2025 (9) TMI 1041 - HC - Income Tax

Penalty under s.271(1)(c) invalidated for lack of AO's subjective satisfaction of concealment or inaccurate particulars

The Principal Commissioner of Income Tax-6 Versus Colo Colour Pvt. Ltd.

HC held that penalty under s.271(1)(c) could not be sustained because the AO failed to form the requisite subjective satisfaction that the taxpayer had ... Penalty u/s 271(1)(c) - additions made towards bogus purchases and commission on such bogus purchases - HELD THAT:- It is well settled that the condition precedent for levy of penalty u/s 271(1)(c) is only when the Assessing Officer, in the course of proceedings, is satisfied that an assessee has concealed the particulars of his income or has furnished inaccurate particulars of income. Thus, in applying the penalty provisions under Section 271(1)(c), it was necessary for the AO to reach to a conclusion, that the assessee had consciously concealed the particulars of his income and/or had deliberately furnished inaccurate particulars of income to gain an undue advantage of not offering the real income to tax. A clear subjective satisfaction of these essentials is a sine qua non for the Assessing Officer to levy a penalty. Penalty proceedings are penal in nature, as the intention of such provisions is to create an effective deterrent, which will restrain the assessee from adopting any practices detrimental to the fair and realistic assessment as the law would mandate. In the facts of the present case, in our opinion, the approach of the assessee was certainly, not of the nature which can be recognized to involve any concealment of particulars of income and/or furnishing inaccurate particulars of income. The reason being that the penalty could not have been levied when an ad-hoc estimation of the assessee’s income was made by the Assessing Officer who restricted the profit element in the purchases at 12.5%. This encompasses that the Assessing Officer accepted the sales made by the assessee and which were subject matter of the invoices / bills which were produced by the assessee. Thus, this is not the case where the Assessing Officer outrightly for want of a tangible material rejected the books of accounts and or the documents as submitted by the assessee in supporting such accounts, when it related to the alleged bogus purchases so as to bring to tax the entire amount of such invoices, on the alleged bogus purchases, to be added to the income of the assessee. There cannot be two opinions that Section 271(1)(c) of the Act, would be required to be strictly construed, hence in the absence of such clear position of a concealment of particulars of income or furnishing of inaccurate particulars of income, in the facts of the present case, penalty proceedings could not have been initiated. This more particularly when the penalty proceedings are initiated clearly on the basis of additions made in the re-opening proceedings thereby leaving no room for a doubt of the disclosures made by the assessee, warranting penalty proceedings. In the present case such material essentials were completely lacking. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under Section 271(1)(c) of the Income-tax Act can be levied where the Assessing Officer has made ad-hoc estimations/adjustments in assessment proceedings in respect of alleged bogus purchases. 2. Whether mere reliance by the Assessing Officer on information from the Sales Tax Department, without furnishing that information to the assessee or producing positive/independent evidence that specific purchases were bogus, suffices to constitute 'concealment of particulars of income' or 'furnishing of inaccurate particulars of income' for the purpose of Section 271(1)(c). 3. Whether the assessee's agreement to an addition 'to buy peace of mind' or to avoid protracted litigation constitutes an admission amounting to concealment or furnishing of inaccurate particulars of income attracting penalty under Section 271(1)(c). ISSUE-WISE DETAILED ANALYSIS Issue 1: Levy of penalty where assessment additions are based on ad-hoc estimation Legal framework: Levy of penalty under Section 271(1)(c) requires satisfaction that the assessee has concealed particulars of income or furnished inaccurate particulars of income. Penal provisions require subjective satisfaction of the Assessing Officer that concealment or inaccuracy was deliberate. Assessment additions may be made on estimate where books or documents are rejected under Section 145(3), but penal consequences require a higher threshold of culpability. Precedent treatment: The Tribunal and appellate authority applied precedents holding that penalty cannot be levied when the addition is sustained purely on estimation/guesswork (examples cited in the judgment). The Court referred to Division Bench decisions that ad-hoc estimation alone does not translate into concealment/furnishing inaccurate particulars for penalty purposes. Interpretation and reasoning: The Court noted that the Assessing Officer, while estimating profit element at 12.5% and adding unexplained commission at 1%, did not wholly reject the purchases or sales and accepted sales made by the assessee. The estimation was applied despite documents produced by the assessee (invoices, bank