2024 (12) TMI 1573 - AT - Income Tax

Penalty levied u/s 271(1)(c) - Sales Tax Department has proved beyond doubt that parties declared as hawala traders were involved in providing accommodation entry of purchases and the assessee was one of the beneficiary of accepting accommodation entry - CITA(A) deleted penalty Levy - Tribunal had for the Assessment Year 2009-2010 restricted the addition made in the hands of the Assessee to 2% of alleged bogus purchases HELD THAT - We note that the CIT(A) deleted the penalty inter alia on the ground that penalty levied on ad-hoc estimated income cannot be sustained. During the course of hearing the Learned Authorised Representative for the Appellant has placed on record the order passed by the Co-ordinate Bench of the Tribunal in the case of the Assessee for the Assessment Year 2012-13 and 2011-12 2024 (10) TMI 1656 - ITAT MUMBAI wherein it was held by the Tribunal that penalty levied on gross profit estimated on ad-hoc basis was not justified and could not be sustained. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

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

(a) Whether the deletion of penalty under Section 271(1)(c) of the Income Tax Act, 1961 (the Act) by the CIT(A) was erroneous, given that the Sales Tax Department had established that the parties declared as hawala traders were involved in providing accommodation entries and that the assessee was a beneficiary of such bogus purchases.

(b) Whether the penalty under Section 271(1)(c) was rightly deleted despite the assessee's failure to produce day-to-day quantity tally of purchases, sales, stocks, and corresponding values, or to produce the parties for verification despite opportunities provided by the Assessing Officer (AO).

(c) Whether the CIT(A) erred in deleting the penalty ignoring judicial precedents which hold that purchases from bogus suppliers warrant disallowance of purchases at a certain percentage and that penalty is leviable on additions made on account of bogus purchases.

(d) Whether the CIT(A) erred in deleting the penalty ignoring the settled legal position that once penalty proceedings under Section 271(1)(c) are invoked, there is no further onus on the AO to establish mens rea, and the onus shifts to the assessee to prove bonafide nature of claims.

(e) Whether the appeal by the Revenue is maintainable under the exception clause of the CBDT Circular No.5 of 2024.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a), (b) and (c): Validity of deletion of penalty under Section 271(1)(c) on account of additions made on estimated basis arising from bogus purchases

The relevant legal framework involves Section 271(1)(c) of the Act, which penalizes furnishing inaccurate particulars of income or concealment of income. The penalty is generally levied at 100% of the tax sought to be evaded.

Precedents cited by the Revenue include decisions from the Hon'ble Bombay High Court and Gujarat High Court holding that when purchases are from bogus suppliers, disallowance of purchases at a certain percentage is justified and penalty can be levied on the basis of such additions.

However, the Tribunal's interpretation, supported by a coordinate bench decision in the assessee's own case for Assessment Years 2011-12 and 2012-13, emphasized that additions made purely on an estimated or ad-hoc basis do not sustain penalty under Section 271(1)(c). The Tribunal relied on multiple High Court decisions (Rajasthan, Punjab & Haryana, Gujarat) which held that penalties are not leviable on additions made on estimation without concrete evidence of concealment or furnishing inaccurate particulars.

Key evidence includes the fact that the addition for the year under consideration was restricted by the Tribunal to 2% of the alleged bogus purchases, which themselves were estimated figures rather than precise quantifications. The CIT(A) deleted the penalty on the ground that penalty levied on ad-hoc estimated income cannot be sustained.

The Tribunal noted that the AO's addition was based on estimation and that the penalty was levied on the tax sought to be evaded on this estimated addition. The Tribunal found no justification for imposing penalty on such estimated additions, following the principle that penalty under Section 271(1)(c) requires definite findings on concealment or furnishing inaccurate particulars, not mere estimation.

The Tribunal also referred to a detailed order of a coordinate bench which analyzed similar facts and concluded that penalty under Section 271(1)(c) is not leviable on additions made on estimated basis, citing various judicial precedents to that effect. The Tribunal adopted this view as binding and applicable.

Regarding the Revenue's argument that the Sales Tax Department had proved involvement of hawala traders and accommodation entries, the Tribunal observed that the penalty was levied only on the basis of estimated additions and not on any concrete evidence of concealment. The Tribunal thus gave precedence to the principle that penalty cannot be sustained on estimated income.

The competing arguments by the Revenue about the failure of the assessee to produce records or parties for verification were considered but not found sufficient to uphold penalty since the penalty itself was based on estimated additions without concrete proof of concealment.

Issue (d): Onus of proof and mens rea in penalty proceedings under Section 271(1)(c)

The Revenue contended that once penalty proceedings are invoked, there is no further onus on the AO to establish mens rea (guilty mind) and that the assessee must prove bonafide nature of claims, citing a Supreme Court decision.

The Tribunal found this ground to be infructuous in the present facts because the penalty was levied on estimated additions rather than on established concealment or furnishing inaccurate particulars. The principle that the assessee must prove bonafide does not override the settled legal position that penalty cannot be levied on mere estimated additions.

Issue (e): Maintainability of appeal under CBDT Circular

The Revenue raised maintainability of the appeal under the exception clause of the CBDT Circular No.5 of 2024. The Tribunal did not find this ground to affect the merits of the case and dismissed it as general in nature without further elaboration.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"It is an accepted legal position that penalty under section 271(1)(c) of the Act levied on additions made merely on estimations is unsustainable."

"There is no definite finding on the quantum of concealment of income. The entire addition right from assessment stage to the Tribunal was merely on estimations."

"When income of assessee was determined on estimation basis, then no penalty under section 271(1)(c) could be imposed for concealment and furnishing inaccurate particulars."

"Penalty levied on gross profit estimated on ad-hoc basis was not justified and could not be sustained."

"We respectfully relied on the order of the co-ordinate bench in case of Fancy Diamonds India Pvt Ltd (supra). We set aside the impugned appeal order and direct to delete the penalty levied U/s 271(1)(c) of the Act amount to Rs. Rs.1,71,492/-."

Core principles established include:

- Penalty under Section 271(1)(c) cannot be sustained on additions made purely on an estimated or ad-hoc basis without concrete evidence of concealment or furnishing inaccurate particulars.

- The burden of proof and requirement of mens rea are relevant, but penalty cannot be imposed if the addition itself is not definite and is based on estimation.

- Judicial precedents from various High Courts and coordinate benches reinforce the principle that estimated additions do not attract penalty under Section 271(1)(c).

Final determinations:

- The penalty of Rs.1,44,633/- levied under Section 271(1)(c) for the Assessment Year 2009-10 was rightly deleted by the CIT(A).

- The Tribunal declined to interfere with the deletion of penalty and dismissed all grounds raised by the Revenue.

- Grounds relating to failure to produce records and invocation of mens rea were dismissed as either covered by the principle regarding estimated additions or as infructuous.

- The appeal filed by the Revenue was dismissed in entirety.