Bogus purchases: only the profit element is taxable when sales are accepted and full verification is unavailable.

Where sales were accepted but the purchase parties were not traceable and verification remained unavailable, the disputed purchases were not treated as wholly genuine. However, the accepted sales prevented rejection of the purchases in full, so the addition was confined to the profit element embedded in the alleged bogus purchases rather than the entire purchase value. The ITAT followed the approach adopted in the assessee's earlier year and applied a 12.5% suppression rate, subject to reduction by the gross profit rate already declared for the year under appeal. The result was that the full addition under section 69C was not sustained and the assessee obtained relief.

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Issues: Whether, in respect of alleged bogus purchases where sales were accepted, the entire purchase amount could be added under section 69C of the Income-tax Act, 1961, or only the profit element embedded in such purchases was liable to tax.

Analysis: The assessee's purchases could not be fully accepted as genuine because the parties were not traceable and the assessee did not furnish correct current addresses, so effective verification and cross-examination remained unavailable. At the same time, the acceptance of sales meant that the purchases could not be disregarded in full. In such cases, the taxable addition is confined to the profit element embedded in the disputed purchases, rather than the entire purchase value. Following the approach adopted in the assessee's own earlier year, the suppressed profit element was taken at 12.5%, to be reduced by the gross profit rate declared by the assessee for the year under appeal.

Conclusion: The addition of the entire alleged bogus purchases was not sustained; only the profit element embedded in the purchases was directed to be assessed at 12.5% less the gross profit rate declared by the assessee, resulting in relief to the assessee.

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