive additions, while the challenge to consequential interest did not survive.

Ratio Decidendi: Rejection of books and estimation of income require identifiable defects that make the profit results unreliable, and an ad hoc disallowance of business expenditure cannot be sustained without specific material showing non-business or bogus expenditure.

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