Unverifiable purchases after book rejection justify only estimated profit addition, not full disallowance, where actual business consumption is shown.

Where purchases are found unverifiable and the books are rejected under section 145(3), the entire purchase claim need not be disallowed if the record still shows actual use of the goods in business. In such circumstances, only the profit element embedded in the disputed purchases may be estimated on a reasonable basis, taking into account gross profit trends, the nature of the business, and the available quantitative consumption details. Applying that approach, the Tribunal held that the lower estimate required modification and sustained the addition only to the extent of 10% of the disputed purchases, granting relief on the balance.

---

---

Issues: Whether the addition made on account of alleged bogus purchases, after rejection of books of account, required interference and whether the disallowance should be sustained at a reduced percentage.

Analysis: The assessee failed to furnish confirmed ledger accounts, current addresses and verifiable details of the alleged hawala suppliers, and the books were therefore rejected under section 145(3) of the Income-tax Act, 1961. At the same time, the materials on record showed that the purchases were used in the manufacturing activity and that quantitative details of consumption had been furnished. In these circumstances, the entire purchase addition was not warranted, and the profit element embedded in the disputed purchases had to be estimated on a reasonable basis. Considering the gross profit position and the nature of the business, the Tribunal found that the estimate adopted by the lower authority required modification.

Conclusion: The addition on account of bogus purchases was sustained only to the extent of 10% of the disputed purchases, with the balance relief granted to the assessee.

Final Conclusion: The dispute was resolved by sustaining only a part of the purchase disallowance on an estimated profit basis, resulting in relief to the assessee and rejection of the Revenue's challenge.

Ratio Decidendi: Where purchases are found unverifiable but the material indicates actual consumption in the business, only the profit element embedded in such purchases can be estimated and sustained on a reasonable basis after rejection of books of account.

---