2025 (9) TMI 366 - AT - Income Tax

Assessee wins: bogus purchase addition reduced to 5% and penalty under s. 271(1)(c) set aside for lack of concealment

Shri Suresh Ukhchand Mehta HUF Versus ITO Ward 19 (3) (1) Mumbai

Shri Suresh Ukhchand Mehta HUF Versus ITO Ward 19 (3) (1) Mumbai - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under section 271(1)(c) is sustainable where additions in assessment are based on an estimated gross profit applied to alleged non-genuine purchases, without material establishing concealment of income or furnishing of inaccurate particulars. 2. Whether reliance solely on third-party information (from VAT authorities/DGIT(Inv.)) without independent enquiry or corroborative evidence by the Assessing Officer suffices to sustain penalty under section 271(1)(c). 3. Whether reduction of estimated addition in quantum proceedings (from AO's 12.5% GP to Tribunal's 5% GP) affects the foundation for imposing penalty under section 271(1)(c). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Sustenance of penalty where additions rest on estimation of gross profit absent material of concealment Legal framework: Section 271(1)(c) penalises concealment of income or furnishing of inaccurate particulars of income. Penalty requires a finding of concealment or inaccuracy in particulars, not merely the making of additions in assessment. Precedent Treatment: The Tribunal (and the Court) applied the established legal principle that mere estimation of income or adoption of an arbitrary addition, without material proving concealment or inaccurate particulars, does not automatically sustain penalty under section 271(1)(c). The Court followed the settled approach of distinguishing between quantification adjustments and culpable concealment for penalty purposes. Interpretation and reasoning: The impugned additions arose from application of a gross profit rate to alleged bogus purchases; there is no record material showing that invoices were absent, goods not delivered, sales were fabricated, or that the assessee knowingly concealed income. Documentary evidence of purchase invoices, matching sales and bank payments were on record. The Tribunal itself significantly reduced the AO's estimate, indicating uncertainty in the quantum. In absence of direct evidence of an intention to conceal or of inaccurate particulars, an addition based on estimation cannot be equated with concealment for penalty imposition. Ratio vs. Obiter: Ratio - Penalty under section 271(1)(c) cannot be sustained where additions are founded solely on estimation without material proving concealment or inaccurate particulars. Obiter - Observations on the degree of estimation reduction (12.5% to 5%) serve explanatory purposes but reinforce the ratio that mere estimation is insufficient. Conclusion: Penalty under section 271(1)(c) is not sustainable where additions are based purely on estimated gross profit in respect of alleged non-genuine purchases and there is no material establishing concealment or inaccurate particulars of income. Issue 2 - Sufficiency of reliance on third-party information without independent enquiry to impose penalty Legal framework: Assessment and penalty proceedings must be founded on relevant material and reasoned findings. Reliance on inputs from investigative agencies or third parties may be permissible but must be corroborated by independent enquiry where the material consequences (such as penalty) depend on findings of concealment. Precedent Treatment: The Court adhered to the principle that third-party information, standing alone and uncorroborated, cannot form a conclusive basis for penalty. This follows the established approach requiring independent verification or corroboration before imposing penal consequences. Interpretation and reasoning: The AO proceeded on DGIT(VAT) information indicating accommodation entries by certain dealers but did not conduct independent inquiries into deliveries, genuineness of invoices, or the assessee's supporting records. Given that the assessee produced invoices, corresponding sales and bank payment evidence, the absence of independent enquiry or additional corroboration undermines the AO's conclusion of concealment. The penalty cannot be sustained where the AO's finding derives exclusively from third-party inputs without substantiation. Ratio vs. Obiter: Ratio - Uncorroborated third-party information without independent inquiry is insufficient to found a penalty for concealment under section 271(1)(c). Obiter - The procedural expectation that AO should seek corroboration before levying penalty is emphasized. Conclusion: Reliance solely on information from VAT/ investigative sources, without independent enquiries or corroborative evidence, does not justify imposition of penalty under section 271(1)(c). Issue 3 - Impact of Tribunal's reduction of estimated addition on the validity of penalty Legal framework: Penal liability under section 271(1)(c) depends on the existence of concealment or inaccurate particulars, not merely on the amount of addition. However, the stability and reliability of the foundational factual finding in quantum proceedings inform whether a valid finding of concealment exists. Precedent Treatment: The Court relied on the established connection that where the quantum addition itself is uncertain or substantially reduced on appeal, it weakens any concomitant factual finding of deliberate concealment required to sustain penalty. Interpretation and reasoning: The Tribunal's reduction of the AO's estimated GP from 12.5% to 5% demonstrates the speculative nature of the addition and absence of a conclusive finding on concealment. If the quantum is arrived at by estimation and is subject to significant downward revision, it signifies lack of incontrovertible material establishing concealment. Therefore, the tribunal's reassessment of quantum erodes the foundation upon which a penalty for concealment could rest. Ratio vs. Obiter: Ratio - Significant reduction of assessment additions in appellate/tribunal proceedings evidences lack of conclusive material of concealment and is a relevant consideration militating against sustaining penalty. Obiter - The magnitude of reduction is illustrative of speculative estimation but not the sole determinative factor. Conclusion: The Tribunal's substantial reduction of the estimated addition undermines any conclusive finding of concealment and accordingly negates the basis for imposing penalty under section 271(1)(c). Final Disposition Conclusion (as applied to all issues) The penalty levied under section 271(1)(c) cannot be sustained in the absence of material showing concealment or inaccurate particulars of income, where additions are founded on estimation of gross profit, based solely on third-party information without independent corroboration, and where the estimated additions have been substantially reduced on appeal. Accordingly, the penalties are directed to be deleted.