Profit element adjustment in alleged bogus purchases limited to estimated excess over declared gross profit margin.

Whether an addition for alleged bogus purchases should be limited to a fair estimate of the profit element was decided by applying a Coordinate Bench approach adopting 6% as the estimated profit imbedded in such purchases; the tribunal adjusted that estimate by the assessee's actual gross profit margin for the year (3.67%) and restricted the disallowance to the difference (2.33% of the alleged bogus purchases), resulting in partial allowance of the assessee's appeal and dismissal of the revenue's appeal.

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Issues: Whether the addition made on account of alleged bogus purchases of Rs. 39,65,372/- should be restricted to a fair estimate of the profit element after adjusting the gross profit margin declared by the assessee.

Analysis: The issue was examined in light of an identical decision of a Coordinate Bench which adopted 6% as a fair estimation of the profit element imbibed in alleged bogus purchases and directed that the disallowance be restricted to 6% of the bogus purchases reduced by the gross profit margin already declared by the assessee in respect of those purchases. The Tribunal applied that approach to the year under consideration, taking into account the gross profit actually shown by the assessee in that year (3.67%), and calculated the net disallowance as the difference between the 6% estimate and the declared gross profit margin.

Conclusion: The addition is restricted to 2.33% of the alleged bogus purchases (i.e., 6% less the declared gross profit of 3.67%), resulting in partial allowance of the assessee's appeal and dismissal of the revenue's appeal.

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