Bombay HC Deletes Penalty as Bogus Purchase Addition Was Based on Estimation

PCIT Vs Elcon Pipe And Fittings Pvt. Ltd. (Bombay High Court)

The Bombay High Court dismissed the Revenue’s appeal against the order of the Income Tax Appellate Tribunal (ITAT) deleting the penalty imposed under Section 271(1)(c) of the Income-tax Act for Assessment Year 2009-10.

The case originated after the Revenue received information from the Maharashtra Sales Tax Department identifying certain entities allegedly engaged in issuing bogus purchase bills. Based on this information, a notice under Section 148 was issued to the assessee, and an assessment under Sections 144 and 147 was completed on 21 March 2014, making additions on account of non-genuine purchases. Simultaneously, penalty proceedings under Section 271(1)(c) were initiated for furnishing inaccurate particulars of income. Since the assessee did not comply with the notice issued during the penalty proceedings, the Assessing Officer levied a penalty equal to 100% of the tax sought to be evaded, amounting to Rs. 22,12,061.

The assessee challenged the assessment before the Commissioner of Income Tax (Appeals). The CIT(A) partly allowed the appeal by restricting the addition relating to bogus purchases to 12.5%, thereby granting substantial relief. Both the assessee and the Revenue appealed before the ITAT. The Tribunal dismissed the Revenue’s appeal and upheld the CIT(A)’s decision to sustain only 12.5% of the alleged bogus purchases, relying on the decision of the Gujarat High Court in Smith P. Seth.

The Revenue subsequently challenged the quantum addition before the Bombay High Court. By an order dated 3 March 2022, the High Court dismissed the Revenue’s appeal and upheld the addition restricted to 12.5%.

Meanwhile, in the penalty proceedings, the assessee appealed against the penalty order. The CIT(A) held that penalty could survive only to the extent of the addition sustained in the quantum proceedings and accordingly restricted the penalty proportionately to the 12.5% addition. The Revenue did not challenge this order. The assessee, however, appealed before the ITAT, which deleted the penalty entirely on the ground that the addition itself had been sustained only on an estimated basis.

Before the High Court, the Revenue argued that the ITAT had erred in deleting the penalty despite the assessee’s inability to establish the genuineness of the purchases or produce the alleged suppliers for verification. It also contended that the assessee intended to reduce taxable income by claiming purchases from non-genuine parties and relied upon the Supreme Court’s decision in MAK Data (P) Ltd. v. CIT.

After considering the submissions, the High Court observed that the issue was squarely covered by its earlier decision in Principal Commissioner of Income Tax-6 v. Colo Colour Pvt. Ltd., decided on 16 September 2025. In that judgment, the Court had held that penalty under Section 271(1)(c) cannot be imposed where the addition is sustained purely on an estimated basis or is founded on guesswork.

The Court noted that the ITAT had deleted the penalty because the quantum addition was ultimately restricted to 12.5% of the alleged bogus purchases, which was an estimation. Since the Tribunal’s decision was consistent with the principle laid down in Colo Colour Pvt. Ltd., the High Court found no error in the deletion of the penalty.

Holding that the ITAT’s order did not give rise to any substantial question of law, the Bombay High Court dismissed the Revenue’s appeal. No order as to costs was passed.

FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT

1. The above Appeal is filed by the Revenue challenging the Order dated 11^thFebruary 2019 of the Income Tax Appellate Tribunal (ITAT). The above Appeal arises from penalty proceedings and relates to Assessment Year 2009-2010. According to the Revenue, the impugned Order of the ITAT gives rise to the following questions of law:

“A. Whether on the facts and circumstances of the case, the Hon’ble ITAT has erred in deleting the penalty by not appreciating the fact that the assessee failed to prove the genuineness foteh alleged bogus purchases from the Hawala parties during the course of assessment as well as penalty proceedings ?

B. Whether on the facts and circumstances of the case, the Hon’ble ITAT has erred in deleting the penalty by not appreciating the fact that the assessee could not produce the alleged bogus parties for verification of genuineness of transaction during assessment proceedings as well as penalty proceedings ?

C. Whether on the facts and circumstances of the case, the Hon’ble ITAT has erred in deleting the penalty by not appreciating the fact that there was clear intention on the part of the assessee to reduce the taxable income by claiming purchases from non-genuine parties?

