Judicial Support to New Penal provision Under Section 270A

[A] Preamble: 

Section 270A is a new penalty provision which was introduced by endorsing the philosophy that in order to bring objectivity, certainty and clarity into the penalty provisions, it is repealed by an altogether a new penal provision. The issue as to existence of (i) concealment of income or (ii) furnishing inaccurate particulars of income has always been a matter of litigation owing to different interpretations under different circumstances.

Under the new provision, an altogether fresh terminology of ‘misreporting’ and ‘under reporting’ is introduced with a view to curb the ambiguity in the interpretation of penal provisions.

The litigations being contested at various levels beginning with that the assessing officer to Supreme Court relating to penalties constitute a sizeable percentage. What usually, though unfortunately, happens in practice is that the officers imposing penalties go overenthusiastic and quantum of penalties imposed attain fantastic proportions threatening the very existence of the assessees.

In this session, we will be discussing the ex post facto judgments. This is a terminology for the principle of law that a judicial pronouncement to settle a fair proposition can never grow old. The old judgments are still holds a good law.

Sub-section (6) of Section 270A provides exceptions to levy penalty. It describes the circumstances under which the penalty should not be levied by the assessing officer.

So, this article provides you the weapons of judicial precedents to pursue the penalty proceedings initiated under Section 270A and file a proper rebuttal to the show-cause notices issued proposing the levy of penalty u/s 270A.

[B] Natural Justice:

1. Opportunity of being heard – Necessity in penalty proceedings : It is a basic principle of law that before an authority competent to impose penalty resolves to do so, the person affected must be given a reasonable opportunity of being heard.

1.1 Section 274(1) of the Income Tax Act mandates that no order imposing the penalty under various sections of Chapter XXI, will be made unless (i) the assessee has been heard, (ii) he has been given a reasonable opportunity of being heard. When an order of penalty passed in violation of Section 274(1), it is a statutory violation.

[Rajeev Kumar Gupta Vs. CIT (123 ITR 907) (All)]

1.2 Penalty for concealment cannot be levied, where the assessee was not even asked to justify his claim and penalty was levied on the basis of presumption the assessee’s intention was to evade tax.

[Rupam Mercantiles Ltd. Vs. Dy. CIT (91 ITD 237) (Ahd.)]

2. Opportunity of being heard must be a clear opportunity for demonstrating against proposed action: Mere opportunity does not suffice the requirement. It should be a clear opportunity so that the assessee can make an effective representation against the proposed action, otherwise it cannot be said to be reasonable opportunity.

[R.B. Shreeram Durga Prasad & Fatehchand Nursingdas vs. Settlement commission (176 ITR 169) (SC)]

2.1 Audi alteram partem: Where in the course of penalty proceedings, the assessee was not given the material relied on which would have helped him properly avail of the opportunity to cross-examine the witness, proceedings were held vitiated for violation of natural justice. The tribunal also observed that though opportunity to cross-examination of witness was offered to assessee in penalty proceedings, however, relevant statement upon which reliance was placed were not supplied to him when asked for, that amounted to breach of the doctrine of Audi alteram Partem.

[Premier Breweries Ltd. Vs. Dy. CIT (36 ITD 197) (Cochin Trib.)]

2.2 Explanation was not considered: The AO was wrong in levying penalty for concealment of income where explanation offered by the assessee for the excess quantity of jewellery found during raid was not considered by him.

[CIT vs. G. R. Rajendran & Anr. (259 ITR 109) (Mad)]

3. Opportunity given in assessment proceedings is of no significance in penalty proceedings: Penalty has been regarded as an additional tax in certain sense and for certain purposes, penalty proceedings are not essentially a continuation of proceedings relating to assessment proceeding. Both the proceedings are different in nature and findings in assessment proceedings are not conclusive in penalty proceedings. Though such findings may be relevant and admissible in evidence they do not operate as res judicata so as to preclude production of other evidence in penalty proceedings.

