Bogus purchase additions limited to profit element where sales are accepted and stock records support the purchases.

Where sales are accepted and the purchases are recorded in the stock register with supporting books, an addition for alleged non-genuine purchases cannot be made on the entire purchase value. The tax consequence is confined to the profit element embedded in such purchases, because the dispute concerns the source and genuineness of the purchases rather than the existence of sales. On that basis, a 100% addition was held unsustainable and, in the factual context of diamond trading and the declared gross profit rate, the addition was restricted to 2% of the alleged non-genuine purchases, partly in favour of the assessee.

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Issues: Whether the addition made on account of alleged non-genuine purchases could be sustained at 100% of the purchase value, or whether it should be restricted to a reasonable profit element.

Analysis: The assessee produced books of account and supporting material, and the purchases were reflected in the stock register with corresponding sales being accepted. The dispute, therefore, was not about the existence of sales but about the source and genuineness of the purchases. Even where purchases are treated as suspicious or from an undisclosed source, only the profit element embedded in such purchases can be brought to tax. A 100% addition was found to be irrational and unsustainable, particularly in a diamond trading business. Considering the declared gross profit rate and the comparable factual context, the addition was restricted to 2% of the alleged non-genuine purchases.

Conclusion: The addition was not sustained at 100% and was instead restricted to 2% of the alleged non-genuine purchases; the issue was decided partly in favour of the assessee.

Ratio Decidendi: In cases of alleged bogus purchases where sales are accepted and the purchases are reflected in the stock records, only the profit element embedded in the purchases can be taxed, not the entire purchase value.

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