Case Law Details
Thakorbhai & Company Vs ITO (ITAT Surat)
Income Tax Appellate Tribunal (ITAT) Surat has ruled in favor of the assessee, Thakorbhai & Company, in a case concerning the imposition of a penalty under Section 271(1)(c) of the Income Tax Act for Assessment Year 2009-10. The dispute arose after the Assessing Officer (AO) made an addition of ₹38.51 lakh by disallowing 50% of purchases amounting to ₹77.03 lakh, treating them as bogus. Subsequently, the AO levied a penalty of ₹2,11,310 under Section 271(1)(c) for alleged concealment of income. The assessee contested this penalty, arguing that it was based on estimated additions and hence, not legally tenable.
On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] revised the disallowance, restricting it to 5% of the gross turnover of ₹1.36 crore, acknowledging that the original addition lacked concrete evidence and was excessive. The assessee then challenged the penalty before the ITAT, asserting that as per judicial precedents, penalties cannot be levied when income is assessed on an estimated basis. In support, the assessee cited several rulings from the Gujarat High Court, including CIT vs Subhash Trading (1996), Navjivan Oil Mills vs CIT (2002), and ITO vs Bombaywala Readymade Stores (2015), all of which held that estimated additions do not warrant penalty under Section 271(1)(c).
The Revenue, on the other hand, defended the penalty by arguing that the disallowance was not merely an estimation but a calculated restriction of the profit element within the alleged bogus purchases. The Department maintained that the AO had adequate justification for imposing the penalty based on findings from the original assessment and subsequent appellate order.
After hearing both sides and reviewing the records, the ITAT concluded that the addition made by the AO, later modified by the CIT(A), was indeed based on estimation. Citing the jurisdictional High Court’s decision in Bombaywala Readymade Stores, the Tribunal emphasized that where income is assessed on a presumptive or estimated basis, penalties for concealment cannot be sustained. The Tribunal noted that the AO did not have conclusive proof of concealment but had resorted to estimation, which cannot form the basis for penal action under the cited section.
Accordingly, the ITAT allowed the appeal of Thakorbhai & Company and directed the deletion of the penalty of ₹2,11,310 imposed under Section 271(1)(c) of the Income Tax Act. The decision reinforces the principle that estimated disallowances, unless backed by clear evidence of concealment, do not warrant penalty. The order was announced in open court on November 6, 2023.
FULL TEXT OF THE ORDER OF ITAT SURAT
1. This appeal by the assessee is directed against the order of National Faceless Appeal Centre, Delhi (NFAC)/learned Commissioner of Income Tax (Appeals) (in short, the CIT(A)) dated 28/07/2023 in confirming the penalty levied under Section 271(1)(c) of the Income Tax Act, 1961 (in short, the Act) for the Assessment Year (AY) 2009-10. The assessee has raised sole ground of appeal which reads as under:
“1. The ld. NFAC/CIT(A) erred in law and on facts in imposing a penalty u/s 271(1)(c) of the Act of Rs. 2,11,310/-.”
2. Rival submissions of both the parties have been heard and record perused. The learned Authorised Representative (ld. AR) of the assessee submits that while passing the assessment order, the Assessing Officer made addition on account of bogus purchases. The Assessing Officer disallowed 50% of such purchases of Rs. 77,03,224/- thereby made addition of Rs. 38,51,612/-.
3. On appeal before the ld. CIT(A), disallowance was restricted to 5% of gross turnover of 1.36 crore. The Assessing Officer levied penalty on such disallowances vide order dated 29/01/2022. The Assessing Officer levied penalty of Rs. 2,11,310/-. The ld. AR of the assessee submits that it is settled position under law that no penalty is leviable on estimated additions. To support his view, the ld. AR of the assessee relied on the following case laws:
(i) CIT Vs Subhash Trading (1996) 86 Taxman 30 (Guj)
(ii) Navjivan Oil Mills Vs CIT (2002) 124 Taxman 392 (Guj)
(iii) CIT Vs Valimkbhai H patel (2006) 280 ITR 487 (Guj)
(iv) ITO Vs Bombaywala Readymade Stores (2015) 55 com 258 (Guj)
(v) CIT Vs Hariyana Textile Industries P ltd. Tax Appeal No. 741 of 2009 dated 28/06/2016
(vi) ITA 1044/Ahd/2018 I-Serve Systems Pvt. Ltd. Vs DCIT order dated 02/02/2022
(vii) Anil Abhubhai Odedara Vs ITO (2020) 117 taxmann.com 490 (Rajkot-Trib)
4. On the other hand, the learned Senior Departmental Representative (ld. Sr. DR) for the revenue supported the orders of the lower authorities. The ld. Sr.DR for the revenue submits that the disallowance was not made on estimated basis rather it was restricted to the profit element embedded in such purchases. The penalty was rightly levied by assessing officer, on such disallowances.
5. I have considered the rival submissions of both the parties and perused the record carefully. I find that the Assessing Officer while passing the assessment order, noted that the has shown purchases in cash aggregating to 77,03,224/-. The Assessing Officer after giving show cause notice, disallowed 50% of such purchases. Aggrieved by the additions in the assessment order, the assessee filed appeal before the ld. CIT(A). The ld. CIT(A) restricted the addition to the extent of 5%, however, 5% was applied on total turnover. On receipt of order of ld. CIT(A) in quantum assessment, the Assessing Officer levied penalty of Rs. 2,11,310/-. I find that the addition was certainly bases on estimation made by the Assessing Officer and modified by the ld. CIT(A). I find that the Hon’ble Jurisdictional High Court in the case of ITO Vs Bombaywala Readymade Stores (supra) held that “whether since no income had been filed by assessee and income was assessed on estimate basis by revenue, no penalty under Section 271(1)(c) could be levied for concealment of income.” In view of the aforesaid factual and legal position, I find that no penalty is leviable on the assessee, when the addition on account of impugned purchases was estimated merely on the basis of estimation, therefore, I direct to delete the penalty levied under Section 271(1)(c) of the Act. In the result, ground of appeal raised by the assessee is allowed.
6. In the result, this appeal of assessee is allowed.
Order announced in open court on 06th November, 2023.
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