Penalty cannot be levied on the basis of estimated additions

Laxman Trimbak Gule Vs ITO (ITAT Pune)

In the present case, the Assessing Officer estimated the disallowance at 50% being Rs.9,90,685/- and initiated penalty proceedings u/s.274 r.w.s 271(1)(c) of the Act. It is a basic need of the provisions of law that definite finding is required to be recorded by the Assessing Officer for reaching to a conclusion with regard to concealment of income or furnishing of inaccurate particulars of income and without any such findings, there cannot be any question of imposition of any penalty u/s.271(1)(c) of the Act. We find that the Ld. CIT(Appeals) relying on the written submission filed by the assessee adjudicated the claim of commission and also improvement expenditure but failed to make specific enquiry regarding the same and came to a conclusion based on only materials on record. We find that the disallowance upheld by the Ld. CIT(Appeals) is merely on estimate basis without any categorical statement of facts whether there is „concealment of income‟or „furnishing of inaccurate particulars of income‟. More so, when the disallowances have been enforced by the Ld. CIT(Appeals) on estimation basis, in such scenario, the settled legal position is that no penalty u/s.271(1)(c) of the Act cannot be imposed.

Hon‟ble Delhi High Court in CIT vs. Aero Traders Pvt. Ltd.(supra.) has held that no penalty u/s.271(1)(c) of the Act can be imposed when income is determined on estimate basis.

Therefore, keeping in view the totality of the facts and circumstances of the case, we are of the considered view that in this case, the additions were made on the basis of estimation and as discussed in the cases referred above, the penalty cannot be levied on the basis of estimated additions and thus, it is not a fit case for levying penalty.

FULL TEXT OF THE ORDER OF ITAT PUNE

This appeal preferred by the assessee emanates from the order of the Ld. CIT(Appeals)-1, Aurangabad dated 26.12.2017 for the assessment year 2011-12 as per the following grounds of appeal on record:

“1. On the facts and circumstances of the case and in law, the Learned CIT(Appeals) Aurangabad erred in confirming the penalty levied by the AO u/s.271(1)(c) of the Income Tax Act to the tune of Rs.2,04,100/- which may kindly be deleted.

2. On the facts and circumstances of the case and in law, the learned CIT appeals is not justified in confirming the penalty order of the AO looking to the decision of the Honourable Supreme Court of India, Civil Appeal No. 2463 of 2010 arising out of SLP No.27161 of 2008 in the case of CIT, Ahmedabad Vs. Reliance Petro Products Pvt. Ltd. The penalty levied by the AO may kindly be deleted.”

2. The solitary grievance of the assessee in this appeal is levy of penalty by the Assessing Officer u/s.271(1)(c) of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟) and as confirmed by the Ld. CIT(Appeals).

3. The brief facts as in the assessment order are that the assessee is an individual filed return of income for assessment year 2011-12 on 30.04.2013 declaring total income of Rs.6,72,940/- under the head long term capital gain. The notice u/s.143 of the Act was issued to the assessee which he had responded that the return of income was already filed which may be considered as the return filed against the said notice. During the assessment proceedings, the Assessing Officer verified the claim of commission of Rs.2,50,000/- and improvement expenditure of Rs.50,000/-. The Assessing Officer had asked the assessee to produce documentary evidences regarding the claim made by the assessee. That the matter being old, the assessee could not produce the evidences and as such the Assessing Officer estimated the disallowance at 50% being Rs.9,90,685/- and added the same to the total income of the assessee and also initiated penalty proceedings u/s.274 r.w.s. 271(1)(c) of the Act for concealing the particulars of income or furnishing inaccurate particulars of income.

4. The Ld. CIT(Appeals) vide order dated 26.12.2017 at Para 2 of his order has relied on the written submissions filed by the assessee and available materials/documents available on record and thereafter, considering the assessment order and the said written submissions placed on record upheld the levy of penalty dismissing the appeal of the assessee. That however, none had appeared for the assessee before the Ld. CIT(Appeals).

5. At the time of hearing, the Ld. Counsel for the assessee submitted that these were the disallowances made by the Assessing Officer on estimation basis and it is the settled legal position that there cannot be any imposition of penalty u/s.271(1)(c) of the Act in respect of disallowances made on such estimation basis.

6. The Ld. Counsel for the assessee submitted that the assessee had made bona-fide disclosures through all the necessary particulars in the return of income and computation statement. Mere disallowance of a claim made bona-fide would not amount to concealment of particulars of income or furnishing inaccurate particulars of such income to warrant imposition of penalty u/s.271(1)(c) of the Act. To support such contention, the Ld. Counsel has placed reliance on the following decisions:

i) CIT Vs. Reliance Petro products Pvt. Ltd., 322 ITR 158 (SC).

ii) Ventura Textiles Ltd. Vs. CIT-Mumbai City-11, Income Tax Appeal No.958 of 2017

iii) Mohd. Farhan A Shaikh Vs. Deputy Commissioner of Income Tax, Tax Appeal Nos. 51 & 57 of 2012 (2021) 110 CCH 0125 MumHC

