2023 (12) TMI 1462 - AT - Income Tax

Penalty under s.271(1)(c) cannot be imposed where income was estimated using a fair gross profit ratio against alleged bogus purchases

ITAT held that penalty under s.271(1)(c) could not be imposed where the assessing authority estimated income by applying a fair gross profit ratio to ... Penalty u/s 271(1)(c) - Estimation of income - Bogus purchases - HELD THAT:- No penalty can be imposed when the profit was estimated on the basis of fair gross profit ratio. See Whitelene Chemicals [2013 (8) TMI 144 - GUJARAT HIGH COURT] - Thus, imposition of penalty is hereby set aside - Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under section 271(1)(c) of the Income Tax Act is sustainable where the assessment addition challenged in appeal was made on the basis of an estimate (fair gross profit ratio) and subsequently reduced by the Tribunal to 12.5% of alleged bogus purchases. 2. Whether the First Appellate Authority's (CIT(A)) failure to consider the consequence of the Tribunal's earlier reduction of the addition (to an estimate-based figure) and the fact that the CIT(A)'s order was ex parte, precludes sustaining penalty under section 271(1)(c). 3. Whether, when the appellate order is ex parte, the matter should be remanded to the First Appellate Authority where the relevant facts and material necessary for deciding the penalty issue are already on record. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Sustainability of penalty under section 271(1)(c) when addition is estimate-based Legal framework: Section 271(1)(c) permits imposition of penalty where income has been concealed or inaccurate particulars furnished. Penalty normally depends on existence of concealment or deliberate furnishing of inaccurate particulars. Where addition is made by estimating income using fair gross profit ratio, the character of the addition as an estimate is material to the exercise of penalty powers. Precedent treatment: The Tribunal relied on decisions of High Courts (Rajasthan and Gujarat) and Tribunal precedents holding that penalty cannot be levied where additions are made on the basis of a fair gross profit estimate; such estimation does not necessarily establish concealment or furnishing of inaccurate particulars warranting penalty. Interpretation and reasoning: The Court examined the factual sequence - an original 100% addition for alleged bogus purchases, later restricted by the Tribunal to 12.5% based on an estimate of gross profit. The Tribunal reasoned that where the addition is essentially an estimate (as opposed to a finding of deliberate concealment supported by positive evidence), imposition of penalty is not justified. The Court relied on the principle that an estimate-based addition lacks the necessary finding of mens rea (concealment) required to sustain penalty under section 271(1)(c). Ratio vs. Obiter: The proposition that penalty cannot be imposed where additions are founded on an estimate of gross profit is treated as ratio by the Court for the facts at hand, since the decision turns directly on that legal principle and the reduction effected by the Tribunal. Conclusion: Penalty under section 271(1)(c) cannot be sustained where the impugned addition has been restricted to an estimate (12.5% on gross profit basis); the original levy of penalty is therefore unsupportable and must be set aside. Issue 2 - Effect of CIT(A)'s ex parte order and failure to consider Tribunal's estimate-based reduction Legal framework: Appellate authorities must consider relevant material on record and apply legal principles to the facts; an ex parte order can give rise to remand where the appellant was not at fault. However, remand is not automatic if the record already contains the material necessary to decide the matter on merits. Precedent treatment: Tribunal and High Court authorities have recognized that appellate fora should consider the effect of estimation-based additions on penalty even where an assessee did not fully engage with notices, provided the relevant facts and materials are on record. Interpretation and reasoning: The Court noted that the CIT(A) did not consider the effect of the Tribunal's restriction of the addition to an estimate (12.5%) when adjudicating penalty. Although the CIT(A)'s order was ex parte, the Court found that the necessary facts and material relevant to the penalty question were on record and could be adjudicated without remand. Thus, the failure of the CIT(A) to address the estimate-based nature of the addition rendered the penalty order unsustainable. Ratio vs. Obiter: The finding that a first appellate order's ex parte character does not mandate remand where the record suffices to decide the legal issue is applied as ratio on the facts; the Court treated consideration of the estimate-based reduction as determinative of the penalty question. Conclusion: CIT(A)'s failure to consider the Tribunal's earlier estimate-based reduction was a material omission; given the record, the penalty could be considered on merits by the Tribunal, and the penalty order must be set aside. Issue 3 - Whether to remand where appellate order is ex parte but material is on record Legal framework: Courts have discretion to remand issues to lower fora for fresh consideration if necessary to secure fair adjudication. Remand is not obligatory where the appellate court can resolve the dispute on the existing record and where remand would only multiply proceedings. Precedent treatment: The Tribunal acknowledged established practice of remanding ex parte appellate orders when assessee is not at fault, but also recognized authorities cautioning against remands where facts and material are on record and the appellate tribunal can decide the matter on merits to avoid multiplicity of proceedings. Interpretation and reasoning: The Court balanced the remedial purpose of remand against judicial economy. It held that because the relevant facts and materials bearing on the penalty question were already on the record, a remand was unnecessary; the Tribunal could hear the matter on merits and dispose of the appeal directly. Ratio vs. Obiter: The decision that no remand was required in these circumstances is applied as ratio for this case; it is a pragmatic application rather than a broad new rule. Conclusion: No remand to the First Appellate Authority was required; the Tribunal properly proceeded to decide the penalty issue on the record and allowed the appeal, setting aside the penalty. Overall Disposition The penalty imposed under section 271(1)(c) was set aside because the contested addition had been reduced by the Tribunal to an estimate based on gross profit (12.5%), and the First Appellate Authority failed to consider that reduction; consequently, the record did not support sustaining penalty for concealment or furnishing of inaccurate particulars.