No Penalty for Additions Based on Estimation Without Concrete Proof: ITAT Mumbai

Dev Engineers Vs DCIT (ITAT Mumbai)

Summary: In the case of Dev Engineers Vs DCIT, the Income Tax Appellate Tribunal (ITAT) Mumbai dealt with penalties levied under Sections 271(1)(c) and 271AAB of the Income Tax Act. Following a search operation, additions totaling ₹2.27 crore were made, including bogus purchases and labor expenses. The Assessing Officer imposed penalties for inaccurate income details and undisclosed income. On appeal, CIT(A) partially reduced the additions but upheld the penalties, citing intent to conceal income. However, ITAT ruled in favor of the assessee, stating penalties could not be sustained for estimated additions. It observed that the additions were based on estimation, with no direct evidence of concealment or inaccurate particulars. Additionally, for Section 271AAB penalties, ITAT emphasized the absence of concrete proof of undisclosed income. Relying on precedents, including CIT v. Aero Traders Pvt. Ltd. and PCIT v. Roshan Lal Sancheti, ITAT clarified that penalties require clear evidence, which was lacking in this case. The Tribunal deleted all penalties, highlighting that mere disallowance or estimation does not justify punitive actions.

Brief Facts of the Case:

The assessee, M/s. Dev Engineers, was subjected to a search and seizure operation u/s. 132(1) on 16.02.2017 in the case of Shri Pratap Uttam Purohit.

• Based on incriminating documents, proceedings u/s. 153C were initiated, and an assessment order was passed u/s. 143(3) r.w.s. 153C on 27.12.2018.
• The AO made additions totaling Rs. 2,27,75,000/-, including:
• Cash expenses – Rs. 1,83,380/-
• Bogus purchases (u/s. 69C) – Rs. 58,59,297/-
• Bogus labor expenses (u/s. 69C) – Rs. 1,67,32,303/-
• Penalty proceedings u/s. 271(1)(c) were initiated for furnishing inaccurate particulars of income.
• For A.Y. 2017-18, penalty u/s. 271AAB was imposed, treating the additions as undisclosed income.

2. First Appellate Proceedings (CIT(A)):

• CIT(A) partially reduced the additions but upheld the penalty, alleging mens rea (guilty intent) by the assessee.

3. ITAT Mumbai Ruling:

• ITAT deleted the penalty on the following grounds:

1 .Additions were based on estimation (percentage disallowance of expenses).

2. Penalty u/s. 271(1)(c) is not leviable on estimated additions.

3. Penalty u/s. 271AAB requires concrete evidence of undisclosed income, which was absent.

4. No conclusive proof of concealment or inaccurate particulars was established.

Thus, penalties under both sections were deleted, and the appeals were allowed in favor of the assessee.

Final Legal Submissions

I. Penalty u/s. 271(1)(c) Not Sustainable on Estimated Additions

1. Penalty under section 271(1)(c) cannot be levied when the additions are based on estimation and disallowance of expenses.

2. No direct evidence of concealment or inaccurate particulars of income was found.

3. CIT(A) himself reduced the disallowance percentage, proving that the additions were purely estimated.

II. Penalty u/s. 271AAB Not Automatic

1. Section 271AAB applies only when there is conclusive evidence of undisclosed income found during search.

2. Merely disallowing an expense does not mean that the income was “undisclosed” under section 271AAB.

III. Case Laws

A. Penalty u/s. 271(1)(c) Not Levied on Estimated Additions

1. CIT v. Aero Traders Pvt. Ltd. [(2010) 322 ITR 316 (Del)]: Penalty under section 271(1)(c) cannot be levied when the addition is based on estimation and there is no direct proof of concealment.

2. CIT v. Sangrur Vanaspati Mills Ltd. [(2011) 337 ITR 178 (P&H)] When income is assessed on estimated basis, penalty under section 271(1)(c) is not justified.

3. Harigopal Singh v. CIT [(2002) 258 ITR 85 (P&H)]:Penalty cannot be imposed for disallowance of expenses based on estimation.

4. CIT v. Dhandayuthapani Finance Ltd. [(2014) 45 taxmann.com494 (Mad) : Penalty under section 271(1)(c) is not automatic and must be supported by clear evidence of concealment.

B. Mere Disallowance of Expense Does Not Mean Inaccurate Particulars

5. Reliance Petroproducts (P) Ltd. v. CIT [(2010) 322 ITR 158 (SC)]: Mere disallowance of a claim does not mean inaccurate particulars were filed.

C. Penalty u/s. 271AAB Requires Clear Evidence of Undisclosed Income

6. PCIT v. Roshan Lal Sancheti [(2019) 414 ITR 276 (Raj)] Penalty u/s. 271AAB is not automatic and can only be levied when there is clear, direct evidence of undisclosed income found in search.

7. DCIT v. Rakesh B. Mistry [(2023) 103 taxmann.com412 (Mum)]: Merely making an addition does not mean penalty u/s. 271AAB is justified.

• The department must prove that the income was undisclosed as per section 271AAB’s definition.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

These three appeals filed by the assessee are against the orders of Ld. CIT(A)-48, Mumbai, vide order nos.

i) ITBA/APL/S/250/2024-25/ 1069174245(1),

ii) ITBA/APL/S/250/2024-25/ 1069174402(1)

iii) ITBA/APL/S/250/2024-25/ 1069174068(1)

all dated 27.09.2024 passed against the penalty orders by the Deputy Commissioner of Income Tax, Central Circle – 2(1), Mumbai, dated 31.05.2023 for Assessment Years 2015-16 and 2016-17, u/s. 271(1)(c) of the Income-tax Act (hereinafter referred to as the “Act”) and for 2017­18, u/s. 271AAB of the Act.

