Bogus purchase disallowance limited where sales are reliable; measured estimation applied due to grey market procurement and VAT impact.

Where sales were not disputed, the article explains that a full disallowance of purchases alleged to be bogus is unjustified and a measured estimation should be applied; adverse inference from non-production of suppliers supports some disallowance but not total denial. Applying prior reasoning and recognising grey market procurement and VAT payment that affect tax incidence, the appropriate outcome is a restricted disallowance calculated on an estimated percentage of such purchases rather than a 100% exclusion; the author notes a 5% estimation was applied in the cited instance to partly allow the appeals.

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Issues: Whether the disallowance on account of alleged bogus purchases sustained at 12.5% should be upheld or reduced (A.Y. 2010-11 and 2011-12); and whether 100% disallowance is permissible where sales are not doubted.

Analysis: Documentary evidence of purchases and bank payments was submitted, but suppliers were not produced; adverse inference was therefore drawn. Sales were not disputed. Established authority holds that where sales are not doubted, a complete (hundred percent) disallowance for purchases alleged to be bogus is not warranted. Prior tribunal decision in the assessee's own case for an earlier year limited disallowance to 5% of such purchases in view of the nature of the business and VAT having been paid on the purchases. Applying the same principle to the present facts, and having regard to grey market procurement which affects tax incidence, an estimation-based approach using a reduced profit/disallowance rate is appropriate.

Conclusion: Disallowance for alleged bogus purchases is restricted to 5% of the purchases; appeals are partly allowed in favour of the assessee.

Ratio Decidendi: Where sales are not doubted, hundred percent disallowance for alleged bogus purchases is not justified and a measured estimation (here 5%) of disallowance is appropriate, particularly in cases of grey market purchases where tax impact rather than absence of purchases is at issue.

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