Profit element on disputed purchases only, as accepted sales prevented taxation of the full purchase value.

Where sales were accepted and only the purchases were doubted as unverified or from unaccounted sources, the entire purchase value could not be added under section 69C; only the profit element embedded in those purchases was taxable because taxing the gross amount would distort real income. Search material was treated as primary evidence and statements under section 132(4) as corroborative, so denial of cross-examination did not invalidate the addition, although the quantum still had to be confined to a reasonable profit estimate.

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Issues: Whether, where the declared sales were not disturbed and the purchases were alleged to be unverified or from unaccounted sources, the entire purchase amount of Rs. 22,50,000 could be added under section 69C of the Income-tax Act, 1961, or only the profit element embedded in such purchases was liable to tax; and whether denial of cross-examination of persons whose statements were relied upon vitiated the addition.

Analysis: The assessee was engaged in trading activity and the Revenue had not rejected the sales declared by the assessee. On that footing, the purchases corresponding to such sales could not be treated as wholly non-existent for tax purposes. Where sales are accepted and only purchases are doubted, the settled approach is to tax only the profit element embedded in such purchases and not the entire purchase value, since taxing the gross amount would be inconsistent with the computation of real income. The documentary material seized during search was treated as primary evidence, while the statements recorded under section 132(4) of the Income-tax Act, 1961 were only corroborative. In those circumstances, the absence of cross-examination did not invalidate the addition, but the quantum of addition still had to be restricted to a reasonable estimate of profit.

Conclusion: The entire alleged purchases could not be brought to tax under section 69C of the Income-tax Act, 1961, and the addition was to be restricted to the profit element embedded in the purchases.

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