Reassessment and bogus purchase additions turned on tangible information, unverifiable suppliers, and taxing only the profit element.

Reassessment can be upheld where the tax authorities rely on tangible information from Sales Tax or investigation sources indicating accommodation entries or bogus purchase bills, because prima facie material is sufficient at the initiation stage. Where supplier notices remain unserved, the parties are not produced, and no reliable evidence of delivery or transport is furnished, the purchases may be treated as unverifiable. If sales are not doubted, however, full disallowance is not justified and only the profit element embedded in such purchases may be brought to tax. On those facts, the addition was restricted to 12.5% of the bogus purchases, giving partial relief to the assessee.

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Issues: (i) Whether the reopening of assessment was valid on the basis of information received from the Sales Tax / Investigation authorities regarding bogus purchase entries. (ii) Whether the addition on account of alleged bogus purchases was to be sustained in full or restricted to a reasonable percentage.

Issue (i): Whether the reopening of assessment was valid on the basis of information received from the Sales Tax / Investigation authorities regarding bogus purchase entries.

Analysis: The assessment was reopened on the basis of specific information that the assessee had obtained accommodation entries from hawala / bogus bill providers. The material received from the investigation wing and the Sales Tax authorities constituted tangible and cogent information, and there was a live link between that material and the formation of belief that income had escaped assessment. At the initiation stage, only prima facie material is required to justify the formation of belief under the reassessment framework.

Conclusion: The reopening was held to be valid and was upheld against the assessee.

Issue (ii): Whether the addition on account of alleged bogus purchases was to be sustained in full or restricted to a reasonable percentage.

Analysis: The notices issued to the alleged suppliers returned unserved, none of the parties was produced, and no satisfactory evidence of actual delivery or transportation of goods was furnished. The purchases were therefore treated as not fully verifiable and as arising from grey market dealings. However, since the sales were not doubted, full disallowance of the purchase amount was not considered justified on the facts. The proper course was to estimate the profit element embedded in such purchases.

Conclusion: The addition was restricted to 12.5% of the bogus purchases instead of being sustained in full, in favour of the assessee to that extent.

Final Conclusion: The reassessment was sustained, but the addition for bogus purchases was substantially reduced by estimating only the profit element, resulting in partial relief to the assessee.

Ratio Decidendi: Reassessment is valid where it is founded on tangible material giving rise to a reasonable belief of escapement of income, and in cases of unverifiable purchases where sales are accepted, only the profit element embedded in the bogus purchases may be brought to tax.

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