Bogus purchase additions limited to estimated profit element where sales were accepted and purchases were evidenced by records.

Where sales are accepted and purchases are supported by cheques and stock records, the entire purchase amount is not treated as income merely because the suppliers are found to be accommodation bill providers or linked to the grey market. In such bogus purchase cases, only a reasonable profit element is to be estimated rather than sustaining the full addition. Applying that principle, the income was recomputed by restricting the disallowance to 8% of the bogus purchases, and the full addition was deleted in favour of the assessee.

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Issues: Whether the addition made on account of alleged bogus purchases was to be sustained in full or restricted to a reasonable profit element.

Analysis: The assessee's sales were not doubted, the purchases were supported by cheques and stock records, and the material was treated as having been sourced from the grey market through accommodation bills. In these circumstances, the entire purchase amount was not held to be addable as income. Relying on the principle of estimation of profit in cases involving bogus purchases, the income was directed to be recomputed by applying a net profit rate of 8% on the bogus purchases.

Conclusion: The full addition was not sustained and the Assessing Officer was directed to restrict the disallowance to 8% of the bogus purchases, in favour of the assessee.

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