Profit element approach for unverifiable purchases: when sales are accepted, only embedded income may be taxed, not the full purchase value.

Where sales corresponding to disputed purchases are accepted as genuine, the full purchase value cannot be added as income merely because the purchases are unverifiable or not conclusively proved. In such cases, only the profit element embedded in the purchases is liable to be estimated and taxed on a reasonable basis, having regard to the nature of the trading activity. Applying that principle to trading in ferrous and non-ferrous metals, the addition was confined to 4% of the impugned purchases, with the balance disallowance set aside to that extent.

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Issues: Whether, in respect of purchases found to be non-genuine while the corresponding sales were accepted, the entire purchase amount could be added to income or only the profit element embedded in such purchases was liable to be brought to tax.

Analysis: The sales arising from the impugned purchases were accepted as genuine. In such circumstances, the purchases could not be treated as wholly non-genuine for the purpose of making a full addition. Where the assessee failed to conclusively establish the source and genuineness of the purchases, the appropriate course was to estimate the income element embedded in those purchases on a reasonable basis having regard to the nature of the trading activity. Applying this principle to a trader in ferrous and non-ferrous metals, the estimated addition was restricted to 4% of the impugned purchases for both years.

Conclusion: Only the profit element embedded in the impugned purchases was taxable, and the disallowance was restricted to 4% of the non-genuine purchases for both assessment years, in favour of the assessee to that extent.

Ratio Decidendi: Where sales are accepted as genuine, unexplained or unverifiable purchases cannot be added in entirety; only the profit element embedded in such purchases is liable to be estimated and taxed on a reasonable basis.

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