statements, delivery challans, stock records). The adjudicatory sequence shows the Assessing Officer used estimation as a remedial device rather than as proof of deliberate concealment. Given that the additions arose from an estimate rather than unrebutted proof of falsity, the essential subjective satisfaction required for invoking Section 271(1)(c) was absent. Ratio vs. Obiter: Ratio - penalty cannot be imposed where additions are made on an ad-hoc estimation without positive proof of deliberate concealment or furnishing of inaccurate particulars. Obiter - general observations on the need for a well-considered approach by the Assessing Officer in bogus-purchases inquiries. Conclusion: Penalty under Section 271(1)(c) was not justified solely because an ad-hoc estimation was made; concurrent decisions deleting penalty were rightly upheld. Issue 2: Reliance on Sales Tax Department information without furnishing it to the assessee or producing positive evidence Legal framework: The Assessing Officer may rely on information from other departments (e.g., Sales Tax), but procedural fairness and the requirement of probative material necessitate that such information, if determinative, be placed on record and furnished to the assessee to enable response. For both assessment and penalty, conclusions should rest on evidence capable of supporting the required legal finding. Precedent treatment: The Court relied on its own Division Bench reasoning (Pr. Commissioner v. SVD Resins & Plastics) emphasizing that generalized information from Sales Tax authorities without case-by-case verification and without furnishing to the assessee is an unsound approach and cannot sustain additions or penalty. Interpretation and reasoning: The Assessing Officer's classification of bills as bogus was founded on enquiries with the Sales Tax Department and an internal 'investigation' whose content was not produced to the assessee. The Court held that absent specific, recorded statements or documentary evidence proving those particular purchases to be bogus, it is improper to treat broad information as conclusive. The Assessing Officer's failure to disclose the Sales Tax material deprived the assessee of an opportunity to rebut and meant there was no independent, cogent basis for concluding deliberate concealment. Ratio vs. Obiter: Ratio - information obtained from other departments cannot substitute for positive evidence against the assessee unless furnished and subjected to adversarial testing; such undisclosed information cannot found penalty under Section 271(1)(c). Obiter - recommended practice that Assessing Officer coordinate with Sales Tax authorities and undertake case-by-case verification. Conclusion: Reliance on undisclosed Sales Tax information was insufficient to establish concealment or inaccurate particulars; therefore penalty could not be sustained on that basis. Issue 3: Effect of the assessee's agreement to an addition to 'buy peace of mind' on penalty liability Legal framework: An agreement to an assessment addition for settlement or to avoid litigation is not ipso facto an admission of deliberate concealment or furnishing inaccurate particulars; the legal test for Section 271(1)(c) requires culpable intent or deliberate action to misstate income. Precedent treatment: Courts have recognized that a compromise or acquiescence for pragmatic reasons does not necessarily amount to acknowledgment of guilt or admission of fraudulent intent for penal consequences. Interpretation and reasoning: The assessee expressly stated that its agreement to the addition did not mean it had concealed income or furnished inaccurate particulars. The Court treated this position as relevant: acceptance of an ad-hoc addition to avoid litigation does not equate to conscious concealment. Given that the assessment proceeded on the basis of estimates and that the assessee had produced supporting documents, the mere agreement to an addition did not supply the necessary subjective satisfaction for penalty. Ratio vs. Obiter: Ratio - settlement/agreement to an addition aimed at avoiding litigation does not automatically attract penalty under Section 271(1)(c) absent evidence of deliberate concealment. Obiter -prudential considerations about how such settlements should be treated in penalty proceedings. Conclusion: The assessee's agreement to the addition to avoid protracted litigation was not a ground to infer concealment or to sustain penalty. Cross-references and integrated conclusion 1. Issues 1-3 are interlinked: the assessment involved ad-hoc estimation (Issue 1) founded on undisclosed Sales Tax information (Issue 2) and the assessee's pragmatic agreement to additions (Issue 3). Taken together, these facts negated the Assessing Officer's required subjective satisfaction for invoking Section 271(1)(c). 2. The Court held that penalty proceedings are independent from assessment proceedings; however, when the assessment itself rests on estimation and undisclosed information, it cannot be retrofitted to support a penal conclusion without independent, positive evidence of deliberate concealment. The concurrent findings of the appellate authorities deleting the penalty were therefore warranted and the Revenue's challenge failed.