2025 (5) TMI 516 - AT - Income Tax

Penalty levied u/s 271(1)(c) - assessee claimed bogus purchases in its Return of Income in order to suppress taxable income - assessment order was passed u/s 143(3) r.w.s. 147 of the Act by disallowing 25% of the purchases from the concerns of Shri Rajendra Jain group - disallowance was restricted to 6% of the impugned purchase by the ITAT - HELD THAT - It is clear that 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 deleted by the CIT(A). As relying on SUBHASH TRADING COMPANY 1995 (11) TMI 37 - GUJARAT HIGH COURT and S.P. BHATT. 1973 (3) TMI 39 - GUJARAT HIGH COURT held that 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. Appeal of the revenue is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in these appeals revolve around the imposition and deletion of penalty under section 271(1)(c) of the Income-tax Act, 1961. Specifically, the issues are:

• Whether the penalty under section 271(1)(c) is justified on the facts where the assessee claimed bogus purchases in the return of income, thereby allegedly furnishing inaccurate particulars of income or concealing income.
• Whether the deletion of penalty by the Commissioner of Income-tax (Appeals) [CIT(A)] is erroneous, particularly in light of the decisions of the jurisdictional High Court in Commissioner of Income Tax vs. Subhash Trading Co. and Commissioner of Income Tax vs. S.P. Bhatt.
• Whether the penalty can be levied when additions to income are made on an estimated basis rather than on concrete proof of concealment or furnishing false particulars.
• Whether the Explanation 1 to section 271(1)(c), which presumes concealment or furnishing of inaccurate particulars unless rebutted, applies in the facts of the case, especially when the assessee has offered explanations found acceptable by the appellate authorities.
• Whether the Assessing Officer (AO) correctly applied the law and facts in levying penalty, and whether the CIT(A) erred in deleting the penalty.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legitimacy of Penalty under Section 271(1)(c) for Bogus Purchases

Relevant Legal Framework and Precedents: Section 271(1)(c) penalizes a person who conceals income or furnishes inaccurate particulars of income. Explanation 1 to this section creates a presumption against the assessee if no satisfactory explanation is offered. However, judicial precedents, including decisions by the jurisdictional High Court in Subhash Trading Co. and S.P. Bhatt, have clarified that penalty cannot be levied merely on estimated additions or where the explanation is satisfactory.

Court's Interpretation and Reasoning: The AO disallowed 25% of the purchases from certain entities linked to accommodation entries, based on a search and seizure operation under section 132 of the Act. The AO initiated penalty proceedings on the basis that these purchases were bogus, thus amounting to furnishing inaccurate particulars. However, the ITAT subsequently restricted the addition to 6% of the purchases, indicating the addition was on an estimation basis rather than conclusive proof.

Key Evidence and Findings: The search operation established that the entities involved were providing accommodation entries. The AO relied on this to disallow purchases and levy penalty. However, the ITAT's reduction of the addition to 6% reflects uncertainty and estimation rather than definitive concealment.

Application of Law to Facts: Since the additions were made on an estimated basis, the penalty under section 271(1)(c) cannot be sustained. The Explanation 1 presumption is rebutted by the ITAT's findings and the fact that books of account were not rejected. The CIT(A) rightly deleted the penalty on this ground.

Treatment of Competing Arguments: The revenue contended that the penalty is justified as the assessee claimed bogus purchases and suppressed income. The assessee argued that additions were estimated and that no penalty can be levied on estimated additions, relying on favorable High Court precedents. The Tribunal agreed with the assessee's submissions and the established legal position.

Conclusion: Penalty under section 271(1)(c) cannot be levied where the addition is on an estimated basis and the assessee has rebutted the presumption of concealment or furnishing inaccurate particulars.

Issue 2: Applicability of Jurisdictional High Court Decisions (Subhash Trading Co. and S.P. Bhatt)

Relevant Legal Framework and Precedents: The decisions of the jurisdictional High Court in Subhash Trading Co. and S.P. Bhatt have been cited by both parties. These cases held that penalty under section 271(1)(c) should not be imposed where additions are based on estimates or where the explanation is satisfactory.

