Incriminating material governs completed search assessments, while proven nexus determines research expenditure allocation to tax-incentive units.

For completed and unabated assessments under section 153A, additions require incriminating material linked to the proposed addition; deductions withdrawn for research and development allocation and inter-unit transfers could therefore not be disallowed where no such material existed. A pending scrutiny assessment abates on search, permitting additions despite absence of incriminating material. Promotional freebies provided to doctors are expenditure for a purpose prohibited by law and are not deductible. Research and development expenditure cannot be allocated to units claiming deductions under sections 80IB and 80IC without a specific nexus to their qualifying operations; the related deduction disallowance was deleted.

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Issues: (i) Whether additions in search assessments under section 153A could be sustained without incriminating material for completed and unabated assessments; (ii) Whether expenditure on promotional freebies to doctors was deductible as business expenditure; (iii) Whether research and development expenditure was allocable to units claiming deductions under sections 80IB and 80IC.

Issue (i): Whether additions in search assessments under section 153A could be sustained without incriminating material for completed and unabated assessments.

Analysis: For an assessment completed before the search, additions under section 153A require incriminating material relating to the proposed addition. No such material was identified for the allocation of research and development expenditure or for the inter-unit transfer issue. For the subsequent year, however, the regular scrutiny assessment was pending on the search date and had abated; consequently, the absence of incriminating material did not preclude additions.

Conclusion: In the completed and unabated assessment, the deductions withdrawn for allocation of research and development expenditure and inter-unit transfers could not be disallowed without incriminating material, in favour of the assessee. The challenge based on absence of incriminating material failed for the abated assessment, against the assessee.

Issue (ii): Whether expenditure on promotional freebies to doctors was deductible as business expenditure.

Analysis: The Supreme Court's ruling that freebies provided by pharmaceutical entities to medical practitioners are prohibited and fall within the bar applicable to expenditure incurred for a purpose prohibited by law was applied.

Conclusion: Expenditure on promotional freebies to doctors was not deductible, against the assessee.

Issue (iii): Whether research and development expenditure was allocable to units claiming deductions under sections 80IB and 80IC.

Analysis: The product lists showed that products manufactured by the eligible units were unrelated to formulations under development at the research and development units. Variants under development were distinct from products manufactured by eligible or non-eligible units, and no specific nexus between the relevant research expenditure and any eligible unit was established.

Conclusion: The research and development expenditure was not allocable to the eligible units, and the consequential disallowance of deductions under sections 80IB and 80IC was deleted, in favour of the assessee.

Final Conclusion: The search-assessment relief relating to deductions was granted for the completed assessment, the research and development allocation disallowance was deleted for the subsequent year, and the disallowance of doctors' freebies was sustained.

Ratio Decidendi: In a completed search assessment, additions require incriminating material, whereas an abated assessment may be assessed afresh; research expenditure may be allocated to a tax-incentive unit only upon an established nexus with that unit's qualifying operations.

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