ITAT Mumbai deletes penalty where addition was made on estimation basis

ITO Vs Sunil Bhagwandas Vorani (HUF) (ITAT Mumbai)

In a recent ruling, the Income Tax Appellate Tribunal (ITAT) Mumbai addressed the issue of penalty imposition under Section 271(1)(c) of the Income Tax Act, 1961, in the case of ITO Vs Sunil Bhagwandas Vorani (HUF). The tribunal’s decision to delete the penalty highlights a critical aspect of tax law regarding the imposition of penalties where additions to income are made on an estimation basis rather than based on clear evidence of concealment or misrepresentation.

Case Background: The case pertains to the assessment year (A.Y.) 2010-11, where Sunil Bhagwandas Vorani (HUF), engaged in trading iron and steel under the name M/s S. S. Traders, had filed his income tax return declaring an income of Rs. 3,69,700/-. The assessment was re-opened under Section 147 based on information from the Sales Tax Department regarding bogus entries. Consequently, 25% of the total sales value amounting to Rs. 59,94,897/- was added to the declared income, leading to a penalty under Section 271(1)(c) for alleged concealment.

Revenue’s Argument: The Revenue challenged the CIT(A)’s decision to delete the penalty, arguing that the penalty was justified given that the addition was based on the information about bogus purchases. The Revenue maintained that the onus was on the assessee to prove the genuineness of the purchases, and the failure to do so warranted the penalty.

Tribunal’s Analysis:

1. Estimation Basis for Addition: The ITAT Mumbai examined whether the penalty was appropriate given that the additions were made on an estimation basis. The Tribunal noted that the CIT(A) had restricted the additions to 25% of the non-verifiable purchases, indicating that the addition was estimated due to the inability to verify the books of accounts.
2. Legal Precedents: The Tribunal relied on previous rulings, including the decision in Deepak Gogri Vs. ITO and the Karnataka High Court case of CIT Vs. Parasmal Babulal Jain. Both judgments emphasized that penalties under Section 271(1)(c) cannot be imposed when additions are based on estimation rather than specific evidence of concealment or inaccurate particulars.
3. Absence of Concealment: The Tribunal found that the additions were made due to the rejection of the books of accounts and not due to clear evidence of income concealment. The Tribunal observed that penalties under Section 271(1)(c) are not sustainable when the additions are based on estimates rather than actual evidence of concealment.

Tribunal’s Decision: The ITAT Mumbai confirmed the CIT(A)’s order to delete the penalty, as the penalty was based on estimated additions and not on substantive evidence of concealment. The Tribunal dismissed the Revenue’s appeal, underscoring that penalties are not warranted under circumstances where additions are estimated due to the inability to verify the accuracy of the accounts.

Conclusion

The ITAT Mumbai’s ruling in ITO Vs Sunil Bhagwandas Vorani (HUF) is a significant clarification on the application of penalties under Section 271(1)(c) when additions to income are made on an estimation basis. By deleting the penalty, the Tribunal reinforced that penalties cannot be justified solely on estimated additions, emphasizing the need for concrete evidence of concealment or misrepresentation. This decision provides a crucial precedent for taxpayers and tax authorities in cases involving estimated additions and reinforces the principle of fairness in tax adjudication.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

1. The revenue has instituted the present appeal challenging the order dated 12.12.2023 of Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as the “CIT(A)”], passed under section 250 of the Income Tax Act, 1961 [hereinafter referred to as “the Act”] for the A.Y. 2010-11, wherein the penalty levied u/s. 271(c) of the Act upon the assessee was deleted.

2. The facts in brief as culled out from the orders of the lower authorities are that the assessee is an individual filed its original return of income on 30.09.2010, declaring an income of Rs. 3,69,700/-. The assessee is in the business of trading in iron & steel under the name and style of M/s S. S. Traders. The case was re-opened u/s. 147 on account of information received by the Sales Tax Department, State of Maharashtra regarding certain persons providing bogus entries from bogus purchase bills to the tax payers. The assessment order was passed adding 25% of the total sales value amounting of Rs. 2,39,79,589/- i.e., Rs. 59,94,897/-was added back to the total income over and above the income declared by the assessee and levied tax thereon. The AO has levied the penalty u/s. 271(1)(c) of the Act on the ground that the additions were restricted to 25% by the Ld. CIT(A). It was further observed that the assessee has concealed the particulars of income amounting to Rs. 37,19,972/- on account of no genuine purchases and unexplained purchases, hence, the provisions of Section 271(1)(c) of the Act were attracted. The said order of imposing penalty was challenged before the Ld. CIT(A), who disposed off the appeal by the impugned order and has deleted the penalty imposed by the Ld. AO on the ground that the additions were made on estimate basis and followed the decision of Hon’ble ITAT, Mumbai in the case of Deepak Gogri Vs. ITO – Ward 25(3)(2) in ITA No. 1396/M/2017, dated 23.11.2017. Aggrieved by the order of the Ld. CIT(A), the department is in appeal before us and has raised the following grounds of appeal.

