2021 (4) TMI 375 - AT - Income Tax

Penalty deleted for estimation-based income assessment, highlighting need for concrete evidence in penalty proceedings.

Income Tax Officer – 25 (1) (1), Mumbai Versus M/s. Samrat Exports

The penalty imposed under Section 271(1)(c) of the Income Tax Act was deleted by the Appellate Tribunal as the income was assessed on an estimation basis ... Penalty levied u/s. 271(1)(c) - disallowance to an extent of 12.5% of the non-genuine purchases - HELD THAT:- It is a settled position of law that penalty cannot be levied when an adhoc estimation is made. In this case Assessing Officer treated purchases of ₹.15,47,764/- as non-genuine. However, the Ld.CIT(A) considering the evidences held that actual purchases made by the assessee from various parties is only ₹.8,44,064/- and directed to apply profit element of 12.5% on the non-genuine purchases. Similar view has been taken by the Hon'ble Delhi High Court in the case of CIT v. Aero Traders Pvt. Ltd.. [2010 (1) TMI 32 - DELHI HIGH COURT] wherein the Hon'ble High Court affirmed the order of the Tribunal in holding that estimated rate of profit applied on the turnover of the assessee does not amount to concealment or furnishing inaccurate particulars. In the case on hand the Assessing Officer treated purchases as non-genuine. Ld.CIT(A) considering the evidences restricted the disallowance to an extent of 12.5% on the non-genuine purchases - CIT(A) following various judicial pronouncements deleted the penalty levied by the Assessing Officer. No infirmity in the order passed by the Ld.CIT(A) in deleting the penalty u/s. 271(1)(c) of the Act levied by the Assessing Officer for the Assessment Year. Grounds raised by the revenue are rejected. Issues Involved:1. Deletion of penalty levied under Section 271(1)(c) of the Income Tax Act.2. Treatment of purchases as non-genuine and subsequent disallowance.3. Basis for estimation of profit element on non-genuine purchases.4. Applicability of penalty on income assessed on estimation basis.Detailed Analysis:1. Deletion of Penalty Levied Under Section 271(1)(c):The core issue in this appeal concerns the deletion of the penalty imposed under Section 271(1)(c) of the Income Tax Act. The Assessing Officer had levied a penalty of Rs. 35,512/- on the grounds that the assessee furnished inaccurate particulars of income and concealed its income. However, the Learned Commissioner of Income Tax (Appeals) [Ld.CIT(A)] deleted the penalty, reasoning that the disallowance was based on an estimation of Gross Profit on the purchases. The Appellate Tribunal upheld the Ld.CIT(A)'s decision, reiterating that penalty cannot be levied when the income is assessed on an estimation basis.2. Treatment of Purchases as Non-Genuine and Subsequent Disallowance:The assessee, engaged in the business of manufacturing and exporting readymade garments, had filed a return of income declaring Rs. 4,67,935/- for the A.Y. 2007-08. The assessment was reopened, and the income was reassessed at Rs. 39,28,870/-. The Assessing Officer treated purchases worth Rs. 15,47,764/- as non-genuine based on information from the DGIT (Investigation), Mumbai, which suggested that the assessee received accommodation entries without actual purchases. The Ld.CIT(A) later determined that the actual purchases amounted to Rs. 8,44,064/- and restricted the disallowance to 12.5% of these non-genuine purchases.3. Basis for Estimation of Profit Element on Non-Genuine Purchases:The Tribunal noted that the Assessing Officer had made an ad-hoc estimation of profit on the non-genuine purchases. The Ld.CIT(A) directed the application of a 12.5% profit element on these purchases. This approach was consistent with the decision in the case of Shri Deepak Gogri v. Income Tax Officer, where it was held that there was no concealment of income or furnishing of inaccurate particulars since the profit element was determined by ad-hoc estimation. The Tribunal emphasized that such estimations do not justify the imposition of penalties.4. Applicability of Penalty on Income Assessed on Estimation Basis:The Tribunal referenced multiple judicial precedents to support the view that penalties under Section 271(1)(c) cannot be imposed when income is assessed on an estimation basis. In the case of DCIT v. Manohar Manak, Alloys Pvt. Ltd, it was determined that penalties are unsustainable when additions are made purely on an estimated basis without concrete evidence. The Hon'ble Punjab & Haryana High Court in Harigopal Singh v. CIT and the Hon'ble Delhi High Court in CIT v. Aero Traders Pvt. Ltd. also held that estimated assessments do not amount to concealment or furnishing of inaccurate particulars, thereby invalidating penalties in such scenarios.Conclusion:The Tribunal concluded that the Ld.CIT(A) was correct in deleting the penalty levied under Section 271(1)(c) since the disallowance was based on an estimation of profits on non-genuine purchases. The appeal by the revenue was dismissed, affirming that penalties cannot be imposed when income is assessed on an estimation basis. The decision highlights the importance of concrete evidence over estimations in penalty proceedings under the Income Tax Act.