Case Law Details
Fancy Diamonds India Pvt Ltd Vs DCIT (ITAT Mumbai)
Introduction: In a ruling, the Income Tax Appellate Tribunal (ITAT) in Mumbai has provided significant relief to Fancy Diamonds India Pvt Ltd. The ITAT ruled that penalties under Section 271(1)(c) of the Income Tax Act, 1961, aren’t leviable on additions made purely on an estimated basis. This ruling came against the decision by the Commissioner of Income Tax (Appeals), who had confirmed the penalties for three assessment years under consideration.
Analysis: Fancy Diamonds India Pvt Ltd, engaged in the manufacturing and trading of diamonds, faced a reopening of assessments due to alleged bogus purchases from the Bhanwarlal Jain group. The Assessing Officer estimated profits from these supposed bogus purchases at 12.5%, a figure that the CIT(A) later reduced to 6%.
Penalties were subsequently levied under Section 271(1)(c) of the Income Tax Act for the three years under consideration, based on this estimation. However, the assessee contended that penalties couldn’t be levied on estimated additions, and this argument found favour with the ITAT.
The ITAT relied on past judgements from various High Courts and Tribunals that held penalty under Section 271(1)(c) as unsustainable when levied on estimated additions. The ITAT noted the absence of a definite finding on the quantum of income concealment and concluded that the penalties should be cancelled.
Conclusion: The ruling by the ITAT Mumbai represents a noteworthy precedent for cases where additions are made purely on an estimated basis. By cancelling the penalties levied under Section 271(1)(c) of the Income Tax Act, the ITAT reaffirms the principle that such penalties are not applicable without concrete evidence of income concealment.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
All the three appeals filed by the assessee are directed against the orders passed by the learned Commissioner of Income Tax (Appeals) (NFAC), Delhi (in short ‘Ld. CIT(A)’ and they relate to Assessment Years 2010-11 to 2012-13. The assessee is aggrieved by the decision of Ld. CIT(A) in confirming the penalty levied under Section 271(1)(c) of the Income Tax Act, 1961 (in short ‘the Act’) in all the three years under consideration.
2. The facts relating to the case are stated in brief. The assessee is engaged in the business of manufacturing and trading of diamonds. The Assessing Officer reopened assessment for all the years under consideration by issuing notices under Section 148 of the Act on the basis of information that the assessee made bogus purchases by availing accommodation entries from Bhanwarlal Jain group. The Assessing Officer concluded the assessments by estimating profit from alleged bogus purchases at 12.5%. In the appellate proceedings, the Ld. CIT(A) reduced the rate of profit to 6%. After the orders passed by Ld. CIT(A), the Assessing Officer levied penalty of Rs.1,74,158/-, Rs.6,40,981/- and Rs.21,93,310/- respectively in Assessment Years 2010-11, 2011-12 and 2012-13 under Section 271(1)(c) of the Act. The Ld. CIT(A) confirmed the orders of above said penalty in all the three years and hence, assessee has filed these appeals before the Tribunal.
3. The ld. AR submitted that the addition has been made by the Assessing Officer in all the three years on estimated basis and hence penalty is not leviable on the estimated addition. In this regard, he took support on decision rendered by co-ordinate bench in assessee’s own case in Assessment Year 2013-14 in ITA No. 5384/Mum/2019 wherein the coordinate bench, vide its order dated 17.06.2022, has deleted the penalty holding that no penalty could be levied on estimated addition. In this regard, the co-ordinate bench has followed the decisions rendered in the following cases:-
a) CIT vs Krishi Tyre Retreading & Rubber Industries, 360 ITR 580 (Raj);
b) CIT vs Sangrur Vanaspati Mills Ltd., 303 ITR 53 (P&H); and,
c) CIT vs Subhash Trading Co. Ltd., 221 ITR 110 (Guj)
4. Accordingly, the Ld. AR prayed that penalty levied in these years on estimated addition may kindly be deleted.
5. The Ld. DR, on the contrary, supported the orders passed by the Ld. CIT(A).
6. We heard the rival contentions and perused the record. We noticed earlier that the Assessing Officer has estimated profit on alleged bogus purchases @ 12.5%, which was reduced to 6% by Ld. CIT(A). Admittedly, addition has been made on estimated basis in all the three years under consideration. The question is whether penalty under Section 271(1)(c) of the Act could be levied on addition made on estimated basis. This question was examined by the co-ordinate bench in assessee’s own case and it was held that penalty under Section 271(1)(c) of the Act is not leviable on addition made on estimated basis. For the sake of convenience, we extract below the operative portion of the order passed by the co-ordinate bench in Assessment Year 2013-14 :-
“9. We have heard the submissions made by rival sides and have examined the orders of the authorities below. Undisputedly, the additions made on account of bogus purchases were partially confirmed by the Tribunal. The assessee failed to discharge its onus in proving genuineness of the purchases and dealers. During assessment proceedings, the addition was made on estimation @ 12.5%. In first appeal, the addition was restricted to 3% and on further appeal to the Tribunal by the Revenue, the addition was enhanced to 6%. The entire addition right from assessment stage to the Tribunal was merely on estimations. There is no definite finding on the quantum of concealment of income. It is an accepted legal position that penalty under section 271(1)(c) of the Act levied on additions made merely on estimations is unsustainable.
10. The Hon’ble Rajasthan High Court in the case of CIT vs. Krishi Tyre Retreading and Rubber Industries reported as 360 ITR 580 has held that where addition is made purely on estimate basis, no penalty u/s. 271(1)(c) of the Act is leviable. Similar view has been expressed by Ho’ble Punjab & Haryana High Court in the case of CIT vs. Sangrur Vanaspati Mills Ltd. reported as 303 ITR 53. The Hon’ble High Court approving the order of Tribunal held that when the addition has been made on the basis of estimate and not on any concrete evidence of concealment, penalty u/s. 271(1)(c) of the Act is not leviable. The Hon’ble Gujarat High Court in the case of CIT vs. Subhash Trading Co. Ltd. reported as 221 ITR 110 has taken a similar view in respect of penalty levied u/s. 271(1)(c) of the Act on estimated additions. There are catena of decisions by different High Courts and various Benches of the Tribunal wherein penalty levied u/s. 271(1)(c) of the Act on estimated addition has been held to be unsustainable.
11. In the result, the impugned order is upheld and the appeal of Revenue is dismissed.”
7. Since the facts of the issue under consideration are identical with the facts of the appeal pertaining to Assessment Year 2013-14 decided by the coordinate bench, following the said decision, we hold that the penalty levied under Section 271(1)(c) of the Act is liable to be cancelled in the instant cases since the additions have been made on estimated basis. Accordingly, we set-aside the orders passed by the Ld. CIT(A) in all the three years under consideration and direct the Assessing Officer to delete the penalty levied under Section 271(1)(c) of the Act in all the three years under consideration.
8. In the result, all the three appeals filed by the assessee are allowed.
Order pronounced in the open court on 20th June, 2023.
