Books rejection, ad hoc disallowances and industrial deduction claims fail where records show no specific defects and independent unit operations.

Rejection of books and trading additions for the Baddi unit were found unsustainable because no specific defects, such as suppressed sales, unrecorded purchases, or defective vouchers, were established, and the comparison with the Guwahati unit was unreliable given different operating conditions. Multiple ad hoc disallowances, including expenses, R&D, wastage, excise-duty related addition, interest, unsecured loans, sundry creditors, business asset expenditure, and closing stock, were also deleted because they rested on suspicion rather than adverse material and the supporting records showed business nexus. Deduction for the Guwahati unit under section 80IB / 80IC was allowed because it was an independently established industrial undertaking with separate books and operations, not a reconstruction or split-up of the Baddi unit.

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Issues: (i) Whether the rejection of books of account and the trading addition made to the Baddi unit's results were sustainable; (ii) whether the ad hoc disallowances of expenses, R&D expenditure, wastage, excise-duty related addition, interest on borrowings, unsecured loans, sundry creditors, business-related asset expenditure, and closing stock addition were justified; (iii) whether deduction under section 80IB / 80IC was available to the assessee's Guwahati unit.

Issue (i): Whether the rejection of books of account and the trading addition made to the Baddi unit's results were sustainable.

Analysis: The books were rejected without any specific defect such as suppression of sales, unrecorded purchases, omitted stock entries, or defective vouchers being established. The assessee maintained unit-wise records, and the earlier year's Tribunal decision had already held that the books could not be rejected on similar grounds. The comparison of the Baddi unit with the Guwahati unit was also found to be unreliable because the two units operated under different conditions and with different production profiles.

Conclusion: The rejection of books and the trading addition were unsustainable and the deletion was upheld in favour of the assessee.

Issue (ii): Whether the ad hoc disallowances of expenses, R&D expenditure, wastage, excise-duty related addition, interest on borrowings, unsecured loans, sundry creditors, business-related asset expenditure, and closing stock addition were justified.

Analysis: The additions were made mainly on suspicion, non-verifiability, or assumed diversion of funds, but no specific defect, bogus claim, or adverse material was brought on record. The assessee produced books, vouchers, confirmations, bank statements, and other supporting records, and the appellate authority had test-checked the material and found the claims to be business-related and genuine. The interest disallowance failed because no direct nexus was shown between borrowed funds and any alleged non-business advance, while the unsecured loans and sundry creditors were supported by confirmations and ledger accounts. The excise-duty addition was deleted because the amount was treated as manufacturing expense and not as accrued refund income. The closing stock addition also failed because the stock position and accounting treatment did not support the Revenue's inference. The business asset expenditure was likewise held to be for official use and not personal in nature.

Conclusion: The disallowances and additions were unjustified and the relief granted by the appellate authority was upheld in favour of the assessee.

Issue (iii): Whether deduction under section 80IB / 80IC was available to the assessee's Guwahati unit.

Analysis: The Guwahati unit was held to be a separate industrial undertaking engaged in manufacture of ayurvedic medicines, with no credible material showing that it was merely a reconstruction or split-up of the Baddi unit. The record supported the existence of requisite workers, separate books, and independent operations. The earlier Tribunal decision for an earlier year had already decided the same issue in the assessee's favour, and the facts for the years under appeal remained materially unchanged. For the later year, the unit was also held eligible under section 80IC on the same factual foundation.

Conclusion: Deduction under section 80IB / 80IC was allowable and the Revenue's challenge failed.

Final Conclusion: The Revenue's appeals were rejected in entirety, and the relief granted to the assessee by the first appellate authority was maintained across all years under appeal.

Ratio Decidendi: A trading addition or other ad hoc disallowance cannot be sustained without specific defects or incriminating material, and deduction for an industrial undertaking is allowable where the undertaking is independently established and the statutory conditions are met on the facts.

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