Verification of Purchases: tax profit element may be estimated using gross profit rate where books and records are accepted.

Where books of account were not rejected and quantitative purchase and sale records were maintained and accepted, unverifiable purchases from two suppliers were not treated as wholly non-genuine; instead the profit element was taxed by applying the normal gross profit rate (6.5%) to those specified purchases, with the balance deletion. Conversely, commission and brokerage payments supported by ledgers, bills, bank payments and TDS, without evidence of return of payments or fictitious recipients, could not be disallowed; the entire disallowance was deleted. The operative principle is estimation of taxable profit, not blanket addition of purchase amounts, absent a cash trail or rejected books.

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Issues: (i) Whether additions made on account of alleged non-genuine purchases from three suppliers can be sustained in full; (ii) Whether the disallowance of brokerage and commission expenditure of Rs. 14,18,330/- can be sustained.

Issue (i): Whether purchases aggregating to Rs. 34,08,966/- from three parties should be treated as wholly non-genuine and added to the assessee's income.

Analysis: Books of account were not rejected; quantitative details of purchases and corresponding sales were maintained and accepted; declared turnover and gross profit rate (approx. 6.5%) were not disturbed; notices issued under section 133(6) to certain suppliers were returned unserved and Sales Tax Department listings raised doubt about those suppliers; no material established that payments returned to the assessee or that goods were not received; distinguishable precedents where full additions were sustained involved rejected books or clear cash trail; where sales are accepted and records maintained, taxing entire purchases would amount to taxing gross receipts without allowing cost of goods sold.

Conclusion: Addition restricted. The addition is directed to be sustained only in respect of purchases from two suppliers whose notices were returned unserved, limited to 6.5% of their purchase amounts, and the balance addition is deleted.

Issue (ii): Whether the entire commission and brokerage expenditure of Rs. 14,18,330/- can be disallowed for want of independent verification of the payees.

Analysis: Commission payments were supported by ledger accounts, brokerage bills, bank statements showing payments through banking channels and TDS deduction; books of account were not rejected and turnover was accepted; no material demonstrated that commission payments returned to the assessee or that recipients were fictitious; Assessing Officer did not produce adverse evidence establishing sham payments or carry out independent enquiries with recipients.

Conclusion: Disallowance deleted. The disallowance of Rs. 14,18,330/- is deleted and the ground of appeal relating to commission and brokerage is allowed.

Final Conclusion: The appeal is partly allowed by restricting the purchases addition to 6.5% of specified purchases from two suppliers and by deleting the entire disallowance of commission and brokerage expenditure.

Ratio Decidendi: Where books of account are not rejected, quantitative records and accepted sales exist, and no material shows payments returning to the assessee or a cash trail, the appropriate remedy for unverifiable purchases is to estimate and tax the profit element (using normal gross profit rate) rather than disallowing the entire purchase amount.

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