[Anantharam Veerasinghaiah & Co. Vs. CIT (123 ITR 457)(SC)]

4. Penalty proceedings are independent and separate from assessment proceedings: The assessee is entitled to adduce any evidence which he had adduced or not in the assessment proceedings and such evidence has to be duly considered by the authorities. The assessee is also entitled in penalty proceedings to take up new please which he had not taken up in the course of assessment proceedings. Penalty proceedings are not essentially a continuation of assessment proceedings.

[ Dilip N. Shroff Vs. Jt. CIT (291 ITR 519) (SC)]

[CIT Vs. Gurudayal Ram Mukhlal (190 ITR 39) (Guj)]

5. Protective Penalty is not imposable: There is no concept of levy of any protective penalties. It has first to be established conclusively whether the income declared is of the assessee or of some other person. Until this exercise is done, no penalties can be levied on the present assessee on whom protective assessment has been made. In other words, only a person on whom a substantive assessment is made would be liable for penalty provided the conditions precedent for imposition of penalty are satisfied.

[Bhailal Manilal Patel Vs. CIT (49 taxmann.com 539) (Guj)]

6. Power of succeeding AO vis-a-vis penalty proceedings initiated by predecessor: Where in the original assessment order, the penalty proceedings were initiated only with reference to one of the items, the successor assessing officer cannot modify the initiation of penalty proceedings and extend its scope to consider the penalty with reference to other items.

[CIT vs. Nageshwar Prasad (63 ITD 29) (Patna- Trib)]

7. Material collected at the time of assessment proceedings cannot be ignored: During penalty proceedings, there has to be reappraisal of the very same material on the basis of which the addition was made and if further material is adduced by the assessee in the course of the penalty proceedings, it is all the more necessary the such further material should also be examined in an attempt to ascertain whether the assessee concealed the income or furnished inaccurate particulars thereof.

[Vijay Power Generators Ltd. vs. ITO (180 Taxman 102) (Delhi ITAT)]

[C] Satisfaction in Assessment order:

• Definition of ‘preceding order’ is given in clause (a) of Explanation below Section 270A(3) which enumerates ‘during the course of which the penalty under sub-section (1) has been initiated’.
• On keen perusal of Section 270A(1) , you will find that there is requirement of initiation of penalty during the course of any proceedings under the Act.
• Therefore, the AO should mention in the assessment order the penalty is initiated.
• The initiation of penalty can only be on account of satisfaction that the assessee has under-reported his income.
• Therefore, the AO has to record satisfaction even though Section 270A(1) does not use the expression ‘is satisfied’ as is used in the old Section 271(1) of the Act.

There is a lot of debates are going on between the various experts that the satisfaction is required or not in the new penal provision. In my opinion, the answer is ‘YES’. The satisfaction is very much necessary before levying penalty u/s 270A. For that, I have two grounds or say contentions which is as under;

Contention 1:

The finance ministry had inserted a separated clarificatory sub-section viz (1B) by the finance Act, 2008 to the older provision of penalty u/s 271. The relevant portion is as under;

‘[(1B) Where any amount is added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment and the said order contains a direction for initiation of penalty proceedings under clause (c) of sub-section (1), such an order of assessment or reassessment shall be deemed to constitute satisfaction of the Assessing Officer for initiation of the penalty proceedings under the said clause (c).]’

• On keen perusal of the same, you will find that it is to strike out the requirement of satisfaction by AO while concluding the assessment proceedings. It says that in absence of any clarification about the satisfaction, the it is deemed that the AO has recorded the satisfaction. This subsection was inserted to revert the various judicial pronouncements which categorically required that the satisfaction is very much necessary.
• In the new provision, there is no such clarificatory clause introduced.In absence of any similar provision to the older Section 271(1B) it can be stated that mere direction in the assessment order ‘Issue notice u/s 274 for penalty u/s 270A’ will not be sufficient.

