Bogus jewellery purchases: full disallowance unsustainable where sales, stock and books were accepted; addition limited to profit element.

Disallowance of alleged bogus jewellery purchases was not to be made in full where the purchases were reflected in sales and closing stock, the quantitative details had been accepted by VAT authorities, and the books were not rejected under section 145(3) of the Income-tax Act. In that setting, the adjustment was confined to the profit element embedded in the disputed purchases, to be worked out on a reasonable basis. The income was to be recomputed by applying the average gross profit of the last five years, giving partial relief to the assessee.

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Issues: Whether the disallowance made on account of alleged bogus purchases of jewellery was sustainable in full, and whether the addition should instead be restricted to the gross profit element by recomputing income on the basis of the average gross profit of the last five years.

Analysis: The purchases in question were reflected in sales and closing stock, the quantitative details were accepted by the VAT authorities, and the books of account were not rejected by invoking section 145(3) of the Income-tax Act, 1961. In such a situation, the disallowance could not stand as a full purchase addition. The appropriate course was to confine the adjustment to the profit element embedded in the disputed purchases and to determine it on a reasonable basis.

Conclusion: The addition was not sustained in full. The Assessing Officer was directed to adopt the average gross profit of the last five years and recompute the income accordingly, resulting in partial relief to the assessee.

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