Ad hoc expense disallowance and bogus purchase additions: books not rejected, one supplier deleted, another restricted to profit element.

Ad hoc disallowance of business expenses was held unsustainable where the assessee produced books of account, vouchers, stock records, purchase details and bank statements, and the books were not rejected under section 145(3); the 5% disallowance was deleted. In the purchase dispute, the addition for one supplier was deleted because the transactions were supported by confirmations, invoices, stock records, assessment records and supplier response, with corresponding sales accepted. For the other supplier, where documentation was limited but sales were not doubted, the addition was confined to 2% of the purchase value as profit element. The result was partial relief, with some additions deleted and one restricted.

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Issues: (i) Whether the ad hoc disallowance of 5% of expenses was justified in the absence of rejection of books of account; (ii) Whether the addition on account of alleged bogus purchases from two suppliers was sustainable, and if so, to what extent.

Issue (i): Whether the ad hoc disallowance of 5% of expenses was justified in the absence of rejection of books of account.

Analysis: The assessee had furnished books of account, bills, vouchers, stock register, purchase details, and bank statements. The expenditure had been incurred through banking channels, and the books were not rejected under section 145(3) of the Income-tax Act, 1961. In these circumstances, an ad hoc percentage disallowance without rejecting the book results was not supportable.

Conclusion: The ad hoc disallowance was deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether the addition on account of alleged bogus purchases from two suppliers was sustainable, and if so, to what extent.

Analysis: In respect of one supplier, the purchases were supported by confirmations, invoices, stock records, balance sheet particulars, and the supplier's assessment record, and the corresponding sales were not doubted. The supplier's response to notice also confirmed the transactions, so the profit estimation addition could not be sustained. In respect of the other supplier, the assessee produced only limited documentation, though the corresponding sales were accepted. On those facts, the dispute was treated as one warranting addition only to the extent of profit embedded in the purchases, estimated at 2%.

Conclusion: The addition relating to one supplier was deleted, while the addition relating to the other supplier was restricted to 2% of the purchase value, resulting in a partial relief to the assessee.

Final Conclusion: The impugned additions were partly deleted and partly sustained, and the assessee obtained substantial but not complete relief.

Ratio Decidendi: An ad hoc disallowance of business expenditure cannot be sustained without rejection of the books of account, and in purchase disputes the addition must be confined to the facts proved, with full deletion where transactions are duly corroborated and only profit-element estimation where documentation is deficient but sales are accepted.

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