2025 (8) TMI 1669 - AT - Income Tax

Appellate authority upholds deletion of penalty under s.271(1)(c) where estimated gross profit addition lacked proof of concealment

ITO, Mumbai Versus Parekh Dyes and Chemicals., Mumbai

ITAT upheld the appellate authority's deletion of penalty under s.271(1)(c), finding the assessing officer had only made an estimated addition to gross ... Penalty levied u/s 271(1)(c) - Estimation of income - bogus purchases - CIT(A) restricted GP rate to 7% as against the @17.93% applied by the AO - CIT(A) deleted penalty levy - HELD THAT:- Admittedly, the AO had only estimated the GP on the alleged non-genuine purchases without there being any conclusive proof of concealment of income or furnishing of inaccurate particulars of income. The estimated addition made by the Ld. AO has been further reduced by the Ld. CIT(A). Accordingly, the decision of the CIT(A) in deleting the penalty levied on estimated income is justified - Appeal of the revenue is, accordingly, dismissed. 1. ISSUES PRESENTED AND CONSIDERED Whether penalty under section 271(1)(c) of the Income-tax Act, 1961 can be sustained where the assessing officer made additions by estimating gross profit on purchases alleged to be from accommodation entry providers, when there is no conclusive proof of concealment of income or furnishing of inaccurate particulars? Whether deletion of penalty by the Commissioner of Income-tax (Appeals) on the ground that the addition was made on an estimated basis and founded on presumptions is legally permissible? 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of levying penalty under section 271(1)(c) where additions are based on estimated GP on alleged bogus purchases Legal framework: Section 271(1)(c) penalises concealment of income or furnishing inaccurate particulars of income. For imposition, the assessing officer must demonstrate concealment or inaccuracy of particulars; assessment additions that are speculative or purely estimated do not ipso facto establish concealment. Precedent Treatment: The Tribunal adhered to co-ordinate bench authorities (expressly referencing precedent reasoning) holding that penalties should not be levied where additions are made on the basis of estimation and presumptions without conclusive evidence of bogus transactions or deliberate concealment. Interpretation and reasoning: The AO's disallowance arose from information alleging dealings with accommodation entry providers, leading him to apply a gross profit rate (17.93%) to alleged unverifiable purchases. The CIT(A) reduced the applied GP to 8.75% (thereby reducing the quantum addition) and found that the AO's approach rested on presumptions without establishing that recorded purchases were not actually made or that the assessee concealed income. The Tribunal agreed that where the foundation of the addition is estimation based on unproven assumptions, it is improper to equate such addition with the requisite mens rea or factual basis for imposing penalty under section 271(1)(c). Ratio vs. Obiter: Ratio - Penalty under section 271(1)(c) cannot be sustained where the assessing officer's addition is based on estimation and presumptions without conclusive proof of concealment or inaccuracy. Obiter - Observations concerning the appropriate gross profit percentage to be applied in such estimations (as adjusted by the CIT(A)) are ancillary to the penalty issue. Conclusions: The penalty levied on the basis of estimated addition was rightly deleted. The absence of conclusive proof that purchases were not genuinely incurred meant the statutory threshold for penalty under section 271(1)(c) was not satisfied. Issue 2 - Whether reduction of quantum by appellate authority affects penalty validity Legal framework: Imposition of penalty must be justified independently and requires a finding of concealment or furnishing of inaccurate particulars. A subsequent reduction in quantum by the CIT(A) underscores uncertainty in the AO's estimation and affects the justifiability of any penalty premised on the original estimate. Precedent Treatment: The Tribunal referenced and followed co-ordinate bench decisions where deletion of penalty was confirmed when appellate authorities curtailed estimated additions, indicating that penal consequences cannot rest on add-ons later found to be speculative. Interpretation and reasoning: The CIT(A)'s reduction of the GP rate and resultant lowering of addition demonstrated that the initial assessment was not definitive. The Tribunal reasoned that where the quantum itself is contestable and subject to significant adjustment on appeal, it is inappropriate to sustain a penalty for concealment based on the original estimate. Ratio vs. Obiter: Ratio - A materially adjusted quantum on appeal, arising from uncertainties in the AO's estimate, negates the basis for penalty under section 271(1)(c) unless independent evidence of deliberate concealment exists. Obiter - The procedural sufficiency of the penalty notice insofar as cancellation of relevant limb was mentioned by the CIT(A) is supplemental to the main holding. Conclusions: The appellate reduction of the estimated addition reinforces deletion of the penalty; the penalty could not survive in absence of conclusive proof of concealment independent of the disputed estimated addition. Issue 3 - Burden of proof and onus on the assessee when AO relies on external information (e.g., law enforcement/enquiry sources) that parties are accommodation entry providers Legal framework: Once the AO places material on record suggesting non-genuineness of purchases, the onus shifts to the assessee to prove genuineness. However, the standard of proof required to sustain penalty is higher: the AO must demonstrate concealment or furnishing of inaccurate particulars, not merely raise suspicion. Precedent Treatment: The Tribunal applied established principles that suspicion or information from external sources, unless corroborated by conclusive evidence showing transactions did not occur or were sham, cannot alone justify penalty under section 271(1)(c). Interpretation and reasoning: Although information suggested that certain suppliers were entry providers, there was no conclusive establishment that the assessee's purchases were fictitious or that the assessee intentionally concealed income. The AO's reliance on such external information to estimate GP did not convert the estimation into proof of concealment; hence the onus argument did not validate penalty in circumstances where estimation remained the sole basis for addition. Ratio vs. Obiter: Ratio - External information indicating possible accommodation entries does not automatically substantiate penalty absent conclusive proof or corroborative evidence demonstrating concealment. Obiter - The procedural nuances of how the AO should have investigated or given opportunity to the assessee are ancillary observations. Conclusions: Although the onus to prove genuineness lies on the assessee once adverse information is placed, that onus cannot be used to sustain a penalty where the AO's findings remain estimations and the evidence falls short of proving concealment. Cross-reference and Applicability to Other Assessment Years Because the facts and reasoning are identical across the three assessment years, the Tribunal applied the same legal principles mutatis mutandis to delete penalties for those years as well; the central reasoning on estimation, absence of conclusive proof, and consequent inapplicability of section 271(1)(c) was consistently applied.