High Court dismisses Revenue appeal on 12.5% bogus purchase estimation; Quantum 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) gives rise to a “substantial question of law” under Section 260A for the High Court to intervene, particularly when the Revenue had already accepted the CIT(A)’s reduction to 25%.

Facts

Original Addition: 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) restricted the addition to 25% of the disputed purchases, reasoning that only the profit element should be taxed.
Revenue’s Stance: Crucially, the Revenue did not challenge this order of the CIT(A) before the Tribunal. This implied an acceptance that the entire purchase value (100%) was not taxable.
Second Appeal (ITAT): Only the assessee challenged the CIT(A)’s order, arguing that the 25% rate was still too high. The Tribunal (ITAT) agreed and further reduced the disallowance to 12.5%.
High Court Challenge: The Revenue then filed an appeal before the High Court against the ITAT’s reduction, arguing that the rate should have remained at 25%.

Decision

Estimation is Factual: The High Court held that the determination of the appropriate profit rate (whether 25% or 12.5%) to be applied to bogus purchases is a matter of estimation based on facts, not a question of law.
Effect of Acquiescence: Since the Revenue was satisfied with the CIT(A)’s order (reducing the addition to 25%) and did not file a cross-appeal at that stage, the dispute was narrowed down purely to the quantum of estimation.
No Substantial Question of Law: The Court ruled that a disagreement over the percentage of estimation does not constitute a “substantial question of law” required to invoke jurisdiction under Section 260A.
Ruling: The appeal filed by the Revenue was dismissed in favour of the assessee.

Key Takeaways

Question of Fact vs. Law: The specific Net Profit rate applied to bogus purchases is a “finding of fact.” High Courts generally do not interfere with the Tribunal’s factual findings regarding profit estimation unless they are perverse or lack any basis.

Revenue’s Acceptance: If the Department accepts a CIT(A) order that significantly reduces an addition (e.g., from 100% to 25%), it implicitly accepts the principle of taxing only the profit margin. It cannot later successfully argue in the High Court against a further marginal reduction by the ITAT.

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.