Revenue’s appeal against 12.5% profit estimation on bogus purchases dismissed; Estimation 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 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) 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.