2023 (10) TMI 1538 - AT - Income Tax

Penalty under section 271(1)(c) can't be sustained where additions made by estimate under section 144

Sanjay Kumar Choudhary HUF Versus The ITO, Ward-2 (3) (6), Surat

Sanjay Kumar Choudhary HUF Versus The ITO, Ward-2 (3) (6), Surat - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under section 271(1)(c) can be imposed where the impugned addition in the assessment is made by the Assessing Officer on estimate/best judgment basis under section 144 of the Act. 2. Whether findings from search/seizure material and admissions in third-party statements, when leading to an estimated addition, sustain a penalty for furnishing inaccurate particulars of income under section 271(1)(c). ISSUE-WISE DETAILED ANALYSIS Issue 1: Imposability of penalty under section 271(1)(c) where addition is made on estimation (section 144 assessment) Legal framework: Section 271(1)(c) penalises furnishing of inaccurate particulars of income or concealment of income. Section 144 authorises best-judgment assessment where books are unreliable or not furnished, permitting estimated additions. Precedent treatment: The Tribunal followed the coordinate-bench precedent holding that penalties under section 271(1)(c) cannot be levied when the additions are purely estimated. That line of authority treats levy of penalty on estimation as unsustainable. Interpretation and reasoning: The Court examined the assessment order passed under section 144 which rejected the books under section 145(3) and arrived at assessed income on a best-judgment basis by applying percentage-based commission rates to various turnovers to reach net business income. The Court noted that the impugned assessment and resulting addition were the product of estimation rather than precise, incontrovertible proof of understated income by the assessee. Given that the penalty provision contemplates deliberate furnishing of inaccurate particulars or concealment, the Court reasoned that an addition founded on estimation lacks the requisite factual specificity to sustain a penalty. Ratio vs. Obiter: Ratio - Where the assessment addition is purely estimated under section 144, penalty under section 271(1)(c) is not sustainable. The Court applied and followed the coordinate-bench precedent as binding on facts of estimation. No obiter on altering the statutory tests for penalty was made. Conclusion: Penalty under section 271(1)(c) deleted insofar as it is predicated on additions made on estimate/best-judgment assessment under section 144. Issue 2: Effect of search/seizure material and third-party admissions on sustaining penalty when the assessment addition is estimated Legal framework: Material seized during search (backups, electronic records) and statements recorded under oath can constitute incriminating material and may inform assessment and penal consequences; however, the standard for sustaining penalty under section 271(1)(c) requires proof that the assessee furnished inaccurate particulars or concealed income. Precedent treatment: The Tribunal did not distinguish prior authorities that permit reliance on independent material for making additions; rather, it confined the legal effect to the nature of the addition (estimated vs. proved) as determinative for penalty levied. Interpretation and reasoning: The Assessing Officer relied on search/seizure material and third-party admissions to conclude that accommodation entries were provided by a group and that the assessee's returns understated income by a quantified amount. Nevertheless, the assessment ultimately quantified income by estimation (best judgment), applying assumed commission rates and percentage deductions. The Court concluded that even where incriminating material exists, if the final assessed addition is arrived at by estimation rather than precise reconciliation against the seized data, the statutory requirement for imposing section 271(1)(c) penalty is not satisfied. Cross-reference: See Issue 1 - the decisive factor is that the addition was made under section 144 on estimation; the presence of seized material does not cure the infirmity for penalty purposes when assessment is estimated. Ratio vs. Obiter: Ratio - Existence of search/seizure material and third-party admissions does not validate imposition of penalty under section 271(1)(c) where the assessing authority's addition is purely an estimated one under section 144. Obiter - No general rule laid down on when seized material will convert an estimated addition into a proved concealment; facts determined outcome specific to estimation. Conclusion: The penalty cannot be sustained merely because of search/seizure material or third-party admissions where the assessment addition, on which the penalty rests, is made by estimation under section 144; accordingly, the penalty was deleted.