Bogus purchase disallowance in construction matters may be restricted to estimation where consumption and work-in-progress are proved.

Where construction purchases are doubted on third-party information, the assessee's records, tax invoices, delivery challans, bank payments, confirmations, architect's certificate and quantitative consumption details may justify only an estimated disallowance when the materials are shown as part of work-in-progress and not claimed as revenue expenditure. A separate disallowance under section 40A(3) cannot be sustained unless that provision is specifically invoked and a breach is proved. The stated approach supports partial estimation rather than complete rejection of the purchases where the factual record shows actual consumption.

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Issues: Whether the addition made on account of alleged bogus purchases used in construction and the related ground under section 40A(3) of the Income-tax Act, 1961 were justified.

Analysis: The purchases were doubted on the basis of information received from the sales tax authorities and non-service of notices under section 133(6) of the Income-tax Act, 1961. However, the assessee produced purchase records, tax invoices, delivery challans, confirmations, bank payments, architect's certificate and quantitative details showing consumption of materials. The purchases were reflected in work-in-progress and not claimed as revenue expenditure in the year. The finding under section 40A(3) was not supported by any invocation of that provision or by any record of violation. On the facts, complete disallowance was not warranted, but an estimated addition was justified.

Conclusion: The addition was to be restricted to 3% of the alleged bogus purchases, and the ground based on section 40A(3) failed. The assessee succeeded in part and the Revenue's challenge was rejected.

Ratio Decidendi: Where purchases are doubted but the assessee establishes consumption of materials and the purchases form part of work-in-progress, the disallowance may be sustained only on an estimated basis; a separate disallowance cannot be made under section 40A(3) without invoking and proving breach of that provision.

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