2023 (10) TMI 1395 - AT - Income Tax

Penalty u/s 271(1)(c) - Estimation of income on Bogus purchases - in quantum assessment before Tribunal the disallowances / additions of impugned purchase were restricted to 5% - HELD THAT - We find that ultimately the addition was restricted to 5% being average profit ratio in the industry. Such disallowance was restricted by following decisions of various benches of Tribunal and by following some decisions of jurisdictional High Court. In our considered view the addition was ultimately restricted by Tribunal on ad hoc to the extent of average profit ratio. We find this combination in Nazar Impex P Ltd 2022 (7) TMI 119 - ITAT SURAT while considering the similar contentions of the parties on levy of penalty on similar estimated additions of similar purchase deleted the similar penalty u/s 271(1)(c) by taking view that no penalty is leviable on estimated additions. While deleting the similar penalty we followed the decision of jurisdictional High Court in Vijay Proteins Limited 2015 (1) TMI 828 - GUJARAT HIGH COURT . No justification in levying the penalty by assessing officer on the additions of bogus purchase which were ultimately restricted on estimation average of profit in the similar business. Thus the assessee succeeds.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the notice issued under section 274 read with section 271(1)(c) of the Income Tax Act, 1961, was valid in the absence of a specific charge clearly specifying whether the penalty proceedings were initiated for concealment of income or for furnishing inaccurate particulars of income;

(b) Whether penalty under section 271(1)(c) is leviable on additions made on an ad hoc or estimated basis, particularly when the disputed additions were ultimately restricted by the Tribunal to 5% of the disputed purchases;

(c) Whether the findings of the Tribunal regarding bogus purchases and consequent additions constitute a definite finding of fact sufficient to sustain penalty under section 271(1)(c), or whether such findings amount to guesswork;

(d) The correctness of the penalty levied by the Assessing Officer and upheld by the Commissioner of Income Tax (Appeals) in light of the above issues.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Validity of the Penalty Notice under Section 274 r/w 271(1)(c)

Relevant legal framework and precedents: The provisions of section 271(1)(c) impose penalty for concealment of income or furnishing inaccurate particulars thereof. The initiating notice under section 274 must specify the nature of the charge, i.e., whether it is for concealment or furnishing inaccurate particulars. Precedents relied upon by the assessee include Mohd. Farhan A Shaikh Vs DCIT, PCIT Vs Basanti Property (P) Ltd, CIT Vs SSA's Emerald Meadow, and Paresh Surathiya Vs ITO, which emphasize the requirement of a valid notice specifying the precise charge.

Court's interpretation and reasoning: The Tribunal noted that the notice issued by the Assessing Officer did not strike off the inappropriate portion and failed to specify whether the penalty proceedings were initiated for concealment of income or furnishing inaccurate particulars. The assessment order also lacked a specific charge. The assessee contended that in the absence of a specific charge, the penalty proceedings are vitiated and the order is void ab initio.

Key evidence and findings: The copy of the notice under section 274 r/w 271(1)(c) dated 09.03.2015 and the assessment order were examined, showing absence of clear specification of charge.

Application of law to facts and treatment of competing arguments: While the assessee argued invalidity of the notice, the Tribunal did not expressly decide on this issue as the appeal succeeded on other grounds. The issue was rendered academic due to the findings on the penalty leviability on estimated additions.

Conclusion: The Tribunal did not adjudicate this issue finally but noted the deficiency in the notice. However, since the appeal succeeded on the second issue, this point was not determinative.

(b) Levy of Penalty on Estimated/Ad hoc Additions

Relevant legal framework and precedents: Section 271(1)(c) penalty is leviable when there is concealment of income or furnishing inaccurate particulars. However, various judicial precedents, including Manish Dhiraj Lal Munjal Vs ACIT, ITO Vs Bomayawala Readymade Stores, Nazar Inmex Pvt Limited Vs ITO, and ACIT Vs Shivam Project, have held that penalty is not leviable on estimated or ad hoc additions as such additions do not conclusively establish concealment or inaccurate particulars.

Court's interpretation and reasoning: The Tribunal observed that the Assessing Officer initially made an addition of Rs. 7.15 Crore (100% of disputed purchases) on account of bogus purchases. On appeal, the CIT(A) restricted the addition to 5% of the entire turnover, and subsequently the Tribunal further restricted it to 5% of the disputed purchases, representing an estimated average profit ratio in the industry.

The Tribunal emphasized that such estimated additions are ad hoc and do not conclusively prove concealment or furnishing of inaccurate particulars. It relied on the binding decision of the jurisdictional High Court in Vijay Proteins Limited Vs CIT, which held that no penalty is leviable on estimated additions.

