Recorded sales and unverified third-party material did not justify taxing full turnover; only profit element was taxable.

Where sales are duly recorded in audited books and the books are not rejected, the entire turnover cannot be brought to tax merely on third-party information or doubts about the seller's VAT registration without adequate verification. The principle applied was that only the profit element embedded in such sales may be taxed, not the full sales amount. On the facts, the addition under section 68 was not sustained in full, and the matter was directed to be recomputed by applying a 9% gross profit rate.

---

---

Issues: Whether the addition made under section 68 in respect of sales recorded in the books of account was sustainable in full, or only the profit element embedded in such sales could be brought to tax.

Analysis: The assessed sales were recorded in the audited books and the books were not rejected. The addition was founded mainly on third-party information and a doubt about the seller's VAT registration, without adequate verification. The authorities relied on settled principle that where sales are accepted as recorded, the entire sales turnover cannot be assessed as income and only the profit element embedded in the sales may be taxed. On the facts, a gross profit rate of 9% was considered reasonable for recomputation.

Conclusion: The addition under section 68 was not sustained in full. The matter was directed to be recomputed by adopting a gross profit rate of 9%, which is in favour of the Assessee.

---