2019 (10) TMI 1623 - AT - Income Tax

Addition reduced to 12.5% of disputed purchases; penalty under section 271(1)(c) deleted after profit estimate to plug leakage

ITAT reduced the addition to 12.5% of disputed purchases and deleted the penalty under section 271(1)(c). The tribunal found no dispute that purchases ... Penalty imposed u/s 271(1)(c) - estimation of income on bogus purchases - Tribunal restricted the addition to 12.5% of the disputed purchases HELD THAT:- What the assessee failed to prove is the source of purchase of goods. Otherwise, there is no dispute with regard to the fact that the assessee had purchased the goods, though, may not be from the declared source but from some other source. The failure on the part of the assessee to prove the source of purchases could be for various reasons, which, in some cases may even turn out to be valid. Thus, in such circumstances, once the probable leakage of revenue has been taken care of by estimating the profit, there is no need to penalize the assessee any further by imposing penalty under section 271(1)(c) of the Act. More so, when the addition has been finally made on estimate basis. In view of the aforesaid, we have no hesitation in deleting the penalty imposed under section 271(1)(c) of the Act - Assessee’s appeal is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under section 271(1)(c) is imposable where the assessment addition arises from estimation of profit on disputed purchases rather than a finding of non-existence of transactions or deliberate concealment. 2. Whether penalty quantum under section 271(1)(c) requires revision where the taxable addition on quantum appeal is restricted to a lesser amount by the Tribunal. 3. Whether failure to prove the source of purchases, when purchases themselves are not disputed and payments passed through banking channels and goods entered in stock register, constitutes concealment of income or furnishing of inaccurate particulars within the meaning of section 271(1)(c). ISSUE-WISE DETAILED ANALYSIS Issue 1: Levy of penalty where addition is based on estimation Legal framework: Section 271(1)(c) penalizes concealment of income or furnishing inaccurate particulars of income. The power to impose penalty is contingent on satisfaction that there was concealment or inaccuracy, not merely an assessment addition. Precedent Treatment: The assessee relied on authorities addressing levy of penalty where additions were by estimation; those decisions were cited to support the proposition that estimation-based additions do not automatically equate to concealment. The Tribunal considered its prior quantum order which estimated profit at 12.5% rather than wholly disallowing purchases. Interpretation and reasoning: The Tribunal observed that departmental authorities did not dispute that sales occurred, payments were made through banking channels, and purchases were recorded in stock register. The Tribunal concluded that the factual matrix supported purchase of goods albeit from an undeclared/grey market and that accommodation bills were used to regularize purchases for VAT reasons. Because the addition at final stage was an estimate of profit to safeguard revenue leakage, the Tribunal reasoned that such estimation addressed the potential revenue shortfall and did not necessarily reflect deliberate concealment or furnishing of inaccurate particulars by the assessee. Ratio vs. Obiter: Ratio - Where the assessment addition is limited to an estimated profit on purchases (in circumstances where transactions, payments and stock entries exist), imposition of penalty under section 271(1)(c) is not warranted because the element of concealment or furnishing inaccurate particulars is not established. Obiter - Observations that failure to prove source of purchases may be for valid reasons and that grey-market procurement to save VAT can explain accommodation bills. Conclusions: Penalty under section 271(1)(c) cannot be sustained solely on an estimation-based addition addressing possible leakage of revenue when the basic fact of purchase is not disputed and there is no positive finding of deliberate concealment or inaccurate particulars. Issue 2: Revision of penalty quantum where taxable addition is reduced on appeal Legal framework: Penalty under section 271(1)(c) is consequential on the tax effect; where the quantum of addition is altered by appellate authority, the basis and amount of penalty require adjustment to reflect the corrected taxable income. Precedent Treatment: The Tribunal applied its own quantum determination in the penalty appeal, recognizing that penalty must correspond to the validated addition. Interpretation and reasoning: The Tribunal noted the Assessing Officer imposed penalty on the original addition of Rs. 38,80,265, but the Tribunal's quantum order restricted the addition to profit estimated at 12.5% of disputed purchases. Accordingly, the Tribunal held that the penalty, insofar as it related to the higher disallowed amount, had to be revised. However, having concluded that no penalty was warranted on the estimated addition (see Issue 1), the Tribunal deleted the penalty entirely rather than merely proportionally reducing it. Ratio vs. Obiter: Ratio - A penalty founded on a disallowance must be reassessed in light of any appellate reduction of that disallowance; where the appellate order limits the addition and the nature of the reduced addition negates concealment, penalty is not sustainable. Obiter - The procedural remark that penalty should be revised to the extent of appellate reduction. Conclusions: The penalty initially computed on the full alleged bogus purchases required revision because the Tribunal restricted taxable addition to an estimated percentage; ultimately, no penalty was upheld given the nature of the reduced addition. Issue 3: Whether failure to prove source of purchases equals concealment or furnishing inaccurate particulars Legal framework: For imposition of penalty under section 271(1)(c) there must be material to demonstrate concealment of income or furnishing of inaccurate particulars; mere inability to explain source may not ipso facto amount to concealment if transactions otherwise stand on record. Precedent Treatment: The assessee's citations (decisions where penalties were held unsustainable when additions were estimate-based) were relied upon to support the proposition that absence of source proof is not identical to concealment. Interpretation and reasoning: The Tribunal distinguished between non-existence of transactions and inability to substantiate the declared source. Here, purchases were not denied - sales effected were undisputed, payments transpired through banking channel, and entries were made in stock register. The crucial lacuna was the assessee's failure to prove the declared source of goods. The Tribunal accepted that such failure could arise from varied, possibly legitimate reasons (e.g., grey market purchases to avoid VAT) and that once an estimate of profit is applied to address revenue leakage, penalizing the assessee for lack of source proof would be disproportionate absent a finding of deliberate concealment or fabricated particulars. Ratio vs. Obiter: Ratio - Failure to prove source of purchases, in circumstances where underlying transactions are admitted and documentary/transactional indicia exist, does not automatically constitute concealment or furnishing of inaccurate particulars sufficient to attract section 271(1)(c). Obiter - Comment that procuring goods from grey market to save VAT and obtaining accommodation bills may explain the inability to establish declared sources. Conclusions: In the factual matrix where purchases occurred, payments were traceable, and stock records maintained, mere failure to establish the declared source does not establish the mens rea or factual predicate for penalty under section 271(1)(c); hence penalty deleted. Cross-references See Issue 1 and Issue 3: reasoning on estimation and non-disputed transactions underpins the conclusion on non-levy of penalty. See Issue 2: appellate reduction of addition informs the need to reassess penalty quantum and, in this case, supports deletion.