1. “Whether on the facts and circumstances of the case and in law whether the ld. CIT(A) was justified in deleting the penalties of Rs. 11,49,472/- for the AY 2010-11 levied u/s.27 1(1) (c) without appreciating that the penalties were levied in respect of quantum additions made on account of purchases from bogus parties provided on the basis of information received from external sources in the nature of law enforcement agencies and other facts and material on record wherein the onus was on the assessee to establish the genuineness of such purchases by production of such parties before the Assessing Officer and the assessee failed to discharge his onus” The ITO 26(2)(1), Mumbai.

2. Whether on the facts and circumstances of the case and in law whether the ld. CIT(A) was justified in deleting the penalty merely because the addition was confirmed on estimated basis, though the estimation was necessitated because the books of account were proved false as purchases from bogus parties were debited therein”.

3. The appellant craves leave to amend or alter or add a new ground which may be necessary.”

3. We have heard the Ld. DR on behalf of the department and Ld. AR on behalf of the assessee. It was argued on behalf of the appellant/ revenue that the addition was confirmed on the estimated basis because the estimation was necessitated as the books of accounts were proved false and the purchases for bogus parties were debited therein. It is further argued that onus was on the assessee to establish the genuineness of such purchases by production of such parties before the Ld. AO and the assessee has failed to do so. The Ld. DR has therefore relied upon the order of the Ld. AO in support of his arguments stating that the penalty levied is legally justified.

4. The Ld. AR on behalf of the assessee has argued that since the addition was made on estimate basis, therefore, the penalty levied u/s. 271(1)(c) is not legally sustainable. The Ld. AR has relied upon the case of Coordinate Bench i.e., Shri. Hitesh S. Shah Vs. ITO 25(2)(4), ITA No. 3423/Mum/2017, order dated 19.09.2010. The Ld. AR has taken us to the relevant portion of para no. 6 which reads as under:

“6. …. It was further averred by the ld. AR that as disallowance of 12.5% of the aggregate value of the purchases under consideration made by the A.O. was only backed by a process of estimation, thus on the said count also no penalty under Sec. 271(1)(c) was liable to be imposed on him. The Id A.R in order to fortify his claim that no penalty was called for in the hands of the assessee, relied on the order of a coordinate bench of the Tribunal, viz. ITAT Mumbai “H” bench, Mumbai, in the case of Shri Deepak Gogari Vs. ITO, Mumbai, (ITA No. 1396/Mum/2017, dated 23.11.2017). It was submitted by the ld. A.R that in the aforesaid case involving identical facts, the penalty imposed by the A.O under Sec. 271(1)(c) in respect of the estimated profit element pertaining to the bogus purchases made by the assessee was deleted by the Tribunal. On the basis of the aforesaid contentions, it was submitted by the Id. A.R that the order of the CIT(A) sustaining the penalty imposed by the AO under Sec. 271(1)(c) could not be sustained and was liable to be vacated.”

5. As is evident from para 5.6 of the Ld. AO’s order, the Ld. CIT(A) has restricted the additions of @25% of non-verifiable purchases debited to the trading account, this shows that that Ld. CIT(A) while confirming the addition in quantum appeal has done so on estimate basis. The Hon’ble Karnataka High Court in the case of CIT Vs. Parasamal Babulal Jain, ITA No. 20 of 2006, order dated 14.09.2011, has held that the penalty u/s. 271(1)(c) is not attracted where addition made on estimate basis. The said order reads as under:

“Penalty cannot be levied on the disallowance of expenses made on estimate basis. If no facts are brought on record that any income has been concealed by the assessee or the assessee has furnished inaccurate particulars. It is because of the disallowance of the expenditure the total amount representing total income is enhanced to the extent of disallowance. Conditions which are to be fulfilled before section 271(1)(c) is attracted do not exist.”

6. In this case as is evident from the observation of the para 5.1 of the Ld. AO’s order, the addition was made on estimation of total turnover after rejecting the books of accounts. Notice u/s. 133(6) were also issued to the various purchase parties and all the notice were returned by the postal authority and the assessee has not produced the party to confirm the same. These observation of the lower authorities shows that it is not established by the revenue that the assessee had concealed the particulars of income or has submitted inaccurate particulars of income so as to attract Section 271(1)(c) of the Act. Admittedly, the addition has been made on estimate basis, therefore, the ratio of judgment of the Karnataka High Court referred (supra) and various pronouncements of the judicial ITAT covers the facts of the present case of the assessee. Since the addition was made on the estimate basis and for the aforesaid discussion, the penalty is not sustainable and rightly deleted by the Ld. CIT(A). We find no illegality in the order of the Ld. CIT(A) and same is accordingly confirmed.

7. Both the grounds of appeal of the revenue are accordingly dismissed.

8. In the result, appeal filed by the revenue is dismissed in the above terms.

Order pronounced in the open court on 22.07.2024