Bogus purchases: only profit element is taxable when sales are accepted and purchases are not conclusively disproved.

Where sales are accepted and purchase transactions are not conclusively disproved, alleged bogus purchases do not justify addition of the full purchase value as unexplained expenditure under section 69C of the Income-tax Act, 1961; only the profit element embedded in such purchases may be brought to tax. In this ITAT Mumbai decision, the assessee's books were audited, payments were made through banking channels, and sales were not disturbed, but independent evidence of supplier genuineness was lacking. On those facts, complete disallowance was held unwarranted and the addition was restricted to 8% of the disputed purchases, with the balance deleted.

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Issues: Whether the entire amount of alleged bogus purchases could be added as unexplained expenditure, or only the profit element embedded in such purchases was liable to tax.

Analysis: The disputed purchases were based on information from the Sales Tax Department regarding hawala dealers. The sales declared by the assessee were not disturbed, the books were audited, and payments were made through banking channels. At the same time, the assessee failed to produce transport records, delivery challans, confirmations, and other independent evidence to conclusively prove genuineness of the suppliers. The record also showed that the assessee had reversed VAT credit, and the appeal was being pursued by the legal heir after the assessee's death, with old records no longer traceable. In these circumstances, complete disallowance of the purchases was held to be unjustified, but some addition towards probable suppression of profit was warranted.

Conclusion: The addition was restricted to 8% of the disputed purchase amount, and the balance addition was deleted. The issue was therefore decided partly in favour of the assessee.

Ratio Decidendi: Where sales are accepted and purchase transactions are not conclusively disproved, alleged bogus purchases do not warrant addition of the entire purchase value under section 69C of the Income-tax Act, 1961, and only the profit element embedded in such purchases may be estimated for taxation.

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