Bogus Purchases: Bombay High Court To Examine If ITAT Can Limit Disallowance To Profit Margin

The Bombay High Court has recently admitted an Income Tax Appeal filed by the Department and will examine the correct approach to disallowance in cases involving bogus purchases.

A Division Bench of Justice M S Karnik and Justice S.M. Modak, by an order dated February 5, 2026, admitted the Revenue's appeal against Chandrakant L. Nishar

The Court recorded the submission of the Revenue's counsel that although the tax effect appeared to be less than Rs.2 crore, the appeal fell within an exception to the monetary limits, and that similar appeals had already been admitted. The Bench accordingly admitted the appeal

The Court framed the following substantial questions of law:

First, whether the tribunal, after accepting that the case involved bogus purchases, could have proceeded to determine a profit rate without confirming the disallowance of purchases, without considering the provisions of Section 69C of the Income Tax Act, 1961 (which deals with unexplained expenditure and permits such spending to be treated as income if the source is not satisfactorily explained), and without considering the decision of the Gujarat High Court in N.K. Industries Ltd. v. Deputy Commissioner of Income Tax (2016), since the Special Leave Petition against that decision was dismissed by the Supreme Court in N.K. Proteins Ltd. v. Deputy Commissioner of Income Tax on January 16, 2017

Second, whether, on the facts and circumstances of the case and in law, the ITAT erred in restricting the disallowance to the profit margin on unproven purchases without considering the position of law established by the Supreme Court in N.K. Proteins Ltd., where 100% disallowance on bogus purchases was upheld

The appeal has been admitted and will now proceed for further consideration.

For Appellant: Advocate Suresh Kumar Advocate