I-Serve Systems Pvt. Ltd. Vs DCIT (ITAT Ahmedabad)
Income Tax Appellate Tribunal (ITAT) Ahmedabad has allowed the appeal of I-Serve Systems Pvt. Ltd., cancelling a penalty of ₹8.26 lakhs imposed under Section 271(1)(c) of the Income Tax Act. The penalty was sustained earlier by the CIT(A), but ITAT held that it was unjustified since it arose from estimated disallowances made by the Assessing Officer (AO). The AO had completed the assessment ex-parte under Section 144 after the assessee failed to respond to multiple notices. During the assessment, 25% of expenses amounting to ₹69.23 lakhs were disallowed on an estimated basis due to unverifiable elements and non-compliance with TDS provisions. This resulted in a total income determination of ₹1.59 crore.
However, the Tribunal noted that the AO had not identified any specific instance of bogus expenditure or brought on record any material suggesting concealment or inaccurate reporting of income. The disallowance was purely ad-hoc, without detailed reasoning or evidence. Citing established legal precedent, ITAT ruled that penalties under Section 271(1)(c) cannot be sustained on additions made on estimated or ad-hoc grounds, particularly when there is no clear evidence of intent to evade tax. Furthermore, a delay of 1271 days in filing the appeal was condoned as the assessee had mistakenly appealed the rectification order instead of the original penalty order, a mistake acknowledged by the ITAT in a prior hearing.
