Bogus purchases and income estimation: ITAT directs addition at 5% above declared gross profit rate, partly allowing Revenue.

The dispute concerns estimation of income from alleged bogus purchases and the correct quantum of addition. The ITAT found that purchases were likely made from other parties and that profit on such transactions would exceed the assessee's disclosed gross profit rate, rejecting a narrow addition limited to the disclosed GP element. However, applying the jurisdictional High Court's consistent principle that only the profit margin embedded in bogus purchases should be taxed, the ITAT directed an addition equal to 5% above the assessee's declared gross profit rate; Revenue's appeal was partly allowed.

---

---

Issues: Whether, in respect of purchases of Rs. 3,50,55,146/- held to be from non-existent suppliers, the addition should be made for the entire purchase amount or restricted to the gross profit element embedded in such purchases.

Analysis: The Tribunal examined the factual findings that notices u/s 133(6) returned unserved, the assessee failed to produce the suppliers, VAT registrations were cancelled and no delivery/transport evidence was furnished. The Tribunal also considered the assessee's undisputed project turnover and closing stock, finding the overall purchases for the year not disproportionate to disclosed turnover and work-in-progress; hence the materials were held to be used in construction though bills were from other parties. The Tribunal reviewed relevant precedents of the jurisdictional High Court which consistently applied the principle that taxation in respect of bogus/accommodation purchases is limited to the profit margin embedded in such purchases rather than the entire purchase value. Balancing the factual findings and the settled legal position, the Tribunal concluded that applying an increased gross profit rate (5% higher than the GP rate disclosed by the assessee for the year) to the disputed purchases was a reasonable method to compute the taxable profit portion.

Conclusion: The addition is restricted to the gross profit element in the purchases and the Assessing Officer is directed to compute the profit on Rs. 3,50,55,146/- by applying a gross profit rate 5% higher than the rate disclosed by the assessee for the year; the Revenue's appeal is partly allowed (partly in favour of Revenue).

---