Net-profit estimation for waste-paper traders is a factual determination, not a substantial question of law.

The assessee, a Hindu Undivided Family engaged in trading waste paper and related scrap, challenged additions made by the Income Tax Department for the relevant assessment years.

For A.Y. 2010–11, the Assessing Officer completed assessment under Section 143(3) of the Income-tax Act, 1961, and disallowed 15% of the total purchases on the ground that the purchases were unverifiable, determining total income at ₹57,42,160 against the returned income of ₹8,02,130.

The CIT(A) found that the assessee purchased waste paper from small, largely unorganised vendors, in cash, without complete names, addresses or signed vouchers, but also noted that the sales and the nature of business were not disputed.

The CIT(A) consequently rejected the 15% disallowance and directed estimation of net profit at 3% of turnover, as against the disclosed rate of 2.68%.

The Tribunal affirmed the CIT(A)’s approach and dismissed both the Revenue’s appeal and the assessee’s cross-objection.

Tax Appeal No. 119 of 2020 concerned the similar issue for a subsequent assessment year.

Whether the Tribunal erred in sustaining an ad hoc disallowance or profit estimation when the Assessing Officer had allegedly not rejected the assessee’s books of account.

Whether the CIT(A) and the Tribunal were justified in estimating taxable profit at 3% of turnover or purchases instead of applying the lower profit rate adopted in earlier years.

Whether the Tribunal’s order was perverse or gave rise to a substantial question of law.

The Court applied the principle that estimation of net profit, where based on the nature of the business and the factual material on record, is ordinarily a question of fact and does not give rise to a substantial question of law.

It relied on Principal Commissioner of Income Tax v. Tayab Yunus Barudgar, in which the Court upheld estimation of profit in an analogous waste-paper trading business and accepted that, after rejection of books, profit should be reasonably estimated having regard to the business history and nature.

The judgment also referred to the principle in Commissioner of Income-tax-II v. Dhiraj R. Rungta that, after rejecting the books under Section 145(3), the Assessing Officer should determine a reasonable estimated profit rather than make further additions by relying on the same books.

The relevant statutory framework included Sections 143(3), 145(3) and 68 of the Income-tax Act, 1961, as discussed in the analogous precedent.

The Court accepted that the assessee’s purchases were inadequately verifiable because they were made from small vendors, largely in cash and without complete supporting particulars; nevertheless, the sales, stock particulars and the high-volume, low-margin character of the waste-paper trade were not disputed.

The CIT(A) had therefore rejected the excessive 15% purchase disallowance and adopted a profit-based estimation, increasing the disclosed net profit from 2.68% to 3% after considering the business model and comparable departmental assessments.

The Tribunal affirmed that factual determination by relying on the coordinate Bench decision in Tayab Yunus Barudgar, which had been approved by the High Court in identical circumstances.

The assessee’s alternative argument that the earlier 2% rate should necessarily be applied was also rejected because selecting the appropriate estimated profit rate involved appreciation of facts and did not constitute a question of law.

The High Court held that the Tribunal had committed no error of law in sustaining estimation of the assessee’s profit at 3% and that the challenge to the rate of estimation was essentially factual.

Tax Appeal Nos. 117 and 119 of 2020 were accordingly dismissed.