Bogus purchases: when sales are accepted, only the embedded profit element can be taxed, not full disallowance.

Where sales are accepted, alleged bogus purchases cannot be disallowed in full merely because suppliers or further supporting evidence are not produced. The assessee had shown purchase vouchers and banking-channel payments, and the purchases were treated as grey-market transactions, but the absence of doubted sales meant that only the profit element embedded in the disputed purchases could be brought to tax. On that basis, complete disallowance was held unwarranted and the addition was confined to an estimated 12.5% of the disputed purchases.

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Issues: Whether the 100% disallowance made on account of alleged bogus purchases was sustainable, and if not, what proportion of the purchases represented the taxable profit element.

Analysis: The assessee had produced purchase vouchers and banking-channel payments, but could not produce the suppliers or other supporting evidence. Since the sales were not doubted, a complete disallowance of purchases was held to be unwarranted. The purchases were treated as having been made from the grey market, implying suppression of tax and other incidental costs, but only the profit element embedded in such purchases could be brought to tax.

Conclusion: The 100% disallowance was reduced to 12.5% of the disputed purchases.

Ratio Decidendi: Where sales are accepted, alleged bogus purchases cannot be disallowed in full and only the profit element embedded in such purchases is liable to be estimated and taxed.

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