7. The Ld. DR has placed strong reliance on the orders of the Sub-ordinate Authorities.

8. We have heard the rival contentions and perused the materials available on record. We have also considered the judicial pronouncements placed before us. In the present case, the Assessing Officer estimated the disallowance at 50% being Rs.9,90,685/- and initiated penalty proceedings u/s.274 r.w.s 271(1)(c) of the Act. It is a basic need of the provisions of law that definite finding is required to be recorded by the Assessing Officer for reaching to a conclusion with regard to concealment of income or furnishing of inaccurate particulars of income and without any such findings, there cannot be any question of imposition of any penalty u/s.271(1)(c) of the Act. We find that the Ld. CIT(Appeals) relying on the written submission filed by the assessee adjudicated the claim of commission and also improvement expenditure but failed to make specific enquiry regarding the same and came to a conclusion based on only materials on record. We find that the disallowance upheld by the Ld. CIT(Appeals) is merely on estimate basis without any categorical statement of facts whether there is „concealment of income‟or „furnishing of inaccurate particulars of income‟. More so, when the disallowances have been enforced by the Ld. CIT(Appeals) on estimation basis, in such scenario, the settled legal position is that no penalty u/s.271(1)(c) of the Act cannot be imposed. We find strength from the following decisions of the Hon‟ble High Courts:

i) CIT vs. Aero Traders Pvt. Ltd., 322 ITR 316 (Del)

ii) CIT Vs. Subhash Trading Co., 221 ITR 110 (Guj.)

iii) Harigopal Singh Vs. CIT, 258 ITR 85 (P & H)

9. We find that the Hon‟ble Delhi High Court in CIT vs. Aero Traders Pvt. Ltd.(supra.) has held that no penalty u/s.271(1)(c) of the Act can be imposed when income is determined on estimate basis. The relevant portion of the judgment reads as follows:

“5. Against this order, the assessee filed an appeal before the CIT(A), who deleted the penalty imposed vide order dt. 7th Sept., 2007, holding that the addition made by the AO on the basis of estimated profit cannot be a subject-matter of penalty for concealment of income. The CIT(A) further found that penalty was not imposable in view of the substantial deduction given by the Tribunal and observed as under:

“I have considered the submissions of the assessee and perused the facts that are ruling in the instant case. There is no doubt that there are certain discrepancies noticed in the course of special audit as brought out in their report. However, such discrepancies by itself ipso facto lead to the conclusion that the assessee has concealed the income. Ultimately the AO has to resort to estimated addition only. He could not point out any specific item of any addition with any conclusive evidence. Even the addition made by the AO on estimated basis is substantially reduced by the CIT(A) after considering the various facts and figures and circumstances of the case. The said action of the CIT(A) has become final consequent to the decision of the Hon’ble Tribunal in dismissing the Departmental appeal. Resultantly the income of Rs. 1,02,980 is on the basis of estimated profit rate only. It is not on account of any specific item of addition or disallowance. Such an addition made on the basis of guess work cannot be subjected matter of penalty for concealment of income. Penalty being a quasi criminal proceeding there is a duty cast on the AO to establish the guilt of the assessee in concealing the income or furnishing of inaccurate particulars of such income. As stated the seizure of the books of the police is not an act of the assessee. No motives can be attributed to the non-availability of books of accounts to examine and verify the various claims made by the appellant.”

6. Aggrieved by this order, the Revenue filed an appeal before the Tribunal. The Tribunal, after hearing the submissions made on behalf of the Revenue, came to the conclusion that the CIT(A) had taken the correct decision in deleting the penalty. The operative portion of the impugned order dt. 4th Dec., 2008 is as follows:

“As the facts emerge the substantial quantum relief was given by the CIT(A) which has been confirmed by the Tribunal, the balance pertains to estimated rate of profit applied on the turnover of the assessee which in our view does not amount to concealment or furnishing inaccurate particulars. In our view, the CIT(A) has taken right decision in deleting the penalty which is upheld.

7. The appeal is filed against the above-mentioned order of the Tribunal dt. 4th Dec., 2008. The finding arrived at by the Tribunal does not warrant interference from this Court as it is purely a finding of fact. No perversity has been pointed in such a finding. Consequently, no substantial question of law arises for consideration. As a result, the appeal is dismissed.”

9.1. The Hon‟ble Gujarat High Court in the case of CIT vs. Subhash Trading Company (Guj) on the same issue has held as follows:

“Where income is assessed on estimate basis after rejecting book results, penalty under s. 271(1)(c) cannot be imposed by mere application of Explanation thereof in the absence of any evidence to conclude a positive finding that there was concealment of income.”

9.2 Similar view has been taken by the Hon‟ble Punjab & Haryana High Court in the case of Harigopal Singh vs. CIT (supra) by observing as follows:

“Provisions of s. 271(1)(c) are not attracted to cases where income of an assessee is assessed on estimate basis and additions are made therein on that basis.”

In view of the foregoing precedents of the Hon‟ble Courts, it is apparent that when the bedrock of instant penalty is on the estimated addition, the same cannot be sustained.

10. Therefore, keeping in view the totality of the facts and circumstances of the case, we are of the considered view that in this case, the additions were made on the basis of estimation and as discussed in the cases referred above, the penalty cannot be levied on the basis of estimated additions and thus, it is not a fit case for levying penalty. Accordingly, we set aside the order of the Ld. CIT(Appeals) and direct the Assessing Officer to delete the penalty from the hands of the assessee.

11. In the result, appeal of the assessee is allowed.

Order pronounced on 05th day of April, 2021.