Bogus purchases tax only profit element when sales are accepted and the estimate is reasonable on facts.

Where sales were accepted and the books were not rejected, alleged bogus purchases from a supplier could not be taxed in full merely on third-party accommodation-entry information. The settled principle applied was that, in cases of unverifiable or bogus purchases, only the profit element embedded in the purchases is taxable. On the facts of the diamond trade, the appellate authority's estimate of 4% of the purchase value was treated as reasonable, and the Tribunal found no basis to interfere. The challenge by the Revenue therefore failed, and the addition remained confined to the estimated profit component rather than the entire purchase amount.

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Issues: Whether the addition made on account of alleged bogus purchases from a supplier was to be sustained in full or restricted to the profit element embedded in such purchases.

Analysis: The assessee's sales, including export sales, were not disputed and the books were not rejected. The addition was made on the basis of third-party information concerning accommodation entries. The appellate authority found that the purchases were not fully verifiable but that the entire purchase amount could not be treated as income when only the real income component was taxable. Relying on the settled approach that, in cases of unverifiable or bogus purchases, only the profit element embedded in the purchases is taxable, the authority restricted the addition to 4% of the purchase value. The Tribunal agreed that this estimate was reasonable in the facts of the diamond trade and that no further interference was called for.

Conclusion: The restriction of the addition to 4% of the alleged bogus purchases was upheld and the Revenue's challenge failed.

Final Conclusion: The dispute was resolved against the Revenue and the addition was confined to the estimated profit component rather than the entire purchase amount.

Ratio Decidendi: Where sales are accepted and purchases are found to be unverifiable, only the profit element embedded in such purchases can be brought to tax, and estimation of that element will not be interfered with if it is reasonable on the facts.

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