Revenue's appeal against 12.5% profit estimation dismissed; Quantum of addition is a question of fact

Revenue’s appeal against 12.5% profit estimation dismissed; Quantum of addition is a question of fact

Issue

Whether a further reduction of disallowance on bogus purchases from 25% (set by CIT(A)) to 12.5% (set by ITAT) constitutes a “substantial question of law” under Section 260A for the High Court to intervene, especially when the Revenue had already accepted the CIT(A)’s reduction to 25%.

Facts

Original Assessment: The Assessing Officer (AO) treated certain purchases as bogus and made a 100% addition of the purchase value under Section 69C (Unexplained Expenditure).
First Appeal (CIT(A)): The Commissioner (Appeals) rejected the 100% addition but sustained an addition of 25% of the disputed purchases to cover potential profit leakage.
Revenue’s Stance: Crucially, the Revenue did not challenge the CIT(A)’s order reducing the addition to 25% before the Tribunal. This implied acceptance that the entire purchase value (100%) was not taxable.
Second Appeal (ITAT): The assessee appealed to the ITAT, arguing that even 25% was too high. The Tribunal further reduced the disallowance to 12.5%.
High Court Challenge: The Revenue then appealed to the High Court against the ITAT’s order, challenging the reduction from 25% to 12.5%.

Decision

Estimation is Factual: The High Court held that the determination of the profit rate (whether 25% or 12.5%) on bogus purchases is a matter of estimation based on facts, not a question of law.
Acquiescence: Since the Revenue was satisfied with the CIT(A)’s order (reducing addition to 25%) and did not file a cross-appeal, they had essentially accepted the principle that only a profit margin should be taxed, not the entire amount.
No Substantial Question of Law: The dispute between 25% and 12.5% is purely a question of quantum/estimation. Under Section 260A, an appeal lies only on a “substantial question of law.” Disputes over estimation rates do not qualify.
Ruling: The appeal filed by the Revenue was dismissed.

Key Takeaways

Question of Fact vs. Law: The specific rate of Net Profit (GP/NP rate) applied to bogus purchases is a “finding of fact.” High Courts generally do not interfere with factual findings of the ITAT unless they are perverse.

Revenue’s Acceptance: If the Revenue accepts a CIT(A) order reducing an addition (e.g., from 100% to 25%), it becomes difficult for them to later argue in the High Court that a further minor reduction by the ITAT is illegal.

The 12.5% Precedent: This judgment reinforces the trend where Tribunals and Courts often settle on a 12.5% profit rate addition for bogus purchases (where consumption is not disputed but the source is), assuming the assessee saved on VAT/taxes by buying from the grey market.

HIGH COURT OF BOMBAY

Principal Commissioner of Income-tax

Ravindra Bhaskar Deshmukh^*

M.S. Sonak and Advait M. Sethna, JJ.

IT APPEAL NO. 45 OF 2025

NOVEMBER 11, 2025

Akhileshwar Sharma for the Appellant.

ORDER

1. Heard Mr. Akhileshwar Sharma, the learned counsel for the Appellant.

2. Though the tax effect in this Appeal is only Rs.8,55,130/-. Mr. Sharma submits that the Appeal would be covered by the exceptions carved out under the CBDT circulars.

3. Without going into the issue now raised by Mr. Sharma, we have heard Mr. Sharma on the merits of the Appeal.

4. Mr. Sharma submits that in this case the Assessing Officer made an addition of 100% on account of bogus purchases. He submits that the ITAT has now reduced the same to 12.5%. Therefore, Mr. Sharma submitted that this Appeal should be admitted on the substantial questions of law formulated in the Appeal Memo.

5. Ordinarily, where the Assessing Officer has made an addition of 100% but the same is reduced by the Appellate Authority or the ITAT, we have admitted the Appeals. However, in this case, the addition of 100% made by the Assessing Office was reduced to 25% by the Commissioner of Income Tax (Appeals). This order of reduction was however never challenged by the Revenue before the ITA in this matter. It is only the Assessee who challenged the Commissioner (Appeal)’s order urging that the reduction should have been even greater.

6. In these circumstances, we do not think that the principle applied by us in admitting other Appeals would apply to the present Appeal.

7. If the Revenue was satisfied with the reduction up to 25% made by the Commissioner (Appeals), then, further the reduction up to 12.5% by the ITAT only gives rise to an issue of estimation. This cannot be regarded as a question of law much less a substantial question of law. In such circumstances, in fact, we have declined to admit the Appeals.

8. Accordingly, we dismiss this Appeal without any costs order as involving no substantial questions of law.