PCIT Vs Colo Colour Pvt. Ltd. (Bombay High Court)
Bombay High Court in PCIT vs Colo Colour Pvt. Ltd. examined the validity of penalty levied under Section 271(1)(c) of the Income Tax Act, 1961, in the context of alleged bogus purchases claimed by the assessee. The appeal arose from an order dated 31 July 2020 by the Income Tax Appellate Tribunal (Mumbai Bench), which upheld the decision of the Commissioner of Income Tax (Appeals) to delete the penalty imposed by the Assessing Officer (AO) for Assessment Year 2011-12.
The assessee operated a photo studio and traded in photographic materials. In its return for AY 2011-12, it declared a total income of ₹4,32,530/-. The case was subsequently reopened under Section 148 on 23 March 2016. Upon reassessment under Sections 143(3) and 147, the AO added ₹7,40,776/- to income for alleged bogus purchases and ₹59,262/- for unexplained commission expenses, totaling ₹7,99,038/-, increasing declared income to ₹12,32,570/-. The AO observed that although the purchases themselves could not be doubted, there was suspicion that the profit shown in the books of accounts did not represent the true profit due to potentially fictitious invoices. The AO estimated a 12.5% profit on the alleged bogus purchase bills to determine the addition.
The AO levied a penalty of ₹2,75,000/- under Section 271(1)(c), claiming concealment of income or furnishing inaccurate particulars. The assessee contested, arguing that the additions were ad hoc estimations and that the documents submitted—purchase invoices, delivery challans, bank statements, stock records, and ledger accounts—demonstrated the genuineness of the transactions. The assessee clarified that it had agreed to the addition “for peace of mind” and to avoid prolonged litigation, which did not imply concealment or inaccurate particulars.
The CIT(A) examined the submissions and noted that the AO’s addition was based on suspicion and general information from the Sales Tax Department, without positive evidence of concealment. The CIT(A) observed that the AO estimated the profit element at 12.5% without any conclusive proof of the assessee obtaining undue advantage, and also added ₹59,262/- for unexplained commission expenditure on similar ad hoc grounds. Consequently, the CIT(A) deleted the penalty under Section 271(1)(c).
The AO’s appeal before the Tribunal was dismissed. The Tribunal relied on judicial precedents, including Shri Deepak Gogri vs ITO and CIT vs Aero Traders Pvt. Ltd. (Delhi HC), holding that penalty cannot be levied when additions are made purely on estimates or ad hoc assumptions, in the absence of evidence of intentional concealment or furnishing inaccurate particulars.
The High Court observed that the AO’s approach relied on information from the Sales Tax Department and an internal “investigation,” without providing this material to the assessee or obtaining corroborative evidence. The court emphasized that penalty provisions under Section 271(1)(c) are strictly penal and deterrent in nature, requiring a clear subjective satisfaction that the assessee deliberately concealed income or furnished inaccurate particulars. Estimations or general inferences are insufficient.
The court referred to precedents, including:
