Profit element in disputed purchases, not entire purchase value, is taxable where sales are accepted and purchases are not wholly bogus.

Where sales and contract receipts are accepted, purchases cannot be treated as wholly bogus merely because suppliers appear suspicious or accommodation-based. If the record does not prove that the purchases were non-existent and the assessee shows payment by account payee cheques and consumption of materials in execution of contracts, the proper tax treatment is to bring the profit element embedded in such purchases to tax rather than disallow the entire purchase value. On the factual appreciation recorded, the addition was restricted to 12.5% of the impugned purchases.

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Issues: Whether the entire amount of purchases treated as bogus could be added to income, or only the profit element embedded in such purchases could be taxed.

Analysis: The assessee's sales and contract receipts were not disputed, and the record did not establish that the purchases were wholly non-existent. The suppliers were found to be suspicious or non-genuine, but the assessee had produced material showing payment by account payee cheques and consumption of materials in execution of the contract. In such circumstances, the purchases could not be rejected in full merely because the parties were accommodation providers or because the assessee could not establish the suppliers' existence conclusively. Where sales are accepted, corresponding purchases cannot be ignored altogether, and only the profit embedded in such purchases is liable to be brought to tax. Following the factual appreciation made by the first appellate authority, the addition was restricted to 12.5% of the impugned purchases.

Conclusion: The full disallowance was not justified; only the estimated profit element in the purchases was taxable, and the restriction of the addition to 12.5% was upheld.

Ratio Decidendi: When sales are accepted and purchases are not proved to be wholly bogus, the proper course is to tax only the profit element embedded in such purchases, not to add the entire purchase amount as income.

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