Key evidence and findings: The Tribunal relied on the quantum assessment orders, appellate orders, and the final restriction of additions to 5% of disputed purchases. It also noted consistent judicial pronouncements against penalty on estimated additions.

Application of law to facts and treatment of competing arguments: The Revenue contended that the Tribunal's finding of bogus purchases was a definite finding of fact, not guesswork, and thus penalty was justified. The Tribunal rejected this contention by clarifying that the ultimate addition was restricted on an ad hoc basis and hence no penalty could be sustained on such additions. The Tribunal followed the precedent in Nazar Impex Pvt Ltd (supra), where penalty was deleted on similar grounds.

Conclusion: The Tribunal held that penalty under section 271(1)(c) cannot be levied on ad hoc or estimated additions and accordingly deleted the penalty levied on the additions of bogus purchases that were restricted to 5% of disputed purchases.

(c) Nature of Tribunal's Findings on Bogus Purchases and Their Sufficiency for Penalty

Relevant legal framework and precedents: For penalty under section 271(1)(c), there must be a finding of concealment or furnishing of inaccurate particulars based on clear evidence. Mere estimation or guesswork does not suffice. The Tribunal's findings must be definite and based on material.

Court's interpretation and reasoning: The Tribunal acknowledged that the Revenue argued that the Tribunal's finding of bogus purchases was definite. However, since the additions were ultimately restricted to an ad hoc percentage (5%), the Tribunal concluded that the additions were not based on conclusive evidence but on an estimation reflecting average profit margins.

Key evidence and findings: The sequence of orders restricting the additions from 100% to 5% of disputed purchases was critical. The Tribunal noted that the final figure was an estimate, not a precise quantification of concealed income.

Application of law to facts and treatment of competing arguments: The Tribunal gave precedence to the principle that penalty cannot be levied on estimated additions, regardless of the Tribunal's factual findings of bogus purchases. The Revenue's submission that the findings were not guesswork was rejected on the basis that the penalty must be linked to conclusive concealment, which was not established.

Conclusion: The Tribunal concluded that the findings on bogus purchases, while upheld, did not justify penalty on the basis of estimated additions.

(d) Correctness of Penalty Levy and Upholding of CIT(A) Order

Relevant legal framework and precedents: Section 271(1)(c) penalty requires satisfaction that concealment or furnishing inaccurate particulars has occurred. The validity of penalty depends on the nature of additions and the procedural correctness of notice and proceedings.

Court's interpretation and reasoning: The Assessing Officer levied penalty at 100% of the tax sought to be evaded based on the addition of Rs. 2,98,97,701/-, which was 5% of the disputed purchases as per CIT(A)'s order. The CIT(A) upheld the penalty. However, the Tribunal, on further appeal, restricted the additions to 5% of disputed purchases and held that penalty on such estimated additions is not sustainable.

Key evidence and findings: The Tribunal relied on the assessment order, CIT(A) order, and its own quantum order restricting additions. It also noted that the assessee did not file a reply to the show cause notice, but procedural lapses in notice issuance were also noted.

Application of law to facts and treatment of competing arguments: The Tribunal balanced the procedural defects in notice issuance and the substantive issue of penalty on estimated additions. It found that penalty was unsustainable on the restricted addition and deleted the penalty accordingly.

Conclusion: The Tribunal allowed the appeal, deleted the penalty under section 271(1)(c), and did not find justification for penalty on ad hoc additions.

3. SIGNIFICANT HOLDINGS

"Thus, we find that ultimately the addition was restricted to 5% being average profit ratio in the industry. Such disallowance was restricted by following decisions of various benches of Tribunal and by following some decisions of jurisdictional High Court."

"In our considered view the addition was ultimately restricted by Tribunal on ad hoc to the extent of average profit ratio."

"In view of the binding decision of jurisdictional High Court, which otherwise have followed in many cases, therefore, respectfully following the same, we do not find any justification in levying the penalty by assessing officer on the additions of bogus purchase, which were ultimately restricted on estimation average of profit in the similar business."

"Considering the fact that assessee succeeds on his secondary submission, therefore adjudication on other submissions has become academic."

Core principles established include:

- A penalty under section 271(1)(c) cannot be sustained on additions made on an estimated or ad hoc basis, even if the additions relate to bogus purchases.

- The validity of a penalty notice under section 274 requires clear specification of the charge, either concealment of income or furnishing inaccurate particulars; absence of such specification may vitiate penalty proceedings.

- Findings of fact by the Tribunal must be definite and based on conclusive evidence to sustain penalty; estimated additions do not meet this threshold.

Final determinations:

- The penalty levied under section 271(1)(c) on additions restricted to 5% of disputed purchases was deleted.

- The appeal by the assessee was allowed on the ground that penalty is not leviable on estimated additions.