Bogus purchase additions confined to profit element, while section 10AA relief and prior-year consistency were upheld.

Deduction under section 10AA for SEZ activities was upheld because the same claim had been decided in the assessee's favour in earlier years and that view had been upheld by the High Court. For AY 2010-11, bogus purchases were found unproved despite banking-channel payments, so only the embedded profit element was taxed; the estimate was reduced to 6.5% as 11% was excessive. Proportionate disallowance of directors' remuneration was maintained because the issue had already been decided against the assessee in an earlier year. For AY 2011-12, the addition for alleged bogus purchases was deleted for want of corroborative material, and that deletion was upheld.

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Issues: (i) whether deduction under section 10AA was allowable on the assessee's SEZ activities; (ii) whether the addition on account of bogus purchases for AY 2010-11 was to be sustained in full or only to the extent of estimated profit element; (iii) whether proportionate disallowance of directors' remuneration was justified; and (iv) whether the addition on account of alleged bogus purchases for AY 2011-12 was sustainable.

Issue (i): whether deduction under section 10AA was allowable on the assessee's SEZ activities.

Analysis: The same controversy had already been decided in the assessee's favour in earlier years, and the earlier view had also been upheld by the High Court. Following judicial consistency, the exemption claim under section 10AA was treated as covered in favour of the assessee.

Conclusion: The deduction under section 10AA was upheld in favour of the assessee.

Issue (ii): whether the addition on account of bogus purchases for AY 2010-11 was to be sustained in full or only to the extent of estimated profit element.

Analysis: The purchases from the alleged hawala party were found to be unproved, and banking-channel payments by themselves were held insufficient to establish genuineness. At the same time, the addition was confined to the profit element embedded in such purchases. The estimate made by the first appellate authority at 11% was considered excessive, and a lower rate of 6.5% was found appropriate on the facts.

Conclusion: The addition was sustained only to the extent of 6.5% of the bogus purchases, which is partly in favour of the Revenue and partly in favour of the assessee.

Issue (iii): whether proportionate disallowance of directors' remuneration was justified.

Analysis: The issue had already been decided against the assessee in an earlier year, and no distinguishing material was shown for the year under appeal. The disallowance was therefore maintained on the same reasoning.

Conclusion: The disallowance of directors' remuneration was upheld against the assessee.

Issue (iv): whether the addition on account of alleged bogus purchases for AY 2011-12 was sustainable.

Analysis: The appellate authority found that the addition was not supported by corroborative material and that the assessee's explanation, including the year-wise purchase position, had not been displaced by any further investigation. Those findings were accepted as reasonable and no basis was found to interfere.

Conclusion: The deletion of the addition was upheld in favour of the assessee.

Final Conclusion: The Revenue's appeals were dismissed, and the assessee's appeal was partly allowed. The decision sustains the deduction under section 10AA, restricts the addition on bogus purchases for one year to a lower estimated profit element, maintains the disallowance of directors' remuneration, and upholds deletion of the later-year bogus purchase addition.

Ratio Decidendi: Where purchases are found to be unproved, only the embedded profit element may be brought to tax, and repetitive issues already settled in earlier years may be followed on the principle of judicial consistency.

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