2023 (10) TMI 440 - AT - Income Tax

Appeal successful as penalties cannot be based on estimated additions

The Tribunal allowed the appeal, finding that the penalty imposed under section 271(1)(c) for the assessment year 2010-11 was not justified as it was ... Penalty u/s 271(1)(c) - estimation of income - bogus purchases - addition is made in assessee’s case as a percentage of bogus purchases i.e. by applying 12.50% towards gross profit on the bogus purchases - main contention of the ld AR is that when profit is arrived at on an estimate basis there cannot be any levy of penalty for concealment of income - HELD THAT:- We notice that the coordinate bench in the case of ACIT vs. M/s. Fancy Diamonds India Pvt. Ltd. [2022 (6) TMI 1359 - ITAT MUMBAI] which has held that in case where the addition is made on estimated basis, the penalty u/s. 271(1)(c) of the Act is not leviable. Tribunal has relied on the decision of Krishi Tyre Retreading and Rubber Industries [2014 (2) TMI 21 - RAJASTHAN HIGH COURT] the decision of the Hon’ble Punjab & Haryana High Court in the case of CIT vs. Sangrur Vanaspati Mills Ltd. [2008 (2) TMI 285 - PUNJAB AND HARYANA HIGH COURT] and Subhash Trading Co. Ltd. [1995 (11) TMI 37 - GUJARAT HIGH COURT] on estimated basis, there cannot be any penalty levied. In assessee’s case the AO has made the addition by estimating the profit @ 12.50% on alleged bogus purchases for the reason that the assessee has spiked the purchase price in order reduce the profits and the said purchases made by the assessee from hawala parties. The penalty u/s. 271(1)(c) is levied by applying the minimum tax rate on the said estimated profits and therefore the ratio of the above decisions is clearly applicable in assessee’s case. We hold that penalty u/s 271(1)(c) of the Act cannot be levied where the addition is made on estimate basis and accordingly the penalty levied is hereby deleted. Appeal of assessee allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under section 271(1)(c) is leviable where the assessing officer has made an addition by estimating profit (applying a percentage on alleged bogus purchases). 2. Whether levy of penalty for concealment of income or furnishing inaccurate particulars can be sustained where the impugned addition is made on an estimate basis without conclusive documentary proof of non-genuine purchases. ISSUE-WISE DETAILED ANALYSIS Issue 1: Levy of penalty under section 271(1)(c) when addition is made on estimate basis Legal framework: Section 271(1)(c) penalizes concealment of income or furnishing inaccurate particulars of income. Assessing officers may make additions to income; such additions can be based on direct proof or on estimation when direct evidence is lacking. Precedent treatment: The Tribunal relied on prior judicial decisions holding that penalty under section 271(1)(c) is not leviable where the assessment addition is made on an estimated basis. The Tribunal treated those decisions as applicable and followed their ratio. Interpretation and reasoning: The Tribunal observed that the addition in the present matter was calculated by applying a fixed percentage (12.5%) of gross profit on alleged non-genuine purchases, i.e., an estimate rather than a conclusive determination of undisclosed income. The assessing officer also applied the minimum tax rate on that estimated profit to compute penalty. The Tribunal reasoned that when an assessing officer resorts to estimation for computing income, the element of deliberate concealment or furnishing of inaccurate particulars necessary to attract section 271(1)(c) is not established as a matter of law; estimation by its nature presumes uncertainty and lack of direct proof of intentional misstatement. Ratio vs. Obiter: The holding that penalty cannot be levied where additions are made on an estimate basis is applied as ratio in the decision, with reliance placed on prior authoritative decisions to the same effect. Remarks characterizing the assessing officer's methodology as estimation and the consequent inapplicability of penalty operate as core ratio. Any discussion of facts specific to the present assessee (e.g., mode of payments through banking channels) is incidental to the principal legal conclusion. Conclusion: Penalty under section 271(1)(c) is not sustainable where the assessment addition is made on an estimated basis; accordingly the penalty imposed was deleted. Issue 2: Applicability of penalty where factual material is inconclusive on genuineness of purchases Legal framework: Imposition of penalty for concealment or furnishing inaccurate particulars requires satisfaction of culpable conduct (concealment or inaccuracies) on the part of the taxpayer, established on evidence. Precedent treatment: The Tribunal referred to and followed appellate and High Court authorities that decline to uphold penalties when additions are founded upon estimation in circumstances lacking conclusive documentary proof of fraud or non-genuine transactions. Interpretation and reasoning: The Tribunal noted that the assessing officer's conclusion of non-genuine purchases was premised on information received from investigative authorities and absence of documentary confirmations, leading to an estimation of profit rather than a direct finding of concealed income. The assessee asserted maintenance of books and banked payments. Given that the addition was derived by applying an estimated profit rate to the alleged bogus purchases, the Tribunal found the necessary mental element and factual certainty to support a penalty were lacking. Ratio vs. Obiter: The application of the legal principle that estimation-based additions without conclusive proof do not justify penalty is treated as the operative ratio. Observations concerning the nature of the information received by the assessing officer and the assessee's procedural conduct (e.g., lack of submissions before the appellate authority) are secondary and do not underpin the principal legal conclusion. Conclusion: Where factual material is insufficient to convert an estimated addition into a finding of concealment or furnishing of inaccurate particulars, penalty under section 271(1)(c) cannot be sustained; deletion of penalty is warranted. Cross-reference The conclusions on both issues are interlinked: the Tribunal's central reasoning is that estimation-based additions (applied here as 12.5% gross profit on alleged bogus purchases) preclude a legally tenable imposition of penalty under section 271(1)(c), and earlier judicial precedents to that effect were followed.