Bogus purchases with accepted sales justify only profit element addition on reasonable estimate, not full disallowance.

Where sales are accepted but purchases are not fully verifiable because suppliers are not produced and notices return unserved, the entire purchase value should not be disallowed. Only the profit element embedded in the impugned purchases can be estimated and brought to tax on a reasonable basis, having regard to the nature of business, accepted sales, and surrounding facts. Applying that approach, the estimated disallowance on alleged bogus purchases was reduced from 12.5% to 8%, and relief was granted to the assessee.

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Issues: Whether the addition sustained on alleged bogus purchases required reduction and, if so, what rate of profit element was to be sustained.

Analysis: The purchases were treated as not fully proved because the suppliers were not produced and notices issued to them were returned unserved, though the corresponding sales were accepted. In such circumstances, the entire purchase value could not be disallowed merely because the transactions were not fully verifiable. The proper approach was to estimate only the profit element embedded in the impugned purchases, taking into account the nature of business, the accepted sales, and the surrounding facts.

Conclusion: The disallowance was further reduced from 12.5% to 8%, and relief was granted to the assessee accordingly.

Final Conclusion: The appeal was partly allowed by restricting the estimated addition on the impugned purchases to a lower percentage.

Ratio Decidendi: Where sales are accepted but the genuineness of purchases is not fully proved, only the profit element embedded in such purchases can be brought to tax on a reasonable estimate basis.

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