Estimation of income based solely on purchases is improper without cogent material; addition deleted for licence holder.

Whether an addition by estimating profit on purchases is justified turned on the principle that assessment by estimation is permissible only where there is nondisclosure or suppression and must rest on cogent material. The licence agreements and books showed a fixed licence fee and cost-to-cost transfers, no evidence of the assessee exercising operational control or retaining margins was produced, and Revenue had accepted an identical arrangement for another merchandiser without estimation. Applying the requirement for uniform treatment and evidential basis, the imposed 5% profit estimation was unwarranted; the addition was deleted and the appeal allowed for the licence holder.

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Issues: Whether the addition of Rs. 18,05,258/- by estimating 5% profit on purchases of Rs. 3,61,05,162/- in the hands of the licence holder is justified where merchandise agreements purportedly confine the licence holder to a fixed monthly fee and identical arrangement with another merchandiser was accepted by the Revenue.

Analysis: The dispute centres on whether the licence holder should be assessed for trading profit based on purchases shown in his name where merchandiser agreements allocate operational control and profit to third parties, and where Revenue accepted identical arrangement for a second merchandiser without estimation. Relevant procedural and substantive provisions invoked include the provisions for filing return and assessment inquiries. Estimation is permissible when there is nondisclosure or suppression of income and must be founded on cogent material. Here, the licence-holder produced merchandise agreements showing fixed licence consideration, books recording cost-to-cost transfers were not rejected, no material was produced to show he operated retail sales or controlled margins, and Revenue treated an identical arrangement with a different merchandiser without making any estimation. Selective application of estimation in such facts undermines fairness; estimation on purchases based solely on the merchandiser's failure to offer income, without further evidential basis showing suppression by the assessee, is not warranted.

Conclusion: The addition of Rs. 18,05,258/- by estimating profit at 5% on purchases of Rs. 3,61,05,162/- is deleted and the appeal is allowed in favour of the assessee.

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