Profit element in disputed purchases may be disallowed, not the entire purchase; estimation by fact finder required.

The article addresses disallowance of alleged non genuine purchases in income tax assessments and clarifies that where sales arising from such purchases are accepted as genuine, the entire purchase cannot be treated as non genuine; only the profit element embedded in those purchases may be disallowed, and that element must be reasonably estimated by the fact finding authority. Reliance on an unrelated precedent to enhance disallowance to 100% was rejected as inapt. Applying evidentiary deficiencies and trade nature, the reasonable estimated profit element for the years under review was fixed at 8% and the assessing officer directed to compute income accordingly.

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Issues: Whether the Commissioner of Income Tax (Appeals) was correct in enhancing the disallowance of purchases to 100% treating purchases as non-genuine and, if not, what percentage of the purchases may be disallowed as the profit element for the assessment years under consideration.

Analysis: The Tribunal examined whether reliance on the decision in Shoreline Hotels Pvt. Ltd. to enhance disallowance to 100% was factually and legally apt, noting that the Shoreline decision arose in a different context (section 263 and hotel maintenance expenditure) and is distinguishable. The Tribunal considered authorities holding that where sales from the purchases are accepted as genuine, the whole purchase amount cannot be treated as non-genuine and that only the profit element embedded in such purchases may be subject to tax. Given absence of lorry receipts/confirmations and inability of the assessee to conclusively prove purchases, the Tribunal found a reasoned estimation of the profit element appropriate. Considering the nature of the assessee's trading business and the totality of facts, the Tribunal determined an appropriate and reasonable percentage for estimating the profit element.

Conclusion: The enhancement of disallowance to 100% is not sustained. The disallowance of non-genuine purchases is restricted to the profit element estimated at 8% of such purchases for the assessment years A.Y. 2009-10, A.Y. 2010-11 and A.Y. 2011-12, and the Assessing Officer is directed to compute income accordingly.

Ratio Decidendi: Where sales from alleged non-genuine purchases are accepted as genuine, the entire purchase cannot be treated as non-genuine; only the profit element may be disallowed and such profit element must be reasonably estimated by the fact-finding authority.

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