PCIT-2 Vs Refrigerated Distributors Pvt Ltd (Bombay High Court)
Bombay High Court has dismissed an appeal filed by the Principal Commissioner of Income Tax (PCIT-2) concerning the assessment of Refrigerated Distributors Pvt Ltd for the assessment year 2009-10. The Revenue’s appeal, which raised questions regarding the disallowance of alleged bogus purchases and the application of a profit rate, was dismissed by the High Court on the grounds that no substantial question of law arose from the facts of the case as litigated in the lower forums.
The dispute originated during the assessment of Refrigerated Distributors Pvt Ltd. The Assessing Officer had identified certain purchases as bogus but did not disallow the entire amount. Instead, the Assessing Officer estimated 25% of these alleged bogus purchases as gross profit and added this amount to the company’s income.
Refrigerated Distributors Pvt Ltd challenged this addition before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A), after reviewing the case, upheld the Assessing Officer’s decision to estimate the gross profit at 25% of the bogus purchases.
Subsequently, Refrigerated Distributors Pvt Ltd appealed the CIT(A)’s order before the Income Tax Appellate Tribunal (ITAT). The Tribunal, in its order dated January 13, 2017, provided partial relief to the company by reducing the estimated gross profit rate from 25% to 10% of the alleged bogus purchases.
Aggrieved by the ITAT’s decision to reduce the profit estimation, the Revenue filed an appeal before the Bombay High Court. The Revenue sought to argue that once purchases are found to be bogus, the entire amount should be disallowed, and the Tribunal erred in merely restricting the disallowance to a profit margin. The Revenue’s appeal to the High Court included substantial questions of law, questioning whether the Tribunal, having accepted the case involved bogus purchases, should have proceeded to determine a profit rate without confirming the full disallowance, without considering Section 69C of the Income Tax Act, 1961, and without considering the Gujarat High Court decision in N.K. Industries Ltd. Vs. Deputy Commissioner of Income Tax, against which the Supreme Court had dismissed a Special Leave Petition (N. K. Proteins Ltd. Vs. Deputy Commissioner of Income Tax).
However, during the hearing before the High Court, the judges reviewed the assessment order and the appellate orders of the CIT(A) and the ITAT. The High Court observed that from the initial assessment stage through to the Tribunal, the core issue under contention and adjudication was consistently the estimation of a certain percentage of the purchases towards gross profit, not the outright disallowance of the entire value of the alleged bogus purchases.
The High Court pointed out that the Assessing Officer himself had chosen to estimate the profit at 25% rather than disallowing the full purchase amount. Furthermore, the court noted that the Assessing Officer’s order was not subjected to revisional proceedings under Section 263 of the Income Tax Act by the Principal Commissioner, which would have been a potential course of action if the Revenue believed the assessment was erroneous and prejudicial to the interest of the Revenue due to the non-disallowance of the entire bogus purchase amount. This indicated that even the higher tax authorities at that stage had proceeded on the understanding that the addition was to be limited to a percentage of the purchases as profit.
Given that the sole issue consistently litigated and decided by the lower appellate authorities was the rate of profit estimation on the alleged bogus purchases, the Bombay High Court concluded that the Revenue’s appeal did not raise a substantial question of law that warranted adjudication by the High Court. The court found that the essence of the dispute throughout the appellate process was confined to determining an appropriate percentage for profit estimation, a factual exercise within the purview of the lower authorities.
Consequently, the Bombay High Court dismissed the Revenue’s appeal, stating that no substantial question of law arose in the circumstances of the case where the dispute was limited to the estimation of profit on the alleged bogus purchases.
Judicial Precedents:
The Revenue, in its grounds of appeal, had referenced the Gujarat High Court decision in N.K. Industries Ltd. Vs. Deputy Commissioner of Income Tax [(2016) 72 taxmann.com 289] and the subsequent dismissal of the Special Leave Petition by the Supreme Court in N. K. Proteins Ltd. Vs. Deputy Commissioner of Income Tax [(2017) 84 taxmann.com 195 (SC)]. These judgments are significant in the context of bogus purchases, as they have addressed the issue of whether the entire amount of bogus purchases should be added back to the income or only a profit element embedded in such purchases. The Supreme Court’s dismissal of the SLP in the N. K. Proteins Ltd. case is often cited to support the argument for 100% disallowance of proven bogus purchases.
However, the Bombay High Court in the present case did not delve into the merits of these precedents concerning the principle of 100% disallowance versus profit estimation. The court’s decision to dismiss the appeal was based on the procedural history of this specific case, highlighting that the fundamental issue of whether 100% of the purchases should be disallowed was not the subject matter of dispute before the CIT(A) or the ITAT. The court effectively ruled that since the Revenue itself had initially proceeded by estimating profit and the subsequent appeals only contested the rate of this estimation, the higher legal question of total disallowance was not live before it in this appeal.
This judgment underscores the importance of how the issues are framed and litigated at each level of the appellate process. While the Supreme Court’s stance in N. K. Proteins Ltd. provides a strong basis for arguing for full disallowance of bogus purchases, the Bombay High Court’s decision in this instance demonstrates that an appeal court may not entertain a legal question if it was not the actual subject of contest and decision by the lower appellate authorities.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. This Appeal for assesment year 2009-10 filed by the Appellant Revenue was admitted by this Court on 22 January 2025 on following substantial questions of law:-
“(i) Whether the Tribunal after accepting that this is a case of bogus purchases, could have proceeded to determine profit rate without confirming the disallowance of purchases, without considering the provisions of Section 69C of the Income Tax Act, 1961 and without considering the decision of the Gujarat High Court in the case of N.K. Industries Ltd. Vs. Deputy Commissioner of Income Tax, (2016) 72 taxmann.com 289 since the Special Leave Petition against the said decision was dismissed by the Hon’ble Supreme Court in case of N. K. Proteins Ltd. Vs. Deputy Commissioner of Income Tax, on 16 January 2017, (2017) 84 taxmann.com 195 (SC) ?
ii. On the facts and circumstances of the case and in law, the ITAT has erred in restricting the disallowance to profit margin on unproven purchases without considering the position of law established by the Hon’ble Apex Court in the case of N. K Proteins Ltd that 100% disallowance on bogus purchases is upheld ?
iii. On the facts and circumstances of the case and in law, the ITAT has erred in deleting the enhancement without giving opportunity to ld. CIT (A) of examining the additional evidence and thereby violating the principles of natural justice?”
2. Today this matter was listed along with the other connected matters. The Appeal was admitted on the premise that the assessing officer has made addition of 100% of the bogus purchases which was subsequently reduced by the Tribunal to 10% since based on such facts we had admitted other Appeals, even this Appeal came to be admitted. However, today on this matter being listed and after going through the assessment order and the appellate orders, we noticed that the assessing officer did not make addition of the entire bogus purchase but estimated only 25% of the bogus purchases towards gross profit.
3. On Appeal filed by the assessee before the Commissioner of Income Tax (Appeals), the Commissioner of Income Tax (Appeals) confirmed the gross profit addition estimated by the assessing officer at 25% in paragraph 6.9 of his order.
4. Being aggrieved by the Commissioner of Income Tax (Appeals) order, the Respondent assessee challenged the said order by filing an Appeal to the Tribunal and the Tribunal vide its order dated 13 January 2017 reduced the gross profit estimate to 10%.
5. In our view, right from the assessment stage till the impugned proceedings, the only issue involved was estimation of certain percentage of the purchases towards gross profit. The issue whether the entire purchases should have been added or not was not the subject matter right from inception but the only issue was estimation of certain percentage of profit. It is also important to note that the assessing officer’s order was not subject matter of revisional proceedings under Section 263 of the Act thereby they too proceeded on a footing that the addition should be restricted only to extent of 25% and not 100%. Since, the issue involved relates to only estimation of profit, in our view, no substantial question of law can be said to have arisen therefore, the Appeal filed by the revenue is dismissed.
