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2025 (4) TMI 1621 - AT - Income TaxLevying penalty u/s 271(1)(c) - Estimation of income - bogus purchases - As alleged invalid penalty order in which the limb of levy of penalty u/s 271(1)(c) not mentioned - addition made on estimation basis - HELD THAT - As decided in Subhash Trading Co. 1995 (11) TMI 37 - GUJARAT HIGH COURT and Whitelene Chemicals 2013 (8) TMI 144 - GUJARAT HIGH COURT and Krishi Tyre Retreading Rubber Industries 2014 (2) TMI 21 - RAJASTHAN HIGH COURT have held that penalty u/s 271(1)(c) of the Act could not be levied where addition was on estimated basis. The Co-ordinate Bench in cases of Yogendra Raj U Sanghvi 2023 (10) TMI 1395 - ITAT SURAT Deepak Banwarilal Agarwal 2024 (2) TMI 1386 - ITAT SURAT have also held that no penalty is leviable on estimated addition. As decided in Mun Gems 2024 (1) TMI 209 - ITAT MUMBAI where AO treated entire purchase as bogus based on findings of Investigation Wing and levied penalty u/s 271(1)(c) since payment of purchase had been made through account payee cheques and there was corresponding sales ad hoc GP rate applied on alleged bogus purchases to factor in suppression of alleged gross profit could not be basis of levying penalty for furnishing of inaccurate particulars of income or concealing particulars of income. Since the facts are similar following the above decisions the AO is directed to delete the penalty levied u/s 271(1)(c) of the Act. Assessee appeal allowed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in these appeals are: (a) Whether the penalty under section 271(1)(c) of the Income Tax Act, 1961 can be validly levied when the addition to income is made on an estimated basis rather than on concrete or direct evidence of concealment or furnishing of inaccurate particulars of income. (b) Whether the penalty notice issued under section 274 read with section 271(1)(c) of the Act is valid when it does not specify the particular limb under section 271(1)(c) on which the penalty is sought to be levied. (c) The correctness and validity of the penalty order passed by the Assessing Officer (AO) and upheld by the Commissioner of Income-tax (Appeals) [CIT(A)] in light of the quantum of addition made on estimation basis and subsequent appellate decisions reducing the addition. 2. ISSUE-WISE DETAILED ANALYSIS Issue (a): Levy of penalty under section 271(1)(c) on estimated addition Relevant legal framework and precedents: Section 271(1)(c) of the Income Tax Act empowers the tax authorities to levy penalty where a person is found to have concealed particulars of income or furnished inaccurate particulars of income. However, the levy of penalty must be based on clear evidence of concealment or inaccurate particulars and not merely on estimated additions. The Tribunal and various High Courts have held that penalty cannot be levied where additions are made purely on an estimation basis without concrete evidence of concealment. Several precedents were relied upon by the appellant including:
These decisions uniformly establish that where the addition is made on an estimated basis, penalty under section 271(1)(c) is not leviable as the element of concealment or furnishing of inaccurate particulars is not satisfactorily established. Court's interpretation and reasoning: The Tribunal observed that the AO initially disallowed 25% of the purchases from the Rajendra Jain group as bogus, which was later restricted to 5% by the CIT(A) and further sustained at 6% by the ITAT. All these additions were made on an estimation basis. The penalty was levied on this estimated addition. The Tribunal noted that the Hon'ble jurisdictional High Courts and coordinate benches of the ITAT have consistently held that penalty under section 271(1)(c) cannot be levied on estimated additions. The Tribunal referred to the decisions cited by the appellant and also to a recent ITAT Mumbai decision in Mun Gems vs. ACIT, where penalty was not sustained on estimated additions despite the AO's findings of bogus purchases, because payments were made through account payee cheques and there was corresponding sales, making the basis of penalty unsustainable. Therefore, the Tribunal concluded that since the additions were on estimation basis and the element of concealment or furnishing inaccurate particulars was not conclusively established, the penalty levied under section 271(1)(c) was not justified. Key evidence and findings: The key factual matrix was that the additions were made on estimation basis after a search and