Bogus purchase disallowance limited to embedded profit element where sales were recorded and purchases remained unverifiable.

Unverifiable purchases may be treated as accommodation entries where suppliers are not produced, notices remain unserved, and no independent evidence of delivery or receipt of goods is shown. However, corresponding sales can indicate that goods were sourced from some channel, so the entire purchase value need not be disallowed. In such cases, only the embedded profit element is estimated, and a 12.5% addition was upheld as consistent with settled judicial approach in similar matters.

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Issues: Whether the disallowance in respect of alleged bogus purchases should be restricted to 12.5% of the purchase value.

Analysis: The purchases were found unverifiable because the parties were not produced, notices issued to them remained unserved, and no independent evidence of actual delivery, transport, or receipt of goods was furnished. At the same time, the material on record showed that the assessee had effected corresponding sales, indicating that goods had in fact been procured from some source. In such circumstances, the proper course was not to disallow the entire purchases but to estimate the embedded profit element in the accommodation entries. The estimate at 12.5% was supported by settled judicial approach in similar matters.

Conclusion: The restriction of the addition to 12.5% of the alleged bogus purchases was upheld, and the Revenue's challenge failed.

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