Contention 2:

• The provisions of Section 270AA(3) reads as under;

“(3) The Assessing Officer shall, subject to fulfilment of the conditions specified in sub-section (1) and after the expiry of the period of filing the appeal as specified in clause (b) of sub-section (2) of section 249, grant immunity from imposition of penalty under section 270A and initiation of proceedings under section 276C or section 276CC, where the proceedings for penalty under section 270A has not been initiated under the circumstances referred to in sub-section (9) of the said section 270A.“

• Clause (9) of section 270A pertains to events of misreporting.
• On perusal of the provision of section 270AA(3), it can be deduced that the AO has to record specifically at the time of conclusion of assessment proceedings that he is desirous to levy penalty for mis-reporting or under-reporting. This fact also indicates that recording of the satisfaction is very much necessary while framing the assessment order.
• This wise, all the following judicial pronouncements will be applicable to the provisions of Section 270A with regard to recording of satisfaction.

1. If satisfaction is missing in the assessment order, no penalty is  leviable: Full Bench of Hon’ble Delhi High Court has held that ‘power to impose penalty under section 271(1)(c) depends upon satisfaction of assessing officer in course of assessment proceedings and it cannot be exercised, if he is not satisfied and has not recorded his satisfaction about existence of conditions specified in clause (a), (b) and (c ) of sub-section (1) of section 271 before proceedings are concluded’. This means, if the satisfaction is missing in the assessment order, no penalty could be levied.

[CIT vs. Rampur Engg. Co. Ltd. (309 ITR 143) (Delhi HC)]

Penalty proceedings cannot be commenced by the ITO before the completion of assessment proceedings by the AO. However, the power to impose penalty depends upon the satisfaction of the ITO in the course of proceedings under the Act i.e. it cannot be exercised if he is not satisfied about the existence of conditions for penalty before the proceedings are concluded. Satisfaction before conclusion of the proceeding under the Act, is a condition for the exercise of the jurisdiction.

[CIT vs. S. V. Angidi Chettiar (44 ITR 739) (SC)]

2. Satisfaction must be for specific charge of default: The Meaning of the word direction is of importance. Merely saying that penalty proceedings are being initiated will not satisfy the requirement. The direction to initiate proceedings should be clear and not ambiguous. As the words used in the legal fiction or the deeming provisions of Section 271(1B) is Direction. Use of the phrase like.

(a) Penalty proceedings are being initiated separately and

(b) Penalty proceedings under Section 271(1)(c) are initiated separately,

do not comply with the meaning of the word direction as contemplated even in the amended provisions of law.

[CIT vs. Manjunath Cotton and Ginning Factory (359 ITR 565) (Kar HC)]

3. Element of satisfaction should be apparent: Element of satisfaction should be apparent from the body of the assessment Order itself. The Court cannot go in the mind or search the assessment file of ITO.

[Commissioner of Income Tax V/S. Vikas Promoters Pvt. Ltd. (277 ITR 337) (Delhi)]         

4. Satisfaction of assessing officer, CIT(A), or CIT, order of penalty to be passed by that authority only: The assessing officer, CIT(A) or CIT in the course of any proceedings is satisfied that the assessee has committed an offence which is liable to penalty. There must be satisfaction of the respective officer. Penalty order is to be passed on the basis of the order passed by that authority i.e.  A.O., CIT(A) or CIT.

[CIT V/s. Shadiram Balmukund (84 ITR 183) (Allahabad)]

[D] Exceptions enumerated in Section 270A(6):

The new provision has given respect to various landmark decisions and hence to cut short the controversy, a specific sub-section i.e. ‘sub-section (6)’ has been inserted which enumerates the exceptions to the provisions of section 270A. I have bifurcated the same into two major parts. (a) Bona-fide (b) estimate. The relevant judgments to support different situations are as under;

(a) Cases where assessee’s explanation held to be bona-fide:

1. There must be mens rea or mala fide intention to levy penalty: In order to attract penalty, mens rea is necessary. As per the Court, the word ‘inaccurate’ signifies a deliberate act or omission on part of the assessee. [Dilip N. Shroff Vs. CIT (291 ITR 519) (SC)]

However, the same was reverted by the SC and held that there is no necessity of mens rea since section 271(1)(c) indicated the element of strict liability on the assessee while filing the return.

