Section 271(1)(c) penalty cannot be levied when income addition sustained on estimated basis for bogus purchases

The ITAT Mumbai held that penalty under section 271(1)(c) cannot be levied where income addition is sustained on estimated basis. The assessee faced disallowance of bogus purchases, with CIT(A) restricting it to 17.5% and Tribunal further reducing it to 8%. The ITAT ruled that adhoc disallowance of purchases does not constitute furnishing inaccurate particulars of income under section 271(1)(c). Since the AO did not doubt sales but only disallowed bogus purchases, relying on Nikunj Eximp Enterprises precedent, the ITAT set aside CIT(A)'s order and directed deletion of penalty, allowing the appeal in favor of the assessee.

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Issues:
Appeals against penalty orders under sections 271(1)(c) and 250 of the Income Tax Act for A.Y 2009-10, A.Y. 2010-11 & A.Y. 2011-12, and a cross-appeal by the revenue for A.Y 2010-11.

Detailed Analysis:

1. Penalty Imposed under Section 271(1)(c) of the Income Tax Act:
The appeals were filed by the assessee against the penalty orders passed by the National Faceless Appeal Centre under sections 271(1)(c) and 250 of the Income Tax Act for multiple assessment years. The Assessing Officer (AO) had imposed penalties based on alleged bogus purchase transactions. The AO made ad hoc disallowance of purchases, leading to penalty proceedings. The CIT(A) partly allowed the appeals, considering the quantum addition of bogus purchases and directing the AO to restrict the disallowance percentage. The Tribunal found that where additions are sustained on an estimated basis, no penalty under section 271(1)(c) can be levied. The Tribunal emphasized that disallowance on an ad hoc basis does not amount to furnishing inaccurate particulars of income. Citing judicial precedents, the Tribunal set aside the CIT(A)'s order and directed the AO to delete the penalty, ruling in favor of the assessee.

2. Validity of Penalty Notice and Judicial Precedents:
During the hearing, the assessee's representative argued that the CIT(A) erred in partly sustaining the penalty under section 271(1)(c) of the Act. The representative highlighted that the Tribunal had directed the AO to restrict the addition on account of bogus purchases, which was accepted by the assessee. The Tribunal agreed that penalty on estimated income cannot be sustained in such cases. The representative also relied on judicial decisions to support the argument against the penalty. On the other hand, the Departmental Representative (DR) supported the CIT(A)'s order. The Tribunal, after considering the submissions and judicial decisions, concluded that the penalty could not be levied on estimated income and ruled in favor of the assessee.

3. Revenue Appeal Against Penalty Reduction:
In a cross-appeal filed by the revenue for A.Y 2010-11, the revenue challenged the CIT(A)'s decision to reduce the penalty levied under section 271(1)(c) of the Act. The DR argued that the CIT(A) erred in partly deleting the penalty, emphasizing the transactions of bogus purchases. However, the Tribunal reiterated that when additions are made on an estimated basis, penalties under section 271(1)(c) cannot be levied on such ad hoc estimated income. The Tribunal dismissed the revenue's grounds of appeal, as the findings in the assessee's appeal were relied upon, and no new evidence was presented to warrant a different view.

In conclusion, the Tribunal allowed the appeals filed by the assessee for A.Y 2009-10, 2010-11, and 2011-12, while dismissing the appeal filed by the revenue for A.Y 2010-11. The orders were pronounced on 29.05.2024.

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