Bogus purchase additions limited to profit element where sales were accepted and purchase evidence was deficient.

Bogus purchase additions were examined where the assessee failed to prove delivery of goods through delivery challans, transport evidence, or octroi receipts, and notices to the alleged suppliers either went unserved or drew no response. As the purchases were not satisfactorily linked to corresponding sales, the purchases were treated as suspicious; however, the sales themselves were not rejected, making full disallowance excessive. On these facts, a reasonable estimate of the profit element embedded in the impugned purchases was applied, and the disallowance was restricted to 10% of such purchases rather than the higher addition proposed.

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Issues: Whether the addition on account of bogus purchases from three parties was to be sustained in full as made by the Assessing Officer or restricted to a lower percentage as estimated by the appellate authority.

Analysis: The purchases were treated as suspicious on the basis of information from the Sales Tax Department and the assessee could not establish delivery of goods through supporting documents such as delivery challans, transport evidence or octroi receipts. Notices issued to the alleged suppliers either remained unserved or elicited no response, and the material purchases were not satisfactorily linked with the corresponding sales. At the same time, the sales themselves were not rejected and the disallowance made at assessment was viewed as excessive. On these facts, a reasonable estimation of profit embedded in the impugned purchases was considered appropriate.

Conclusion: The addition was not to be restored at 20%, and the proper course was to enhance the disallowance to 10% of the impugned purchases.

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