seizure operation under section 132 of the Act on the Rajendra Jain group and related concerns. The AO disallowed 25% of purchases, CIT(A) reduced it to 5%, and ITAT sustained 6% addition. The penalty was levied on this estimated addition. The Tribunal found no direct evidence of concealment beyond the estimation. Application of law to facts: Applying the settled legal principle that penalty under section 271(1)(c) requires proof of concealment or furnishing inaccurate particulars and cannot be levied merely on estimated additions, the Tribunal held that the penalty was not sustainable. Treatment of competing arguments: The revenue argued that since the additions were sustained by the ITAT at 6%, penalty should also be upheld. The Tribunal rejected this argument, emphasizing the distinction between quantum of income and penalty proceedings, and the requirement of proof of concealment for penalty. The Tribunal relied on binding precedents to hold that estimated additions do not attract penalty. Conclusions: The penalty levied under section 271(1)(c) on estimated additions was deleted by the Tribunal. Issue (b): Validity of penalty notice issued under section 274 r.w.s. 271(1)(c) without specifying the limb of penalty Relevant legal framework and precedents: The procedural requirement under section 274 of the Act mandates that the penalty notice specify the grounds or limb under section 271(1)(c) on which penalty is proposed to be levied. Failure to specify the limb renders the notice invalid and vitiates the penalty proceedings. The appellant relied on various High Court and Tribunal decisions holding that a vague or incomplete penalty notice is invalid. Court's interpretation and reasoning: The CIT(A) dismissed the ground challenging the validity of the notice. However, since the Tribunal allowed the appeal on merit by deleting the penalty, it did not find it necessary to adjudicate this issue further, rendering it academic. Key evidence and findings: The appellant pointed out that the penalty notice did not specify the particular limb under section 271(1)(c). The CIT(A) rejected this contention. The Tribunal did not delve into this issue given its decision on the merit. Application of law to facts: Not applicable as the issue was not adjudicated due to the merit ruling. Treatment of competing arguments: The appellant raised the issue; the revenue opposed it. The Tribunal did not decide on this ground. Conclusions: The issue was left undecided as the penalty was deleted on merit. Issue (c): Validity of penalty order in light of appellate reductions in addition Relevant legal framework and precedents: It is well established that penalty under section 271(1)(c) can only be levied on the income or addition that is sustained or confirmed after appellate proceedings. If the addition is reduced or deleted, penalty cannot be levied on the disallowed or deleted portion. Court's interpretation and reasoning: The Tribunal noted that the AO initially disallowed 25% of purchases, CIT(A) reduced it to 5%, and ITAT sustained 6%. The penalty was levied on the AO's disallowance but upheld by CIT(A). The Tribunal held that penalty must be consistent with the addition finally sustained by the appellate authorities and since the addition was on estimation basis, penalty was not justifiable. Key evidence and findings: The appellate orders reducing the addition from 25% to 5% and sustaining 6% were key findings. The penalty was levied on the AO's addition. Application of law to facts: The Tribunal applied the principle that penalty must be based on sustained addition and not on the original disallowance. Since the sustained addition was on estimation basis, penalty was not sustainable. Treatment of competing arguments: Revenue argued for penalty on sustained addition; appellant argued penalty not sustainable on estimated addition. Tribunal sided with appellant. Conclusions: Penalty was not sustainable in light of appellate reductions and estimation basis of addition. 3. SIGNIFICANT HOLDINGS "It is now fairly well settled that in Income-tax proceedings, no penalty is leviable on addition made on estimated addition." "The additions all through have been made on estimation basis. The penalty u/s 271(1)(c) of the Act has been levied on the estimated addition by the AO, which has been sustained by the CIT(A)." "Following the above decisions, the AO is directed to delete the penalty levied u/s 271(1)(c) of the Act." Core principles established:
Final determinations:
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