Penalty under s. 271(1)(c) quashed where income added only through estimated gross profit on bogus purchases

The ITAT Mumbai deleted the penalty imposed under s. 271(1)(c) where the quantum addition arose from estimating gross profit at 12.5% on alleged bogus purchases. The Tribunal held that when income is determined on an estimated basis by applying a fair gross profit rate, such estimation does not constitute concealment of income or furnishing of inaccurate particulars for the purposes of s. 271(1)(c). Consequently, the impugned appellate order sustaining the penalty was set aside and the penalty levied on the assessee was quashed in entirety.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether delay of 481 days in filing the appeal before the Tribunal should be condoned.

1.2 Whether penalty imposed under section 271(1)(c) of the Income-tax Act, 1961 is sustainable where the quantum addition arises from estimation of gross profit on alleged bogus purchases.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Condonation of delay in filing the appeal

Interpretation and reasoning

2.1 The Tribunal noted that the appeal was filed with a delay of 481 days and that the assessee had filed an affidavit explaining the reasons for the delay.

2.2 The Tribunal recorded that the delay was duly and properly explained and that the departmental representative raised no objection to the condonation of delay.

Conclusions

2.3 The delay of 481 days in filing the appeal was condoned and the appeal was admitted for adjudication.

Issue 2: Sustainability of penalty under section 271(1)(c) where addition is based on estimated gross profit on bogus purchases

Legal framework (as discussed)

2.4 Penalty proceedings were initiated and penalty was levied under section 271(1)(c) on income of Rs.11,76,195/-, being 100% of the tax sought to be evaded, arising from addition on account of bogus purchases computed by applying gross profit rate of 12.5%.

Interpretation and reasoning

2.5 The Tribunal noted that the quantum addition was made by estimating gross profit at 12.5% on alleged bogus purchases, and that such addition had been confirmed in quantum proceedings.

2.6 Relying on a co-ordinate bench decision, the Tribunal recorded that where the addition is restricted to a percentage (12.5%) of alleged bogus purchases on the basis of an estimate of gross profit, the issue of levy of penalty under section 271(1)(c) is covered against the Revenue.

2.7 It was noted, with reference to the co-ordinate bench decision, that when income is enhanced on the basis of estimated gross profit, such estimation does not furnish a sufficient foundation for imposition of penalty for concealment or furnishing of inaccurate particulars.

2.8 The Tribunal observed that in the present case also, the addition stood on the same footing, being based solely on the application of an estimated gross profit rate on bogus purchases, and held that the matter was "squarely covered" by the binding co-ordinate bench decision.

Conclusions

2.9 The Tribunal held that penalty under section 271(1)(c) could not be sustained where the underlying addition was based on estimated gross profit on alleged bogus purchases.

2.10 The impugned appellate order confirming the penalty was set aside and the penalty of Rs.3,98,700/- was quashed.

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