2024 (2) TMI 1552 - AT - Income Tax

Penalty levied u/s. 271(1)(c) - Estimation of income - bogus purchases made by the assessee from various hawala parties - FAA restricted the addition to 5% of the alleged bogus purchase - HELD THAT - As relying on M/s. V. K. Ispat Alloys 2023 (2) TMI 1058 - ITAT MUMBAI penalty u/s. 271(1)(c) of the Act cannot be levied where the addition has been made on estimate basis on the gross profit on alleged bogus purchase. We therefore direct the ld. A.O. to delete the impugned penalty levied u/s. 271(1)(c) of the Act. Appeal filed by the assessee is allowed.

Summary

The core legal question considered in this appeal is whether penalty under section 271(1)(c) of the Income Tax Act, 1961 can be levied where additions to income have been made on an estimated basis, particularly in the context of alleged bogus purchases.

The issue arises from the penalty imposed on the assessee for furnishing inaccurate particulars and concealment of income, based on additions made by the Assessing Officer (AO) on account of alleged bogus purchases from certain entities. The AO had made additions totaling Rs.2,47,45,023/- on the basis that these purchases were accommodation entries. The Commissioner of Income Tax (Appeals) (CIT(A)) reduced the addition to 5% of the amount, but upheld the penalty calculated on the quantum of income addition confirmed by it.

Relevant legal framework includes section 271(1)(c) of the Income Tax Act, which empowers the tax authorities to levy penalty for concealment of income or furnishing inaccurate particulars. The question of levy of penalty when additions are made on an estimated basis has been dealt with in various judicial precedents, which were heavily relied upon by the assessee.

The Court examined the facts that the AO had disbelieved the genuineness of purchases from three entities, holding them to be bogus and controlled by certain groups. The assessee had maintained books of accounts, purchase and sales registers, and filed supporting documents such as invoices, ledger extracts, payment proofs, bank statements, and PAN/VAT details. However, these were rejected by the AO. The CIT(A) moderated the addition to 5% of the alleged bogus purchases, indicating a recognition of estimation rather than exact quantification.

The assessee's authorized representative argued, relying on a series of coordinate bench decisions, that penalty under section 271(1)(c) cannot be levied when the addition is made on an estimated basis. The decisions cited include cases where the Tribunal held that the penalty is not leviable if the addition is not based on concrete evidence but on estimation or approximation.

A key precedent extracted and relied upon was from a coordinate bench decision in M/s. V. K. Ispat & Alloys, which held as follows:

"It is evident that the said addition made in the case of the assessee pertains to the addition made on bogus purchase on estimated basis... The Tribunal has relied on the decision of the Hon'ble Rajasthan High Court in CIT vs. Krishi Tyre Retreading and Rubber Industries, the Hon'ble Punjab & Haryana High Court in CIT vs. Sangrur Vanaspati Mills Ltd., and the Hon'ble Gujarat High Court in CIT vs. Subhash Trading Co. Ltd., all reiterating the proposition that penalty under section 271(1)(c) cannot be levied where addition is made on estimated basis."

The Tribunal in that case noted that the AO had made additions based on a percentage of gross profit and VAT, which was further restricted by the CIT(A), thereby confirming the estimated nature of the addition. Consequently, the penalty was deleted.

In the present case, the Court found the facts analogous. The AO's addition was based on the disallowance of purchases alleged to be bogus, but the CIT(A) reduced the addition to 5%, effectively treating it as an estimate rather than a precise quantification of concealed income. The Court observed that the penalty was levied on the quantum of addition confirmed by CIT(A), which was itself an estimate.

The Court applied the legal principle from the precedents that penalty under section 271(1)(c) is not leviable when additions are made on estimated basis, as the element of furnishing inaccurate particulars or deliberate concealment is not established beyond doubt. The Court treated the competing arguments by the Revenue, which sought to uphold the penalty, as untenable in light of the settled legal position.

Accordingly, the Court held that the penalty under section 271(1)(c) could not be sustained in the facts of the case and directed the Assessing Officer to delete the impugned penalty.

Significant holdings include the explicit reliance on the principle that penalty under section 271(1)(c) is not leviable where additions are made on estimated basis. The Court stated:

"We hereby hold that the penalty u/s. 271(1)(c) of the Act cannot be levied where the addition has been made on estimate basis on the gross profit on alleged bogus purchase."

This establishes a core principle that estimation-based additions do not automatically attract penalty unless there is clear evidence of concealment or furnishing inaccurate particulars. The final determination was the deletion of the penalty levied on the assessee for the Assessment Year 2011-12.