Bogus purchase addition restricted to embedded profit element, with 10% gross profit adopted instead of 12.5%.

In alleged bogus purchase cases, where supplier notices remain unserved or unconfirmed and accommodation bills are inferred, the taxable addition should ordinarily be limited to the profit element embedded in the purchases if sales and business activity are not rejected. Applying that principle, the ITAT Mumbai held that a fair estimate at 10% of the purchase value was sufficient in view of the assessee's declared gross profit, instead of sustaining 12.5%. The addition was therefore restricted to 10% on the alleged bogus purchases.

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Issues: Whether, in respect of alleged bogus purchases, the addition should be sustained at 12.5% of the purchase value or restricted to 10% having regard to the estimated profit element.

Analysis: The assessee's purchases were treated as non-genuine because notices issued to the alleged suppliers were unserved or not confirmed, indicating accommodation bills. The Tribunal noted the settled position that where purchases are found doubtful but sales and business activity are not rejected, the taxable addition should ordinarily be confined to the profit embedded in such purchases and not the entire purchase amount. Considering the assessee's declared gross profit and the need to make a fair estimate, the Tribunal found that a further estimation at 10% would meet the ends of justice instead of sustaining 12.5%.

Conclusion: The addition was restricted by adopting 10% gross profit on the alleged bogus purchases, and the assessee succeeded to that extent.

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