Grey-market diversion and bogus purchase additions fail where records, confirmations and transport evidence support the assessee.

Additions based on alleged diversion of acetic anhydride in the grey market, bogus sales of MG-7, stock deficit and bogus purchases were held unsustainable where the assessee's books, statutory records, stock registers, issue slips, invoices and transport evidence were corroborated by purchaser and transporter confirmations and by retracted earlier statements. The material also showed that a criminal court had accepted the defence version after evidence. In these circumstances, adverse inferences drawn only from initial statements and suspicion could not prevail over consistent documentary and oral evidence, and the additions were deleted.

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Issues: Whether the additions made on the premise that acetic anhydride was diverted in the grey market and that the sales of MG-7 were bogus could be sustained, and whether the related additions for alleged unaccounted stock deficit and bogus purchases were justified.

Analysis: The material on record showed that the purchasers and the transporter had confirmed the transactions, the earlier adverse statements had been retracted, and the criminal court had accepted the defence version after recording evidence. The assessee's statutory records, stock registers, issue slips, sales invoices, and transport evidence were not discredited by any cogent material. The inference that the finished goods were never manufactured and that acetic anhydride had been clandestinely sold was not supported by reliable evidence. In these circumstances, the adverse view based only on initial statements and suspicion could not prevail over the corroborated documentary and oral evidence.

Conclusion: The additions on account of alleged illicit sale of acetic anhydride, alleged non-genuine sales of MG-7, alleged deficit stock, and alleged bogus purchases were deleted, and the appeals were allowed in favour of the assessees.

Ratio Decidendi: Where the assessee's books and statutory records are supported by confirmations, retractions, transport evidence, and judicially tested testimony, additions based only on uncorroborated initial statements and suspicion cannot be sustained.

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