[Dhamendra Textile Processors (306 ITR 277) (SC)]

However, the SC corrected the position while dealing with identical question of law and held that the Law laid down in Dilip N. Shroff continues to be a good law. Mens rea is most important ingredient in Penalty.

[Reliance Petro Products (P) Ltd. (322 ITR 158) (SC)]

This wise, the proposition laid down by the decision in case of Reliance Petro Products (P) Ltd. (supra) has once again clarified the circumstances and held that the mens rea is very much necessary which still holds a good law in the prevailing provisions of penalty.

2. Technical and venial default under bona fide belief :

Penalty will not be imposed merely because it was lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judiciously and on consideration of all the relevant circumstances. Even if minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose the penalty when there is a technical or venial breach of the provisions of the Act or where a breach flows from a bona fide belief that the offender is not liable to act in a manner prescribed by the statute.

[Hindustan Steel Ltd. V/S. State of Orissa (83 ITR 26) (SC)]

3. Claim on the basis of advice of counsel – Affidavit of counsel filed: The assessee claimed his income exempted u/s. 10 (36) on the basis of advice of his counsel. Claim of exemption was rejected. In penal proceedings, the assessee filed affidavit of his counsel admitting his mistake. Penalty was cancelled looking to the facts of the case.

[CIT V/s. Deepak Kumar (232 CTR 78) (P&H) ]

4. Claim on the basis of case law: If assessee puts any claim of deduction / allowances / exps. etc. on the basis of certain case law under bona fide belief, but the assessing officer makes addition on different interpretation, no penalty for concealment could be levied.

[CIT vs. Babitaben Rameshbhai Patel (Tax Appeal No.1072 to 2009) (dtd.10.01.2011) (Guj) ]

[CIT Vs Caplin Point Laboratories Ltd. (293 ITR 524) (Madras)]

5. Genuine Error in preparing return: In the case of well-known tennis player Sania Mirza, amount of award received was disclosed in statement of income but not offered to tax. Return was accepted and afterwards case was reopened u/s.148. Penalty for furnishing inaccurate particulars of income was issued and penalty was levied also by assessing officer. This penalty was cancelled by ITAT as bona fide mistake was committed by Advocate / CA of the appellant. Amount was surrendered to tax. As the receipt was disclosed there is no occasion to levy penalty being bona fide mistake.

[CIT V/s. Sania Mirza (87 DTR 371) (AP)]

6. Difference of opinion – change of head : Merely rejection of legal claim of assessee for taxability of income under a particular head of income was not by itself sufficient to warrant imposition of penalty. Mere treatment of speculation loss as business loss would not justify levy of penalty. In such cases, no penalty is exigible.

[CIT vs. Bhartesh Jain (323 ITR 358) (Delhi)]

[CIT Vs. PHI Seeds India Ltd. (301 ITR 13) (Delhi)]

[Telebuild construction ℗ Ltd. Vs. Asstt. CIT (13 SOT 218) (Mum)]

7. Surrender – Before Detection: The assessee surrendered and offered the income after paying tax by filing revised return. The penalty was not levied even when the assessee surrendered after issuance of questioner in assessment proceedings. The Court held the surrender before detection and considered to be bona fide gesture from the assessee.

[CIT vs. Harnarain (ITA No.2072 of 2010) (dtd.31.10.2011)(Delhi HC)]

[ACIT vs. Ashok Raj Nath (33 taxamann.com 588) (Delhi Trib)]

8. Surrender – in Survey case : Mere fact of agreed addition does not result into a conclusion that amount agreed to be added as income is concealed income so as to levy of penalty; in such a case, Assessing Officer should further bring some material on record so that it is conclusively established that such surrender, in fact, represented real income or undisclosed income of assessee. In the instant case, there was no variation in the return of income and the findings in survey.

