Bogus purchase additions limited to profit element where sales are accepted and suppliers are unproved

Purchases from suspected hawala or accommodation-entry suppliers were treated as non-genuine because the notices to the parties remained unserved, the assessee could not produce them, and no reliable transport or delivery evidence was furnished. As sales were accepted, the facts did not justify taxing the entire purchase value as income; instead, the addition was confined to the estimated profit element embedded in the impugned purchases. The disallowance was therefore restricted to 12.5% of the purchases rather than the full amount.

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Issues: Whether the assessee's purchases from suspected hawala / accommodation-entry parties were bogus and, if so, whether the addition should be sustained in full or restricted to the profit element.

Analysis: The information received by the Assessing Officer regarding accommodation-entry providers was found to be credible, and the reopening based on such material was not disturbed. The notices issued to the suppliers returned unserved, the assessee could not produce the parties or establish their current whereabouts, and no reliable transportation or delivery evidence was furnished. On these facts, the purchase bills were treated as unsupported by cogent evidence and the suppliers were regarded as non-existent. At the same time, the sales were not doubted, and the facts did not justify treating the entire purchase value as income. Following the approach adopted in cases dealing with grey-market purchases, the appropriate disallowance was confined to the estimated profit embedded in such purchases.

Conclusion: The purchases were held to be bogus, but the addition was restricted to 12.5% of the impugned purchases instead of 100%.

Ratio Decidendi: Where sales are accepted but purchases from non-existent or accommodation-entry suppliers are not proved genuine, only the profit element embedded in such purchases can be brought to tax.

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