2022 (11) TMI 1563 - AT - Income Tax

Penalty under Section 271(1)(c) not leviable for ad-hoc bogus purchase disallowance; explanation failure not inaccurate income

Shri Poonam K. Prajapati Versus ITO – 19 (2) (5) Matrumandir Mumbai

Shri Poonam K. Prajapati Versus ITO – 19 (2) (5) Matrumandir Mumbai - TMI 1. ISSUES PRESENTED and CONSIDERED Whether penalty under section 271(1)(c) of the Income Tax Act can be sustained where additions are made on an estimated basis without proof of concealment or furnishing inaccurate particulars of income. Whether disallowance of purchases on an ad-hoc or estimated basis amounts to concealment of income or furnishing inaccurate particulars under section 271(1)(c). Whether penalty proceedings can be initiated and decided prior to final adjudication of the quantum of income under appeal. Whether reliance on information from external agencies (e.g., Sales Tax Department) to make additions and levy penalty is valid for sustaining penalty under section 271(1)(c). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Sustenance of penalty under section 271(1)(c) where additions are made on estimated basis Relevant legal framework and precedents: Section 271(1)(c) penalizes concealment of income or furnishing inaccurate particulars thereof. The principle established by judicial precedents is that mere estimation or ad-hoc additions do not automatically imply concealment or inaccurate particulars unless there is clear evidence of such concealment or misrepresentation. Court's interpretation and reasoning: The Tribunal observed that the Assessing Officer (AO) made additions by disallowing purchases alleged to be bogus based on information from the Sales Tax Department and without direct proof of concealment. The sales recorded in the books were not doubted. The AO applied best judgment assessment under section 144 r.w.s 147. The addition was on an estimated basis, initially at full value, later restricted to 25% profit element by the CIT(A), and further reduced to 9% by the Tribunal on quantum appeal. The Tribunal relied on jurisdictional High Court precedent holding that penalty under section 271(1)(c) cannot be levied when additions are made purely on an estimated or ad-hoc basis without proof of concealment or furnishing inaccurate particulars. Key evidence and findings: The AO's addition was based on information from an external agency; no direct evidence of concealment by the assessee was found. The assessee failed to produce evidence substantiating genuineness of purchases but the AO did not doubt sales. Application of law to facts: Since the addition was made on an estimated basis without proof of concealment or inaccurate particulars, penalty under section 271(1)(c) was not justified. Treatment of competing arguments: The Department contended that penalty was justified based on bogus purchases. The assessee argued that estimation of income does not amount to concealment. The Tribunal accepted the assessee's argument, emphasizing the absence of concealment or inaccurate particulars. Conclusion: Penalty under section 271(1)(c) cannot be sustained where additions are made on an estimated basis without evidence of concealment or furnishing inaccurate particulars. Issue 2: Whether disallowance of purchases on ad-hoc/estimated basis amounts to concealment or furnishing inaccurate particulars Relevant legal framework and precedents: The law requires that penalty under section 271(1)(c) be predicated on concealment or furnishing inaccurate particulars. Ad-hoc or estimated disallowances do not necessarily satisfy this threshold. Court's interpretation and reasoning: The Tribunal found that disallowance of purchases was ad-hoc and based on information from the Sales Tax Department. The AO did not find direct evidence that the assessee concealed income or furnished inaccurate particulars. The disallowance was a measure to estimate escaped income. Key evidence and findings: Notices to alleged bogus parties were returned undelivered, and the assessee failed to produce corroborative evidence. However, the AO accepted sales figures and only disallowed purchases provisionally. Application of law to facts: Since the disallowance was provisional and based on estimation, it did not amount to concealment or furnishing inaccurate particulars for penalty purposes. Treatment of competing arguments: The Revenue maintained that bogus purchases constituted concealment. The assessee argued that estimation does not equate to concealment. The Tribunal sided with the assessee. Conclusion: Disallowance of purchases on an ad-hoc or estimated basis does not amount to concealment or furnishing inaccurate particulars under section 271(1)(c). Issue 3: Whether penalty can be levied prior to final adjudication of quantum of income Relevant legal framework and precedents: Penalty proceedings under section 271(1)(c) are generally contingent on the final determination of income. It is a recognized principle that penalty should not be imposed before the quantum appeal is decided. Court's interpretation and reasoning: The Tribunal noted that the assessee was simultaneously contesting the quantum of addition before the CIT(A) and the Tribunal. The CIT(A) had restricted the addition to 25% profit element and the Tribunal further to 9%. The penalty was levied before the final quantum was settled. Application of law to facts: Since the quantum was under appeal and the addition was subject to reduction, penalty proceedings were premature and could not be sustained. Treatment of competing arguments: The Revenue argued penalty is independent. The assessee contended penalty cannot be decided before quantum. The Tribunal accepted the latter. Conclusion: Penalty under section 271(1)(c) cannot be sustained where the quantum of income is under appeal and not finally determined. Issue 4: Reliance on information from external agencies for levy of penalty Relevant legal framework and precedents: Information from external agencies such as Sales Tax Department can be a basis for initiating inquiries but penalty under section 271(1)(c) requires proof of concealment or furnishing inaccurate particulars by the assessee. Court's interpretation and reasoning: The AO relied on information from the Sales Tax Department regarding bogus purchases. The Tribunal observed that when penalty is levied solely on the basis of information from outside agencies without independent proof of concealment, such penalty is not sustainable. Key evidence and findings: Notices to alleged bogus parties were returned undelivered; the assessee did not substantiate the transactions but also did not furnish inaccurate particulars. Application of law to facts: Penalty cannot be sustained solely on information from external agencies without corroborative evidence of concealment by the assessee. Treatment of competing arguments: Revenue relied on external information to justify penalty. The assessee challenged the validity of penalty on this ground. The Tribunal agreed with the assessee. Conclusion: Penalty under section 271(1)(c) is not sustainable when levied solely on the basis of information from external agencies without proof of concealment or furnishing inaccurate particulars by the assessee.