Bogus purchase additions limited to profit element, with VAT and interest claim subject to verification

Unverifiable purchases where notices to suppliers remained unserved and the assessee failed to produce them were treated as grey-market purchases, but accepted sales and undisputed trading activity meant only the embedded profit could be taxed. Applying the cited comparable precedent, the profit element was estimated at 5% of the bogus purchases rather than sustaining the full or higher proposed addition. The assessee's claim for additional VAT and interest was required to be verified by the Assessing Officer, with no double deduction permitted.

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Issues: Whether the addition made on account of alleged bogus purchases was to be sustained in full or confined to an estimated profit element, and whether the assessee's claim regarding additional VAT and interest required adjustment.

Analysis: The purchases from the identified parties were treated as unverifiable, as the notices issued to them remained unserved and the assessee could not produce them. At the same time, the sales were accepted and the assessee's trading activity in iron and steel was not doubted. In such circumstances, the purchases were held to be from the grey market and only the profit embedded in those purchases could be brought to tax. Following the comparable precedent relied upon, the reasonable rate of profit was taken at 5% of the bogus purchases. The claim relating to additional VAT and interest was directed to be verified by the Assessing Officer, with the clarification that no double deduction could be allowed.

Conclusion: The addition was not sustained at 15% and the Assessing Officer was directed to recompute the income by applying 5% to the bogus purchases. The assessee obtained partial relief.

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