Estimation of income from suspect purchases permitted where books are accepted; AO directed to apply a reasonable percentage.

When recorded purchases are alleged to be accommodation entries but the assessee produces invoices, e-way bills, transport receipts and bank payment records and corresponding sales are not disbelieved nor books rejected, a blanket disallowance as unexplained transactions is not mandatory; instead the tribunal directs that additional income embedded in suspect purchases may be estimated by applying a reasonable percentage where specific gross or net profit rates are absent, and remits the matter to the assessing officer to assess income at 3% on the disputed purchases in addition to profits declared in books.

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Issues: Whether the addition of Rs. 45,36,000 under Section 69C of the Income-tax Act, 1961 on account of alleged bogus purchases should be sustained in full or requires modification.

Analysis: Undisputed evidence shows purchases of Rs. 45,36,000 from a supplier alleged to be an accommodation entry provider; the assessee produced invoices, e-way bills, transport receipts and bank payment records which were not accepted by the Assessing Officer. The corresponding sales were not doubted and the books of account were not rejected under Section 145(3) of the Income-tax Act, 1961. Where books are accepted and sales are not disbelieved, a complete disallowance of recorded purchases as unexplained expenditure under Section 69C is not automatically warranted. In such circumstances, an assessment of the additional income embedded in suspect purchases by application of a reasonable estimated percentage is an appropriate method when specific gross profit or net profit rates for the trade are not furnished.

Conclusion: The order under appeal is set aside in part and the matter is remitted to the Assessing Officer with a direction to estimate income at the rate of 3% on the disputed purchases of Rs. 45,36,000 under Section 69C of the Income-tax Act, 1961, in addition to the profits already declared in the books.

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