Bogus purchases: addition confined to estimated gross profit where corresponding sales were accepted as genuine.

Where purchases were treated as bogus on the basis of search material and a statement recorded during search, the addition could not extend to the full purchase amount because the corresponding sales were accepted as genuine. The proper approach was to confine the disallowance to the profit element embedded in the disputed purchases, having regard to the surrounding facts and supporting evidence. The addition was therefore restricted to 10% of the disputed purchases as estimated gross profit, granting the assessee partial relief.

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Issues: Whether the entire purchases treated as bogus could be disallowed, or only the gross profit element embedded in such purchases was liable to be added.

Analysis: The assessee's purchases from a supplier were treated as bogus on the basis of search material and a statement recorded during search, but the corresponding sales were not disputed and stood accepted as genuine. In such circumstances, the addition could not extend to the full purchase amount. The appropriate course was to restrict the disallowance to an estimated gross profit component, having regard to the surrounding facts and the evidence filed in support of the purchases and sales.

Conclusion: The addition was restricted to 10% of the disputed purchases as estimated gross profit, and the assessee received partial relief.

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