2. This set of three appeals by the assessee is on a common issue of levy of penalty on the issues which in the quantum proceedings have been decided by the Coordinate Bench of ITAT Bench in assessee’s own case, granting partial relief by adopting certain percentages on an estimate basis. For appeal in ITA No.6004/Mum/2024 for Assessment Year 2017-18, the penalty levied is u/s.271AAB and for the other two years u/s. 271(1)(c). Since identical issue is involved in all the three appeals, we take up appeal for Assessment Year 2015-16 for drawing the facts and give our findings thereon which will apply mutatis mutandis on the other two appeals also.

3. Assessee filed its return of income on 29.09.2015 reporting total income at Rs 4,10,19,620/-. Subsequently, a search and seizure action u/s. 132(1) of the Act was conducted in the case of Shri Pratap Uttam Purohit on 16.02.2017. Assessee was covered u/s 153C on the basis of the incriminating documents pertaining to assessee were found and seized during the course of search and seizure action. Shri Pratap Uttam Purohit was the key person of the Group and runs a proprietary concern in the name and style of M/s Dev Engineers. Shri Pratap Uttam Purohit was engaged in carrying out civil contract works awarded by BMC/MCGM through his proprietorship concern M/s. Dev Engineers. However, w.e.f. 20.12.2014 Shri Pratap Uttam Purohit converted his proprietorship concern M/s. Dev Engineers into a partnership firm with the same name i.e. M/s. Dev Engineers and continued to carry on his business in this new partnership firm.

3.1. During the course of search, it was noticed by the search team that assessee had indulged itself in booking bogus bills of purchases and sub-contracts in his books of accounts in his proprietorship concern M/ s Dev Engineers as well as in the books of his partnership firm M/s. Dev Engineers. Notice u/s.153C of the Act dated 14.09.2018 was issued and duly served upon the assessee. In response, assessee filed its return of income u/s 153C for A.Y. 2015-16 on 04.10.2018 declaring total income at Rs.4,10,19,620/-. An order u/s 143(3) r.w.s. 153C of the Act was passed on 27.12.2018, assessing the total income at Rs. 6,37,94,600/-, after making addition of Rs. 1,83,380/- on account of cash expenses, Rs.58,59,297/- on account of bogus purchases expenditure u/s. 69C and Rs. 1,67,32,303/- on account of bogus labour payment u/s.69C of the Act. Penalty proceedings u/s 271(1)(c) were initiated for furnishing inaccurate particulars of income and a notice u/s. 271(1)(c) of the Act dated 27.12.2018 was issued and served on the assessee to file explanation for the same within seven days. Assessee filed a letter on 16.01.2019 requesting to keep penalty proceedings in abeyance for the reason that assessee had filed an appeal before the Ld. CIT(A) which was pending for disposal.

3.2. Ld. CIT(A) passed a combined order for A.Y. 2015-16 & 2016-17 and granted part relief to the assessee vide order No. CIT(A)-48/I.T. 6568 657/DCCC-2(1)/2018-19 dated 31.10.2019.

4. Aggrieved with the order of the Ld. CIT(A), assessee filed an appeal before the Tribunal. Coordinate Bench of ITAT allowed partial relief to the assessee. Details of additions upheld by ld. CIT(A) and the Coordinate Bench are as under-

5. Despite the above tabulated findings of Coordinate Bench, allowing partial relief to the assessee, which is reproduced by ld. Assessing Officer in para -6 of the impugned order while imposing penalty, he noted in para – 8 that, submissions made by the assessee are found to be not acceptable. Such an irresponsible noting by ld. Assessing Officer despite having findings of the Coordinate Bench on the quantum additions on record, reflects absence of fundamental understanding of judicial discipline, while taking up penalty proceedings. The table produced in para-6 of the impugned penalty order, for all the additions made by the ld. Assessing Officer have been either reduced to a lower percentage from the percentage at which the addition was made or have been deleted in toto. For example, in the case of addition for cash expenses on account of “site expenses”, ld. Assessing Officer made the addition by applying 50% of the expenses which was reduced by ld. CIT(A) to 35% and was subsequently reduced to 20% by the Coordinate Bench. Similar is the case for other expenses and payments for which additions have been made.

5.1. We are ridiculed to note that even the first appellate authority, despite taking record of partial relief to the assessee in terms of the findings as stated above has observed that there appears to be a malafide intention of the assessee and “mens rea” is present in the case. He concluded to uphold the penalty so imposed on account of furnishing inaccurate particulars of income by the assessee.

5.2. It is a fact on record as noted both by ld. Assessing Officer and ld. CIT(A), tabulated above that additions sustained are purely on estimate basis. The issue before us is no longer res integra and it is a settled law that in the said factual position, penalty is not imposable on additions sustained on estimate basis. It is an accepted fact that whenever an addition is made on the basis of estimate, penalty u/s.271(1)C is not leviable. There is no scope to levy penalty under the said section. Accordingly, in the given set of facts, the penalty levied u/s.271(1)C is deleted. Ground raised by the assessee is allowed.

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

7. For the other two appeals, for Assessment Year 2016-17 and 2017-18, there being identical fact pattern, except that for Assessment Year 2017-18, the penalty is imposed u/s. 271AAB, our observations and findings in ITA No.6002/Mum/2024 applies mutatis mutandis to ITA No.6003/Mum/2024 and 6004/Mum/2024. Both, ld. Assessing Officer and ld. CIT(A) have made identical observations and arrived at adverse conclusions despite partial relief granted by Coordinate Bench on quantum additions as discussed above. In the result, these two appeals are also allowed.

Order is pronounced in the open court on 20 February, 2025