Ad hoc disallowance of purchases and expenses cannot stand without rejection of audited books or specific defects.

Ad hoc disallowance of purchases and business expenses is unsustainable where audited books of account, tax audit material, quantitative details, invoices and other supporting records are produced and no specific defect or falsity is identified. Estimation-based addition is not permissible unless the books are first found to be incorrect, incomplete or unreliable and are rejected in accordance with law. In the absence of rejection under section 145(3) or any cogent basis showing violation of section 37(1), a percentage disallowance made purely on an ad hoc footing cannot stand.

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Issues: Whether ad hoc disallowance of a percentage of purchases and business expenses could be sustained when the assessee maintained audited books of account, furnished supporting details, and no specific defect or falsity in the claimed expenditure was pointed out.

Analysis: The purchases and expenditure were not disputed in principle, and the assessee had produced books of account, tax audit reports, quantitative details, invoices, addresses, and other supporting material. The authorities did not reject the books of account or record any finding that they were incorrect, incomplete, or unreliable. In the absence of rejection of books under section 145(3), an estimation-based addition under section 144 was not permissible. The disallowance was made purely on an ad hoc basis without demonstrating violation of section 37(1) or any cogent defect in the claim.

Conclusion: The ad hoc disallowance of 5% on purchases and expenses was unsustainable and was deleted. The assessee succeeded and the Revenue's corresponding challenge failed.

Ratio Decidendi: Estimation or ad hoc disallowance cannot be made unless the books of account are first found to be incorrect, incomplete, or unreliable and are rejected in accordance with law.

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