Profit element only applies where recorded sales and purchases are routed through bank accounts and no separate defects are proved.

Where sales and purchases are accepted in the books and the surrounding facts show that business transactions were routed through the assessee's bank account, any addition based on a sales-cash deposit difference is confined to the profit element and cannot extend to the full receipts. A separate addition for alleged purchase differences on a gross profit basis was also unsustainable because the purchases were recorded and no outside-the-books purchases were shown. An ad hoc disallowance of expenditure for incomplete vouchers was deleted because it lacked specific defects and quantification.

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Issues: (i) Whether the addition made under section 68 on account of the alleged difference between sales and cash deposits was justified or required to be restricted to the net profit on the transactions; (ii) Whether the addition made on account of the alleged difference in purchases on applying the gross profit rate was sustainable; (iii) Whether the ad hoc disallowance of expenditure for want of complete vouchers was sustainable.

Issue (i): Whether the addition made under section 68 on account of the alleged difference between sales and cash deposits was justified or required to be restricted to the net profit on the transactions?

Analysis: The sales and purchases recorded in the books were accepted, and the material on record showed that transactions of connected business activity were routed through the assessee's bank account. On that footing, the amount treated as unexplained could not be assessed as the whole of sales receipts. In such cases, only the profit element could be brought to tax.

Conclusion: The addition was not sustainable in full and was rightly restricted to the net profit element, thus the issue was decided against the Revenue.

Issue (ii): Whether the addition made on account of the alleged difference in purchases on applying the gross profit rate was sustainable?

Analysis: The purchases were already reflected in the books, and the Revenue did not dispute the recorded purchases or rebut the explanation that the related transactions had been routed through the assessee's account. In the absence of purchases outside the books, no separate addition on that basis could stand.

Conclusion: The deletion of the addition was upheld, and this issue was decided against the Revenue.

Issue (iii): Whether the ad hoc disallowance of expenditure for want of complete vouchers was sustainable?

Analysis: The disallowance was made on a purely ad hoc basis without identifying the specific vouchers or quantifying the defect in the expenditure claim. A blanket percentage disallowance without such basis was not justified.

Conclusion: The disallowance was rightly deleted, and this issue was decided against the Revenue.

Final Conclusion: The Revenue's appeal failed on all substantive grounds and the order of the first appellate authority was sustained.

Ratio Decidendi: Where sales and purchases are accepted as recorded and the surrounding facts show that only the transactions were routed through the assessee's account, the tax addition can be confined to the profit element and not the entire receipts; likewise, an ad hoc disallowance without specific defects or quantification cannot be sustained.

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