Reassessment additions must match recorded reasons, while gross profit estimates and donation disallowance need fair evidentiary support and opportunity.

Reassessment under section 147 must retain a live link with the recorded reasons for reopening; once the foundational addition on alleged stock understatement failed, independent additions under sections 40(a)(ia) and 36(1)(va) could not survive. Rejection of books under section 145(3) and estimation of gross profit were also unsustainable where the assessee supported the wastage reconciliation with job-work records, invoices, confirmations and an accountant's certificate, and the declared gross profit was not inconsistent with earlier years. Disallowance of donations under section 80G required fresh adjudication because the assessee was not shown to have been given full adverse material or cross-examination.

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Issues: (i) Whether, after deleting the addition made on the basis of the alleged escapement that led to reopening, the other additions made in reassessment under sections 40(a)(ia) and 36(1)(va) of the Income-tax Act, 1961 could survive; (ii) Whether the addition made by estimating gross profit could stand when the assessee had explained the stock/wastage reconciliation and the books were rejected under section 145(3) of the Income-tax Act, 1961; (iii) Whether the disallowance of donations under section 80G of the Income-tax Act, 1961 required fresh adjudication in the absence of cross-examination and full adverse material.

Issue (i): Whether, after deleting the addition made on the basis of the alleged escapement that led to reopening, the other additions made in reassessment under sections 40(a)(ia) and 36(1)(va) of the Income-tax Act, 1961 could survive.

Analysis: The reassessment was initiated on the alleged understatement of wastage stock. Once that addition was held unsustainable, the other additions did not form part of the original basis for reopening. The settled principle applied was that reassessment under section 147 must retain a live link with the reasons recorded for reopening, and where the foundational addition fails, independent additions on unrelated issues cannot survive in the same reassessment.

Conclusion: The additions under sections 40(a)(ia) and 36(1)(va) of the Income-tax Act, 1961 were deleted in favour of the assessee.

Issue (ii): Whether the addition made by estimating gross profit could stand when the assessee had explained the stock/wastage reconciliation and the books were rejected under section 145(3) of the Income-tax Act, 1961.

Analysis: The assessee furnished reconciliation of the alleged shortage of wastage with supporting job-work records, invoices, confirmations and the chartered accountant's certificate. The material did not reveal any infirmity in the explanation. In those circumstances, rejection of books was not justified. Even otherwise, the estimated gross profit addition was unsustainable because the declared gross profit was not lower than the earlier years in a manner warranting such estimate.

Conclusion: The rejection of books and the gross profit addition were held unsustainable and the addition was deleted in favour of the assessee.

Issue (iii): Whether the disallowance of donations under section 80G of the Income-tax Act, 1961 required fresh adjudication in the absence of cross-examination and full adverse material.

Analysis: The disallowance rested substantially on information from investigation and alleged statements suggesting bogus donations. The assessee disputed the disallowance and complained of denial of opportunity, including non-furnishing of adverse material and absence of cross-examination. Since these procedural safeguards were not shown to have been provided, the dispute required reconsideration by the assessing authority.

Conclusion: The disallowance of donations was restored to the file of the Assessing Officer for fresh adjudication, partly in favour of the assessee.

Final Conclusion: The first appeal succeeded on the merits of the reassessment additions and the GP estimate, while the second appeal was remanded only on the donation issue for reconsideration after due opportunity.

Ratio Decidendi: Where the basis for reopening fails in reassessment, additions on other issues not forming the recorded reasons do not survive; and an addition founded on third-party material cannot be sustained without fair opportunity, including disclosure of adverse material and cross-examination where relied upon.

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