Bogus purchase disallowance may be estimated at a reasonable percentage when sales are accepted and grey-market sourcing is shown.

Where sales and working results are not doubted, a full disallowance of purchases is not justified because corresponding purchases are ordinarily required to generate those sales. However, if the purchases are found to be from the grey market, an estimated disallowance may be sustained to reflect possible savings in tax and related outgoings. On these facts, restricting the addition to 12.5% was treated as a fair estimate and the Revenue's challenge failed.

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Issues: Whether the addition made on account of bogus purchases was required to be sustained at 100% or restricted to 12.5% where the sales were not doubted.

Analysis: The assessee's sales and working results were not doubted. In such circumstances, a full disallowance of purchases was not warranted because sales cannot ordinarily be generated without corresponding purchases. At the same time, the purchases were found to be from the grey market, which justified an estimated disallowance to account for possible savings on tax and related outgoings. On these facts, the restriction of disallowance to 12.5% was found to be a fair estimate.

Conclusion: The addition was correctly restricted to 12.5% and the Revenue's challenge was rejected.

Ratio Decidendi: Where sales are not doubted but purchases are from the grey market, the disallowance of bogus purchases may be estimated rather than made in full, and a reasonable percentage addition can be sustained.

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