2025 (6) TMI 1907 - AT - Income Tax

Penalty u/s. 271(1)(c) - defective notice u/s 274 - Allegation of no specific charge i.e. either for concealment of income or for furnishing of inaccurate particulars of income - disallowance of expenditure on account of Magazine and Journal - estimation of income - HELD THAT - Upon careful consideration we find considerable cogency in the contention of the ld. AR that penalty u/s. 271(1)(c) of the Act is not leviable since there is no specific charge either for concealment of income or for furnishing inaccurate particulars of income have been made while passing the assessment order passed u/s. 143(3) of the Act dated 28.3.2013 hence on the anvil of settled law on this issue as referred above the penalty in dispute does not survive and hence the same is deleted on this point of view. Further it could be seen from the assessment order that the Assessing Officer has made addition on ad hoc basis by disallowing 10% of the total expenses in the head Magazine and Journals treating the same unjustified and excessive and unreasonable. Ultimately the said addition was made on adhoc/estimate basis however the AO has tried to justify the same by comparing the similarly placed concern but the facts of that case has not been discussed at all. We noted that this issue is now covered by the decision of Technip Italy Spa 2015 (3) TMI 975 - ITAT DELHI wherein held penalty cannot be levied on an estimated income. Merely because books of the assessee were rejected and income was assessed on estimate basis it could not be held that the assessee was guilty of fraud or gross or wilful neglect for the purpose of levy of penalty u/s 271(1)(c). Also in Sangrur Vanaspati Mills Ltd. 2008 (2) TMI 285 - PUNJAB AND HARYANA HIGH COURT wherein it has been held that when addition has been made on the basis of estimate and not on account of any concrete evidence of concealment then penalty u/s 271(1) (c) cannot be levied Decided in favour of assessee.

Summary

Two core legal issues were considered by the Tribunal in this appeal: (1) whether the Assessing Officer (AO) had valid jurisdiction to levy penalty under section 271(1)(c) of the Income Tax Act, 1961, in the absence of a specific charge of concealment of income or furnishing inaccurate particulars in the assessment order; and (2) the validity of the penalty levied on the disallowance of expenditure claimed under the head "Magazine and Journal" on merits, particularly when the disallowance was made on an ad hoc or estimated basis.

Regarding the first issue of jurisdiction, the legal framework centers on the requirement under section 271(1)(c) that penalty proceedings must be initiated with a clear and specific charge-either concealment of income or furnishing inaccurate particulars of income. The Tribunal examined the assessment order dated 28/03/2013, which initiated penalty proceedings but did not explicitly specify the limb under section 271(1)(c) invoked. The assessee relied on binding precedents, including a Full Bench decision of the Bombay High Court and the Delhi High Court, which held that penalty notices or proceedings lacking specification of the limb under section 271(1)(c) are invalid. The Tribunal found that the AO's order merely referred generally to "furnishing of inaccurate particulars and concealment of income" without delineating the precise charge, thus failing to meet the statutory requirement. The Revenue did not dispute this factual position. Applying settled law, the Tribunal concluded that the penalty could not survive on this jurisdictional ground and accordingly deleted the penalty on this basis.

On the second issue concerning the merits of the penalty, the Tribunal analyzed the disallowance of Rs. 92,92,170/- made by the AO on account of "Magazine and Journal" expenses paid to a sister concern. The AO's disallowance was based on an ad hoc estimate of 10% of the total claimed expenditure of Rs. 9.29 crores, justified by comparing the assessee's expenses with those of a similarly placed sister concern and noting lack of evidence for actual utilization of magazines and journals. The AO treated the excess expenditure as unjustified, excessive, and unreasonable, leading to addition to income and penalty initiation.

The Tribunal scrutinized the AO's reasoning and found that the disallowance was essentially an estimate without concrete evidence of concealment or furnishing inaccurate particulars. The AO's comparison with another concern's trading results was not substantiated with turnover or detailed facts. The Tribunal referred to authoritative precedents, including an ITAT Delhi Bench decision and rulings of the Punjab and Haryana High Court, which consistently hold that penalty under section 271(1)(c) cannot be levied where additions or disallowances are based on estimates rather than proven concealment or inaccuracies. Specifically, the Tribunal cited the principle that mere estimation of income or expenses does not ipso facto imply furnishing inaccurate particulars or concealment to attract penalty. The Tribunal also noted that the disallowance had been reduced by the CIT(A) and ITAT on appeal, further underscoring the absence of wilful concealment.

The Tribunal applied these legal principles to the facts, emphasizing that the AO's ad hoc disallowance lacked the necessary evidentiary foundation to sustain penalty. It rejected the Revenue's contention that the excess expenditure was deliberately incurred and held that the penalty on this ground was not sustainable. The Tribunal accordingly deleted the penalty levied on the disallowance of "Magazine and Journal" expenses.

The Tribunal's analysis also addressed the contention regarding the initiation of penalty proceedings without specifying the limb under section 271(1)(c). It observed that the assessment order's vague reference to penalty proceedings was insufficient to meet the statutory mandate. The Tribunal relied on the Full Bench decision of the Bombay High Court and the Delhi High Court ruling, which established that a penalty notice must clearly specify whether it is for concealment of income or furnishing inaccurate particulars. This requirement ensures fairness and clarity in penalty proceedings. The Tribunal found the AO's failure to specify the charge fatal to the penalty's validity.

The Tribunal's significant holdings include the following verbatim excerpts which encapsulate its core legal reasoning:

"Upon careful consideration, we find considerable cogency in the contention of the ld. AR that penalty u/s. 271(1)(c) of the Act is not leviable, since there is no specific charge, either for concealment of income or for furnishing inaccurate particulars of income have been made while passing the assessment order passed u/s. 143(3) of the Act dated 28.3.2013, hence, on the anvil of settled law on this issue, as referred above, the penalty in dispute does not survive and hence, the same is deleted on this point of view."

"We noted that this issue is now covered by the decision of ITAT, Delhi Bench ... wherein it has been held ... penalty under s. 271(1)(c) of the Act cannot be levied on an estimated income ... merely because books of the assessee were rejected and income was assessed on estimate basis, it could not be held that the assessee was guilty of fraud or gross or wilful neglect for the purpose of levy of penalty under s. 271(1)(c) of the Act."

"In view of the aforesaid discussions and respectfully following the aforesaid precedents, the disallowance made by estimating the expenses on adhoc basis @ 10% is not sustainable, hence, in our considered view, the penalty on this disallowance deserve to be deleted."

"The order passed by the ITAT is based upon two decisions of this Court ... wherein it has been held that in order to attract clause (C) of section 271(1) of the Act, it is necessary that there must be concealment by the assessee of the particulars of his income or furnishing of inaccurate particulars of such income. The provisions of section 271(1)(c) of the Act are not attracted to cases where the income of an assessee is assessed on estimate basis and additions are made therein."

The Tribunal's final determinations were that the penalty under section 271(1)(c) could not be sustained on the jurisdictional ground of non-specification of the charge in the assessment order. Further, on merits, since the disallowance was made on an ad hoc estimated basis without concrete evidence of concealment or furnishing inaccurate particulars, the penalty was not justified. Consequently, the Tribunal allowed the appeal and deleted the penalty.