2025 (11) TMI 817 - AT - Income Tax

Penalty under s.271(1)(c) deleted where accepted purchases and sales and evidence showed estimated gross profit addition was not concealment

ITAT MUMBAI - AT allowed the appeal and upheld the CIT(A)'s deletion of penalty under s.271(1)(c). The tribunal held that once quantitative purchases and ... Penalty proceedings u/s. 271(1)(c) - Addition of bogus purchases - CIT(A) who reduce the amount of addition to 12.5% of the alleged bogus purchases HELD THAT:- In our considered view once the quantitative details of purchases and sales stand accepted, the addition made merely on an estimated gross profit cannot form the basis for levy of penalty u/s 271(1)(c) of the Act. As relying on SHRI NARAYANSINGH J. DEORA [2011 (12) TMI 651 - ITAT MUMBAI] when purchases and sales are accepted to make an addition on estimated basis, then there is no concealment of income on the part of the assessee and therefore no penalty could be levied u/s. 271(1)(c). It is well settled that penalty proceedings are distinct from assessment proceedings and the assessee is entitled to explain, on the same set of facts, that there was neither concealment of income nor furnishing of inaccurate particulars. The explanation and evidences furnished by the assessee have not been disputed in the quantum appeal and therefore, the penalty levied by the AO on such estimated addition is unsustainable. Accordingly we see no infirmity in the decision of the CIT(A) in deleting the penalty levied u/s 271(1)(c) of the Act. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under section 271(1)(c) can be sustained where the assessing officer's addition is based on estimation of profit on alleged bogus purchases and the quantum of addition is subsequently restricted by the appellate authorities. 2. Whether estimation-based additions (i.e., additions arrived at by applying a percentage of gross purchases or receipts) amount to 'concealment of particulars of income' or 'furnishing inaccurate particulars' so as to attract penalty under section 271(1)(c). 3. The effect of deletion or reduction of quantum-addition in assessment appeals on the sustainability of penalty proceedings under section 271(1)(c). ISSUE-WISE DETAILED ANALYSIS Issue 1: Sustainment of penalty where addition is based on estimated profit and later restricted by appellate authorities Legal framework: Section 271(1)(c) requires concealment of particulars of income or furnishing of inaccurate particulars to levy penalty; penalty is separate from assessment and depends on the factual and legal findings regarding the taxpayer's particulars supplied in the return. Precedent treatment: The Court relied on appellate authority precedent treating deletion or substantial reduction of quantum additions as erasing the basis for penalty; coordinate bench decisions were followed that deleted penalty where additions were estimation-based and subsequently curtailed on appeal. Interpretation and reasoning: When the assessing officer's addition is confined to an estimated profit element (i.e., profit percentage applied to contested purchases) and appellate tribunals accept the underlying purchases/sales while restricting the quantification to a reasonable estimated profit, the factual foundation required to prove concealment or inaccurate particulars is absent. The Tribunal's acceptance of purchases and sales contradicts the notion that particulars were concealed; the remaining addition reflects a judicial estimate of profit rather than an affirmative finding of misrepresentation. Ratio vs. Obiter: Ratio - where quantum-addition is based on estimation and appellate authority reduces or restricts that addition while not finding concealment of particulars, penalty under section 271(1)(c) cannot be sustained. Obiter - observations about reasonableness of particular percentage rates in different factual matrices. Conclusion: Penalty cannot survive where the addition is merely an estimated profit element subsequently restricted by appellate authority; deletion/restriction of quantum removes the basis for penalty. Issue 2: Whether estimation-based additions amount to concealment or furnishing inaccurate particulars under section 271(1)(c) Legal framework: Section 271(1)(c) applies only where there is concealment of particulars of income or where inaccurate particulars of income are furnished; 'particulars' encompasses details of claims made in the return. Mere unsustainable claims do not automatically amount to inaccurate particulars unless the return's particulars are shown to be false or erroneous. Precedent treatment: The Court followed higher-court dicta establishing that a claim made in a return which is not sustainable in law does not per se constitute furnishing inaccurate particulars; where particulars provided in the return are not shown to be incorrect, penalty cannot be invoked. Interpretation and reasoning: Estimation of income by the revenue or an assessing officer (e.g., applying a percentage of gross purchases/receipts) is an assessment methodology; unless the return itself contained false details (for instance, fabricated receipts or falsified records), an adverse estimation does not equate to concealment. Where purchases and corresponding sales are not disputed and only profit element is estimated, there is no finding that the particulars in the return were inaccurate; ergo, the essential ingredients of section 271(1)(c) are absent. Ratio vs. Obiter: Ratio - estimation-based assessments do not automatically satisfy the statutory threshold for penalty under section 271(1)(c); a finding of inaccurate or false particulars in the return is necessary. Obiter - comments on the distinctness of penalty and assessment proceedings and the assessee's right to explain the same facts in penalty proceedings. Conclusion: Estimation-based additions, without a specific finding that particulars in the return were false or inaccurate, do not attract penalty under section 271(1)(c). Issue 3: Effect of deletion/restriction of quantum-addition on penalty proceedings Legal framework: Penalty under section 271(1)(c) is consequential on the existence of concealment or inaccurate particulars; if the consequential quantum-addition is deleted or materially reduced on appeal, the factual foundation for penalty may be eliminated. Precedent treatment: The Court applied the principle accepted in appellate jurisprudence that deletion or reduction of the quantum-addition ordinarily leads to cancellation of the associated penalty when the addition was the sole basis for invoking section 271(1)(c). Interpretation and reasoning: Where appellate authority reduces the addition (from a higher percentage to a lower one) based on reasonableness and estimation, and where there is no independent finding of falsity or concealment of particulars by the appellate authority, the penalty - especially one computed as a percentage of tax on the deleted/curtailed addition - becomes unsustainable. The assessment and penalty proceedings are distinct, but the penalty cannot subsist when the factual premise (the addition) is discredited by higher forums. Ratio vs. Obiter: Ratio - deletion/restriction of an assessment addition that formed the sole basis for penalty mandates deletion of the penalty absent an independent finding of concealment or inaccurate particulars. Obiter - illustrative references to factual scenarios where independent culpability might sustain penalty despite reduction of quantum. Conclusion: Reduction or deletion of the quantum-addition on appeal negates the basis for the associated penalty under section 271(1)(c) unless there remains a separate, independent finding of concealment or furnishing of inaccurate particulars. Ancillary Observations and Cross-References 1. Cross-reference to Issue 1 & Issue 2: The conclusions on sustainment of penalty and the non-applicability of section 271(1)(c) to estimation-based additions are interlinked - both rest on the absence of a finding that particulars in the return were inaccurate or concealed. 2. The Court emphasized that penalty proceedings are distinct from assessment proceedings and that the assessee is entitled to explain the same facts in penalty proceedings; absence of dispute over gross receipts/purchases in quantum proceedings weakens the foundation for penalty. 3. Practical effect: Where appellate adjudication accepts purchases/sales and restricts the contested addition to an estimated profit percentage, levy of penalty under section 271(1)(c) on that estimated element is unsustainable in the absence of a separate finding of concealment or deliberate misstatement.