D. Whether on the facts and circumstances of the case, the Hon’ble ITAT has erred in deleting the penalty without appreciating the ratio laid down by the Hon’ble Supreme Court in the case of MAX Data (P) Ltd., Vs. CIT (358 ITR 593) (SC) ?”

2. It is the case of the Revenue that information was received from the Sales Tax Department of Maharashtra giving the names and addresses and other details of certain persons who had provided entries of bogus purchase bills to a large number of tax payers.

3. In these circumstances, the Revenue issued a Notice under Section 148 to the Assessee after obtaining prior approval. Thereafter, an Assessment Order under Section 144, read with Section 147, was passed on 21^stMarch 2014 assessing the total income of the Assessee at Rs.71,58,777/-.

This addition was made on account of non-genuine purchases. Penalty proceedings under Section 271 (1)(c) were also initiated against the Assessee for furnishing inaccurate particulars of income. Since there was non-compliance of the Notice issued under Section 271 (1)(c), the Assessing Officer levied 100% penalty of tax evaded amounting to Rs.22,12,061/-.

4. Being aggrieved by the Assessment Order, the Assessee preferred an Appeal before the CIT (Appeals). The CIT (Appeals) restricted the addition of bogus purchases to 12.5%, thereby giving relief to the Assessee of Rs.62,63,930/-.

5. Aggrieved by the Order passed by the CIT (Appeals), the Assessee as well as the Revenue preferred an Appeal before the ITAT Mumbai. The ITAT, “F” Bench, Mumbai, dismissed the Appeal of the Department and confirmed the decision of the CIT (Appeals) to restrict the addition to 12.5% of bogus purchases, relying upon the decision of the Hon’ble Gujarat High Court in the case of Smith P. Seth.

6. Being aggrieved by the decision of the ITAT, restricting the addition to only 12.5% of the bogus purchases, the Revenue approached this Court by filing Income Tax Appeal No.1327 of 2018.

7. The Appeal of the Revenue was dismissed by this Court vide its Order dated 3^rdMarch 2022. In other words, the addition of 12.5% of the bogus purchases, as ordered by the ITAT, was upheld by this Court.

8. Simultaneously, since penalty proceedings were also initiated and a penalty order was passed, the Assessee preferred an Appeal before the CIT (Appeals) challenging the penalty order passed by the Assessee. As mentioned earlier, the penalty levied by the Assessment Officer was 100% of the tax evaded amounting to Rs.22,12,061/- The CIT (Appeals), after hearing the Revenue as well as the Assessee, restricted the levy of penalty to the extent of the addition confirmed in the quantum Appeal, namely to 12.5%. In other words, the CIT (Appeals) deemed it a fit case to levy penalty and restricted the amount in the ratio of the quantum addition upheld by the ITAT.

9. Being aggrieved by the Order of CIT (Appeals), the Assessee assailed the said Order before the ITAT.The Revenue did not file any Appeal from the Order of the CIT (Appeals) in the penalty proceedings. It is in this Appeal that the ITAT passed the impugned Order setting aside the entire penalty on the basis that penalty could not be levied when the addition was made on an estimation.

10. After hearing Mr.Sharma, the learned Advocate appearing on behalf of the Respondent, as well as the learned Advocate appearing on behalf of the Assessee, we find that the issue raised in the present Appeal is squarely covered by the decision of this Court in the case of Principal Commissioner of Income Tax – 6 vs. Colo Colour Pvt.Ltd. in Income Tax Appeal No.48 of 2022 decided on 16^thSeptember 2025. In this decision, this Court has clearly taken a view that penalty cannot be imposed under Section 271 (1)(c) when the addition was sustained purely on an estimate basis or when the addition was made which was on pure guess work. Since the penalty order was set aside by the ITAT on the basis that the addition made in the quantum proceedings was on estimation (i.e. 12.5% of the bogus purchases), the ITAT, in our view, was correct in setting aside the penalty order. We find that the decision of the ITAT is in consonance with the decision of this Court rendered in Colo Colour Pvt.Ltd. (Supra).

11. Considering these facts and circumstances, we find that the impugned Order of the ITAT does not give rise to any substantial question of law. The Appeal is therefore dismissed. However, there shall be no order as to costs.

12. This order will be digitally signed by the Private Secretary/ Personal Assistant of this Court. All concerned will act on production by fax or email of a digitally signed copy of this order.