2024 (1) TMI 1500 - HC - Income Tax

Final ruling upholds 6% disallowance for sham purchases (reduced from 12.5%), finding no substantial question of law

HC upheld the ITAT's estimation treating purchases as sham/bogus, noting the Tribunal's 6% disallowance (reduced from 12.5%) was based on material and ... Estimation of income - bogus Purchases - purchases are sham transactions fabricated through bogus concerns - ITAT estimating the addition in respect of bogus purchases @6% - HELD THAT:- Tribunal are based on material before it and after analysing the facts and figure available before it. When the Tribunal has thought it fit to reduce the disallowance at 6% from 12.5%, the Tribunal had before it the facts which were duly analysed by it. No interference is called for in the said conclusion and findings of the Tribunal in the present appeal by this court. No substantial questions of law. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether, on the facts and in law, the Tribunal was justified in estimating addition in respect of alleged bogus/accommodation purchases at 6% of such purchases instead of sustaining a 100% disallowance made by the Assessing Officer. 1.2 Whether reliance by the Tribunal on the coordinate-bench/High Court approach (reducing disallowance to a percentage of disputed purchases) and specifically adopting 6% instead of 5% (as in an earlier High Court direction) was legally correct and open to the Tribunal on the facts of the case. 1.3 Whether the substantial questions of law raised by the Revenue were already answered by existing coordinate-bench and High Court decisions such that no substantial question of law arises warranting interference with the Tribunal's order. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reducing disallowance for alleged bogus purchases to 6% instead of 100% Legal framework: Reassessment under section 147 read with assessment under section 143(3) permits addition of unexplained/unaccounted transactions where purchases are found to be accommodation entries or non-genuine. Tax liability should, however, reflect the income element rather than the entire value of a disputed transaction where only the benefit component is taxable. Precedent Treatment: The Tribunal and appellate authorities in related matters have applied a principle of taxing only the income/benefit component by making a percentage-based addition (variously 5%, 6%, 12.5% in different fact scenarios). A coordinate-bench decision adopting 6% and certain High Court decisions adopting 5% have been relied upon. Interpretation and reasoning: The Tribunal analyzed the assessee's declared gross profit and net profit, the nature of evidence produced (invoices, bank statements, stock registers, audit report), and material from search proceedings against the supplier-group indicating provision of accommodation entries. It concluded that taxing the entire purchase value would be excessive and that a smaller percentage approximating the benefit derived would prevent revenue leakage while reflecting the income element. Given the assessee's low GP (0.78% in comparable case facts), the Tribunal found 6% to be a fair and reasonable estimate of the income component in the present circumstances, after considering prior determinations (including reductions from higher percentages by the Commissioner and Tribunal in similar matters). Ratio vs. Obiter: Ratio - the principle that where purchases are found to be accommodation entries the tax authorities should quantify only the income component and may reasonably estimate it as a percentage of disputed purchases; the Tribunal's adoption of 6% as an estimation based on factual matrix is a binding conclusion for the case. Obiter - general observations about appropriateness of other percentages in other fact patterns are not binding beyond the facts. Conclusions: The Tribunal's reduction of disallowance to 6% was upheld as a legitimate fact-driven exercise of evaluative judgment to approximate the taxable benefit. Interference was not warranted where the Tribunal considered the assessor's findings, documentary material, and comparative profit levels to arrive at a reasoned percentage. Issue 2 - Reliance on prior decisions (5% vs 6%) and correctness of adopting 6% Legal framework: Administrative and adjudicatory bodies may follow precedents of coordinate benches and higher courts but must apply them to the facts of the case. Where precedent prescribes a percentage in specific factual settings, subsequent authorities may follow, distinguish, or adapt that ratio depending on material differences in facts (e.g., gross profit rates, turnover, nature of evidence). Precedent Treatment: The Tribunal and the Court relied on coordinate-bench and High Court decisions which reached different percentage-based estimates (notably 5% in a High Court decision and 6% in another coordinate-bench decision). The impugned Tribunal expressly followed a coordinate-bench decision applying 6% and noted similarity of facts with other decisions (including one favouring the assessee involving the same supplier-group). Interpretation and reasoning: The Court recognized that the earlier High Court decision reducing additions to 5% arose on particular factual matrices (e.g., GP of 1.03% on a certain turnover). The Tribunal, however, was confronted with facts (GP and net profit figures, turnover, and the scale of disputed purchases) that differed; hence it followed a coordinate-bench decision adopting 6% which it found factually analogous. The Court emphasized that the Tribunal's use of a percentage is a factual estimation exercise and that where the Tribunal has reasonably analyzed figures and preceding decisions, adopting 6% rather than 5% was permissible. Ratio vs. Obiter: Ratio - adjudicators may depart from a fixed percentage applied in earlier decisions if material factual distinctions justify a different estimate; following a coordinate-bench decision that matches the factual matrix is lawful. Obiter - general preference for any specific percentage across all cases is not established; percentages are to be applied contextually. Conclusions: Reliance on the coordinate-bench decision adopting 6% was appropriate because the Tribunal found no change in law or fact to distinguish that decision and identified factual parity. The Tribunal was not bound to rigidly apply a 5% figure from a different High Court decision where facts differed materially; hence adoption of 6% was legally permissible. Issue 3 - Whether the substantial questions of law are already answered, precluding interference Legal framework: A substantial question of law may not arise for adjudication where earlier coordinate-bench or High Court decisions have already conclusively addressed the legal issue on materially similar facts; appellate intervention is limited where the Tribunal's order follows established precedents and rests on record-based evaluation. Precedent Treatment: The Court noted prior coordinate-bench rulings and High Court decisions addressing the same legal issue and the same supplier-group involved in accommodation-entry allegations. The Tribunal explicitly followed the coordinate-bench approach and those decisions were considered dispositive for the present appeal. Interpretation and reasoning: The Court found that the substantial questions of law framed by the Revenue replicated issues already answered by prior decisions on identical or similar facts. The Tribunal's reliance on those decisions, combined with the absence of distinguishing material or contrary evidence from the Revenue, meant that no novel substantial question of law arose to warrant interference. The Court recorded that the Tribunal had evaluated material and reasons for reducing the disallowance and that the appellate scrutiny did not reveal legal error. Ratio vs. Obiter: Ratio - where a tribunal follows binding or persuasive precedent on identical facts and no distinguishing material is presented, a higher court will not entertain a fresh substantial question of law; such questions are treated as already answered. Obiter - comments about the comparative merits of differing precedents remain non-decisive where precedent parity exists. Conclusions: The Court concluded that the substantial questions of law proposed by the Revenue were already answered by existing decisions and the Tribunal's reasoned application of those decisions; accordingly, no substantial question of law remained for adjudication and the appeal was dismissed. Cross-references and Practical Implication Where alleged bogus/accommodation purchases are established, authorities should seek to quantify the taxable benefit rather than tax the entire transaction value; percentage-based additions are an accepted method but must be founded on case-specific facts (profit margins, turnover, documentary evidence). Coordinate-bench and High Court decisions on similar factual matrices are controlling for subsequent adjudication absent distinguishing facts or legal error.