Bogus purchases add only profit element when sales are accepted and purchase records exist

Where alleged bogus purchases are supported by purchase documents and banking payments, and the sales are not doubted, full disallowance is impermissible because sales ordinarily require corresponding purchases. The disputed purchases were treated as routed through the grey market, so the addition had to be confined to the profit element embedded in those purchases by aligning the gross profit rate with genuine purchases. The 100% addition was not sustained and the matter was remitted for fresh computation on that basis.

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Issues: Whether the disallowance on account of alleged bogus purchases should be sustained at 100% or restricted to the profit element embedded in such purchases by aligning the gross profit rate with that of genuine purchases.

Analysis: The assessee had furnished purchase documents and payments were through banking channels, while the sales were not doubted. In such a situation, full disallowance of purchases was held to be impermissible because sales could not ordinarily be generated without corresponding purchases. The purchases were treated as having been routed through the grey market, and the addition was required to be confined to the profit element embedded in the disputed purchases. The matter was therefore sent back for recomputation in line with the principle that the gross profit rate on such purchases should be brought at par with the rate on genuine purchases.

Conclusion: The 100% addition was not sustained. The addition was directed to be restricted to the profit element in the bogus purchases, and the issue was remitted to the assessing officer for fresh computation.

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