Bogus purchase bills and grey market purchases: only the cash component and proven profit element can be taxed.

Where bogus purchase bills are found but the corresponding sales are accepted, the purchase value is not automatically taxable as unexplained income under sections 69 or 69A. Only the cash component retained by the accommodation bill provider can be treated as unexplained, here identified as 1% of the purchases. A further profit element may arise in grey market purchases, but it cannot be fixed on conjecture; the estimate of 10% was set aside because it lacked factual foundation. The matter was restored for fresh findings on stock position, capital deployment, and any gain from the arrangement.

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Issues: (i) Whether the impugned purchases, found to be supported by accommodation bills, could attract addition under section 69 or section 69A of the Income-tax Act, 1961, and if so, to what extent; (ii) whether the disallowance could validly be restricted to 10% of the purchases on an of profit element in grey market purchases, or whether the matter required further enquiry.

Issue (i): Whether the impugned purchases, found to be supported by accommodation bills, could attract addition under section 69 or section 69A of the Income-tax Act, 1961, and if so, to what extent.

Analysis: The admitted survey material, the statement of the supplier, the absence of genuine business activity, and the absence of cross-examination by the assessee established that the recorded purchases were not genuine. At the same time, where the assessee's sales were accepted, the apparent purchases had to be viewed as having been replaced by alternate purchases from another source. On that footing, the source of the purchase payments was not wholly unexplained merely because the bill suppliers were bogus. The only amount that could be treated as unexplained was the component retained in cash by the accommodation bill provider, which represented the amount not cycled back to the assessee.

Conclusion: Addition under section 69 or section 69A was not sustainable for the full purchase value and was confined only to the cash component retained by the bill provider, namely 1% of the purchases.

Issue (ii): Whether the disallowance could validly be restricted to 10% of the purchases on an of profit element in grey market purchases, or whether the matter required further enquiry.

Analysis: Once the purchases were treated as having been sourced from the grey market, some profit element could not be ruled out, but the percentage could not be fixed on conjecture alone. The estimate adopted by the first appellate authority at 10% lacked a factual foundation. The proper course was to examine the stock position, the capital deployed at different points of time, and the possible gain arising from the accommodation bill arrangement, and then determine the addition on definite findings. The issue was therefore not capable of final quantification on the existing material.

Conclusion: The 10% restriction was set aside and the matter was remanded for fresh determination of the profit element and related stock and capital issues.

Final Conclusion: The appeals were disposed of by sustaining only the 1% cash component and by restoring the remaining controversy to the assessing authority for fresh factual findings on stock availability, capital deployment, and the gain, if any, arising from the grey market arrangement.

Ratio Decidendi: In cases of bogus purchase bills where corresponding sales are accepted, the purchase value is not automatically assessable as unexplained income under sections 69 or 69A; only the unexplained cash component and any separately established profit element can be brought to tax on the basis of definite facts.

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