2018 (9) TMI 2168 - AT - Income Tax

Penalty under s.271(1)(c) vacated where purchases unproved but no irrefutable evidence of concealed income despite additions in quantum proceedings

ITAT-MUMBAI held that the assessee's claim of purchases remained unproved but was not conclusively disproved by the revenue; absence of irrefutable ... Penalty u/s 271(1)(c) - failure on the part of the assessee to substantiate the veracity of the purchase transactions - HELD THAT:- We are of the considered view that as the claim of the assessee of having made the purchases from the aforementioned parties could not be proved by him to the hilt, thus the same had remained unproved on his part. We are of a strong conviction that as the failure on the part of the assessee to substantiate the veracity of the purchase transactions under consideration by leading evidence to the satisfaction of the AO had resulted into characterising of the same as an unproved claim, however as it falls short of a claim of purchases the authenticity of which had been conclusively disproved by the revenue on the basis of irrefutable evidence, hence no penalty on the said count could have validly been imposed in the hands of the assessee. We are of the considered view that as held in the case of CIT Vs. Upendra V. Mithani [2009 (8) TMI 1159 - BOMBAY HIGH COURT] no penalty can be imposed if the facts and circumstances are equally consistent with the hypothesis that the amount does not represent concealed income as with the hypothesis that it does. Rather, if the assessee comes up within an explanation which is unproved but not disproved, i.e. it is not accepted but circumstances do not lead to the reasonable and positive inference that the assesses case is false, then no penalty under Sec. 271(1)(c) would be liable to be imposed in the hands of the assessee. As in the case before us the claim of the assessee that it had made purchases from the aforementioned parties though could not be proved to the hilt on the basis of clinching evidence to the satisfaction of the A.O, as a result whereof the assessee had been made to suffer addition in the course of the quantum proceedings, however, as there is nothing discernible from the records which would show that the claim of the assessee of having made purchases from the aforementioned parties had been conclusively disproved by the revenue, thus no penalty under Sec. 271(1)(c) of the Act could have been imposed on him. Appeal filed by the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under section 271(1)(c) can be imposed where the assessing officer disallowed part of purchases as unsubstantiated/estimated but the assessee produced purchase bills, inventory records and bank evidence and the revenue has not conclusively disproved the genuineness of purchases. 2. Whether an addition made by estimation (12.5% of purchases) and based on non-production of specific documents (delivery challans, transport receipts, mode of transport) necessarily supports a finding of concealment or furnishing of inaccurate particulars attracting penalty under section 271(1)(c). 3. Whether facts equally consistent with two hypotheses-(a) transactions represent concealed income and (b) transactions are genuine but unproved-permit imposition of penalty under section 271(1)(c). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Imposition of penalty under section 271(1)(c) where purchases are disallowed but not conclusively disproved Legal framework: Section 271(1)(c) penalises concealment of income or furnishing of inaccurate particulars. The authorities must form a positive satisfaction of concealment or inaccuracy of particulars; mere disallowance in assessment is not conclusive of concealment. Precedent treatment: The Court follows the principle that penalty cannot be imposed where the assessee's explanation is unproved but not disproved and where facts are equally consistent with innocence, citing higher-court authority holding that penalty is inappropriate if circumstances do not lead to a reasonable and positive inference of falsehood. Interpretation and reasoning: The Tribunal examined the record and found the assessee produced purchase bills, inventory records and bank statements evidencing payments by account-payee cheques. The assessing officer required delivery challans, transport receipts and transport details which the assessee did not produce. The AO therefore estimated and disallowed 12.5% of purchases. The Tribunal reasoned that rejection of the assessee's evidence by the AO justified an addition but did not on the record amount to a conclusive disproof of the purchases. The absence of 'clinching' documentary proof led to an adverse inference for assessment purpose but did not establish a deliberate act of furnishing inaccurate particulars or concealment to the degree required for penalty. Ratio vs. Obiter: Ratio - Penalty under section 271(1)(c) cannot be imposed where the assessee's explanation is unproved but not disproved and the revenue fails to produce irrefutable evidence of fabrication or concealment; mere estimation or adverse inference for assessment does not automatically establish culpability for penalty. Obiter - Observations on the sufficiency of account-payee cheque payments as part of the evidence were persuasive but not determinative beyond the facts of the case. Conclusion: The Tribunal concluded penalty under section 271(1)(c) was not sustainable on the facts because the purchases, although unproved to the AO's satisfaction, were not conclusively disproved by revenue; penalty deleted. Issue 2 - Effect of estimation and non-production of specific documents on liability for penalty Legal framework: Estimation powers allow the AO to make additions where primary evidence is lacking, but imposition of penalty requires a separate satisfaction of concealment or furnishing inaccurate particulars beyond mere estimation. Precedent treatment: The Tribunal treated existing case law as establishing that an addition based on estimation does not ipso facto indicate mala fide conduct warranting penalty; the proper test is whether circumstances permit a reasonable and positive inference that the assessee's case is false. Interpretation and reasoning: The AO's reliance on non-production of delivery challans and transport receipts justified an estimate for quantum. However, the Tribunal emphasized that an estimating exercise stems from evidentiary deficiency rather than proof of fabrication. The presence of correlated sales in books and bank payments mitigated the inference of deliberate falsification. Therefore, estimation alone was insufficient to satisfy the mental element for penalty. Ratio vs. Obiter: Ratio - Estimation and non-production of documents that result in an addition do not, without more, sustain penalty under section 271(1)(c). Obiter - The Tribunal's acceptance that the AO may justifiably draw adverse inferences for assessment when specific documents are missing. Conclusion: The Tribunal held that the AO's estimated disallowance cannot be the sole basis for penalty; the penalty must be predicated on evidence of concealment/inaccuracy which was absent. Issue 3 - Application of the 'equally consistent hypotheses' principle to penalty cases Legal framework: Where facts support two explanations-one innocent and one culpable-penalty should not be levied unless revenue can establish the culpable explanation by reasonable and positive inference. Precedent treatment: The Tribunal applied the principle from higher-court authority that no penalty can be imposed if the facts are equally consistent with the hypothesis that the amount does not represent concealed income as with the hypothesis that it does. Interpretation and reasoning: On the record, the Tribunal found viable, non-disproved explanations (purchase bills, inventory and bank payments) that made the innocent hypothesis plausible. The absence of conclusive negative proof by revenue meant circumstances did not lead to a reasonable and positive inference of deliberate concealment. The Tribunal therefore applied the 'equally consistent hypotheses' test to deny penalty. Ratio vs. Obiter: Ratio - Where facts are equally consistent with innocence and guilt and revenue fails to produce conclusive evidence of falsehood, penalty under section 271(1)(c) cannot be sustained. Obiter - Commentary on the quality of evidence necessary to displace an assessee's unaccepted but not disproved explanations. Conclusion: The Tribunal applied the principle and concluded penalty was not warranted because the record did not permit a reasonable and positive inference that the purchases were fabricated; the penalty was deleted. Cross-references and Practical Outcome Cross-reference: Issues 1-3 are interlinked-failure to prove purchases (Issue 1) and reliance on estimation/non-production (Issue 2) were evaluated under the 'equally consistent hypotheses' principle (Issue 3), leading to the conclusion that penalty could not be imposed. Final disposition: Penalty under section 271(1)(c) was set aside because the assessing authority did not discharge the burden of conclusively disproving the assessee's explanations; the Tribunal allowed the appeal and deleted the penalty.