Court's Interpretation and Reasoning: The Tribunal analyzed these precedents and found that they support the assessee's position. The revenue's reliance on these cases was misplaced as the decisions favored deletion of penalty in similar circumstances.

Key Evidence and Findings: The Tribunal noted that these decisions have been consistently followed by coordinate benches of the ITAT in Surat and Mumbai, reinforcing the principle that penalty cannot be levied on estimated additions.

Application of Law to Facts: The facts of the present appeals align with the principles laid down in these precedents, as the additions were estimated and the assessee's explanations were found acceptable.

Treatment of Competing Arguments: The revenue's argument that the penalty deletion is contrary to these decisions was rejected. The Tribunal clarified that these cases are in fact in favor of the assessee.

Conclusion: The Tribunal upheld the deletion of penalty in conformity with the jurisdictional High Court decisions.

Issue 3: Effect of Estimated Additions on Levy of Penalty

Relevant Legal Framework and Precedents: It is a well-settled legal principle that penalty under section 271(1)(c) cannot be levied solely on the basis of estimated additions. The Tribunal referred to multiple decisions including Yogendra Raj U Sanghvi, Deepak Banwarilal Agarwal, and Mun Gems vs. ACIT, which emphasize that estimation in assessment proceedings does not automatically attract penalty.

Court's Interpretation and Reasoning: The Tribunal reiterated that since the additions were made on estimation basis, the penalty could not be sustained. The presence of payments through account payee cheques and corresponding sales further weakened the basis for penalty.

Key Evidence and Findings: The AO's disallowance was based on an estimated percentage of purchases linked to accommodation entries. The ITAT's reduction of the addition to 6% confirmed the estimation nature of the addition.

Application of Law to Facts: The penalty was levied on the estimated addition, which is not permissible under the law. The Tribunal held that the CIT(A) rightly deleted the penalty.

Treatment of Competing Arguments: Revenue argued that since some addition was upheld, penalty should follow. The assessee argued that estimation negates penalty liability. The Tribunal sided with the assessee.

Conclusion: Penalty under section 271(1)(c) cannot be levied on estimated additions.

Issue 4: Validity of Notice and Procedural Aspects

Relevant Legal Framework and Precedents: The assessee raised objections regarding the clarity and validity of the penalty notice under section 274 read with section 271(1)(c). Proper initiation of penalty proceedings requires clear and valid notice specifying the applicable limb.

Court's Interpretation and Reasoning: The CIT(A) and Tribunal noted that the penalty proceedings were initiated properly and the assessee had opportunity to contest. However, since penalty was deleted on merits, the procedural objections became inconsequential.

Key Evidence and Findings: No specific procedural irregularity was found to vitiate the penalty proceedings.

Application of Law to Facts: The procedural compliance was met, but penalty deletion was on substantive grounds.

Treatment of Competing Arguments: The assessee's procedural objections were noted but did not form the basis for penalty deletion.

Conclusion: Procedural aspects did not affect the substantive conclusion on penalty deletion.

3. SIGNIFICANT HOLDINGS

"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 deleted by the CIT(A). The Hon'ble jurisdictional High Court in cases of Subhash Trading Co. and S.P. Bhatt has held that penalty u/s 271(1)(c) of the Act could not be levied where addition was on estimated basis."

"No adverse inference on the basis of quantitative analysis could be laid down by AO to establish the bogus purchase. The books of account were also not rejected. Hence, presumption under Explanation to Section 271(1)(c) stands rebutted. Therefore, penalty cannot be imposed."

"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."

Core principles established include:

• Penalty under section 271(1)(c) cannot be levied solely on estimated additions.
• The presumption under Explanation 1 to section 271(1)(c) can be rebutted by acceptable explanations and non-rejection of books of account.
• Judicial precedents from the jurisdictional High Court and coordinate benches of ITAT support deletion of penalty in cases involving estimated additions.

Final determinations on each issue resulted in dismissal of the revenue's appeals and upholding of the CIT(A)'s orders deleting the penalty. The assessee's cross objections were allowed accordingly.