Bogus purchase additions limited to profit element where sales are accepted, with recomputation on gross profit basis.

Where sales are accepted, alleged bogus purchases are not to be disallowed in full; the addition is confined to the profit element embedded in those purchases. Applying that principle, the issue was restored to the Assessing Officer for fresh quantification by aligning the gross profit rate on the disputed purchases with the rate earned on genuine purchases, after giving the assessee an opportunity of being heard. The appeals were allowed for statistical purposes, leaving recomputation to the Assessing Officer on the gross profit basis.

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Issues: Whether the disallowance made towards alleged bogus purchases required to be sustained, or whether the matter should be restored to the Assessing Officer to restrict the addition by applying the gross profit rate shown on genuine purchases.

Analysis: The appeals involved an identical issue already decided in the assessee's own case for earlier assessment years. The governing principle applied was that where sales are not doubted, the addition in respect of bogus purchases is not to be made at the full amount of purchases, but is to be confined to the profit element embedded in such purchases. The proper course, therefore, was to align the rate of gross profit on the alleged bogus purchases with the rate earned on genuine purchases, after granting the assessee an adequate opportunity of being heard.

Conclusion: The disallowance was not sustained in full and the issue was restored to the Assessing Officer for fresh quantification on the gross profit basis, in favour of the assessee.

Final Conclusion: The appeals were allowed for statistical purposes and the controversy on bogus purchases was left for recomputation by the Assessing Officer in accordance with the gross profit principle.

Ratio Decidendi: Where sales are accepted, the addition for alleged bogus purchases is restricted to the profit element embedded in those purchases, to be determined by applying the gross profit rate of genuine purchases.

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