2019 (2) TMI 232 - AT - Income Tax

Tribunal Cancels Penalty for Estimated Additions

M/s. National Tempo House Versus The Jt. Commissioner of Income Tax (OSD), Circle – 2, Pune

The Tribunal allowed the appeal, directing the Assessing Officer to delete the penalty imposed under section 158BFA(2) of the Income-tax Act, 1961. The ... Levy of penalty u/s 158BFA(2) - AO went through the seized documents and computed the valuation of stock as on the date of search / survey i.e. 28.02.1997 as undisclosed income - gross profit rate as applied on such stock found in search - whether assessee concealed nor furnished inaccurate particulars of income in the block return? - Held that:- In respect of evidence found during the course of search in the hands of assessee the addition has been made being the value of undisclosed stock and no penalty on the said addition has been levied in the hands of assessee. However, the gross profit rate which has been applied on such stock is independent of evidence found during the course of search and though addition has been made in the hands of assessee on such account but the said addition is purely estimated addition, which is further strengthened by the fact that starting from Assessing Officer, CIT(A) and the Tribunal, various GP rates have been applied to estimate the aforesaid addition No merit in the orders of authorities below that the addition is based on material found during the course of search. Undoubtedly, there was some material found during the course of search and additional income on that account was offered by the assessee and the same has been accepted by the Revenue Department but on that account, no penalty has been levied, since the conditions of section 158BFA(2) of the Act are not attracted. Further, on the estimated income, we find no merit in levying penalty under section 158BFA(2) - Hon’ble Bombay High Court in CIT Vs. Dodsal Ltd. (2008 (7) TMI 5 - HIGH COURT BOMBAY) has also laid down the proposition that levy of penalty under section 158BFA(2) of the Act is discretionary and not mandatory. In view thereof, we direct the Assessing Officer to delete penalty levied under section 158BFA(2) - Decided in favour of assessee. Issues Involved:1. Levy of penalty under section 158BFA(2) of the Income-tax Act, 1961.2. Estimation of gross profit rate on undisclosed stock.3. Discretionary nature of penalty under section 158BFA(2).Issue-wise Detailed Analysis:1. Levy of Penalty under Section 158BFA(2):The core issue in the appeal is the levy of penalty under section 158BFA(2) of the Income-tax Act, 1961. The assessee was penalized for an addition of Rs. 15,79,140 on account of undisclosed stock found during a search operation. The penalty was based on the difference between the undisclosed income declared by the assessee and the income assessed by the authorities. The assessee contended that the penalty was unjustified as the addition was based on varying estimates of gross profit.2. Estimation of Gross Profit Rate on Undisclosed Stock:During the search on 27.02.1997 and 28.02.1997, documents and stock were seized from the assessee's premises. The Assessing Officer (AO) applied a gross profit (GP) rate of 18% based on a partner's statement, which indicated a profit range of 15%-20%. This led to an assessed income of Rs. 51,66,000. The Tribunal later modified the GP rate to 20%, resulting in a net addition of Rs. 15,79,136. The assessee argued that the addition was merely an estimate and not based on concrete evidence, thus making the penalty untenable.3. Discretionary Nature of Penalty under Section 158BFA(2):The penalty under section 158BFA(2) is discretionary. The Tribunal noted that the penalty was imposed on the estimated GP rate applied to the undisclosed stock, not on the actual value of the additional stock found. The Tribunal referenced the Hon’ble Bombay High Court's decision in CIT Vs. Dodsal Ltd., which established that the levy of penalty under this section is discretionary. The Tribunal also cited the Hon’ble High Court of Rajasthan's ruling in CIT Vs. Dr. Giriraj Agarwal Giri, which held that no penalty should be imposed when the addition is based on estimation.Conclusion:The Tribunal concluded that the addition was based on estimated income and not solely on material found during the search. Therefore, the conditions for imposing penalty under section 158BFA(2) were not met. The Tribunal directed the AO to delete the penalty, allowing the assessee's appeal. The decision emphasized that penalties should not be levied on estimated additions, reinforcing the discretionary nature of section 158BFA(2).Order Pronouncement:The appeal of the assessee was allowed, and the order was pronounced on January 24, 2019.