[CIT vs. M/s Roop Creation ( p) Ltd. (Tax Appeal No.621 of 2011) (dtd.18.01.2012) (Guj)]

[Bharat Steel Suppliers (ITA No. 1546 / A/2010) (05.04.2013) (Ahd)]

9. Surrender – In case of Search: It is not necessary to file the return before the due date provided that the assessee had made a statement, during the search and explained the manner in which the surrendered amount was derived, and paid tax as well as interest on the surrendered amount. It is not relevant whether any return of income was filed by the assessee prior to the date of search and whether any income was undisclosed in that return of income. In view of specific provision of Section 153A of the I.T. Act, the return of income filed in response to notice under Section 153(a) of the I.T. Act is to be considered as return filed under Section 139 of the Act, as the Assessing Officer has made assessment on the said return and therefore, the return is to be considered for the purpose of penalty and the penalty is to be levied on the income assessed over and above the income returned under Section 153A, if any.

[Kirit Dahyabhai Patel v. Asstt. CIT (Tax Appeal No. 1181 of 2010)  (dtd. 03.12.2014) (Guj)]

10. Deeming Fiction – Section 50C: Revenue has failed to prove by any iota of evidence that the assessee actually received the money. No penalty on such deeming fiction.

[CIT vs. Madan Theatre (260 CTR 75) (Calcutta) ]

[Shri Ashwani Jaipaty vs. The DCIT (ITA No.276 /Del/2018) (dtd.11.07.2018) (Delhi ITAT)]

11. Deeming Fiction – Section 40(a)(ia) : No penalty can be levied for non-deduction of Tax at source as it is a deeming provision.

[Nayan C. Shah Vs. ITO (386 ITR 304) (Guj)]

[Dynatron Pvt. Ltd. (ITA No.2415 / Mum/2011) (dtd.29.05.2013)(Mum)]

12. Deeming Fiction – Section 2(22)(e) : No penalty leviable in case of addition made for Deemed Dividend u/s 2(22)(e).

[CIT vs. Alkesh K. Patel (325 ITR 118) (Bom HC)]

[Sadana Brothers Sales P. Ltd. Vs. Asstt. CIT (10 taxmann.com 122) (Indore) ]

13. Deeming Fiction – Section 14A: No penalty can be levied on disallowance u/s 14A as the assessee has not failed to disclose anything.

[Pr. CIT Vs. Gruh Finance Ltd. (100 taxmann. Com 104) (SC)]

14. Deeming Fiction – Section 40A(2)(b): Where income is assessed on the basis of deeming provisions it would not amount to non-disclosure and as such it is not proper to impose penalty.

[Pr. CIT vs. M/s Hariom Steels P. Ltd. ( Income Tax Appeal No.1 of 2016) (dtd. 03.07.2017) (Allahabad HC)]

15. Deeming Fiction – Section 41(1): The receipt has been brought to tax under a deeming provision under section 41(1). There was not deliberate or wilful default on the part of the assessee. Hence, penalty is not exigible on such deeming.

[Dahod Sahakari Kharid Vechan Sangh Ltd. Vs. CIT (282 ITR 321) (Guj)]

16. Deeming Fiction – Section 115JB/115JC: When the tax payable on income computed under normal procedure is less than the tax payable under the deeming provisions of section 115JB of the Act, then penalty under section 271(1)(c) of the Act could not be imposed with reference to additions/disallowances made under normal provisions. In this regard a Circular is also issued being Circular No.25 of 2015 dtd. 31.12.2015 in consonance with the verdict of Hon’ble Supreme Court.

[CIT vs. Nalwa Sons Investment Ltd. (21 taxmann. com 184) (SC) (327 ITR 543) (Delhi HC)]

17. Additions u/s 68, 69, 69A, 69B & 69C creates fiction: Sections 68, 69, 69A, 69B and 69C are all part of the same scheme where certain amounts though not proved to be the income of the assessee of the previous year concerned are for the purpose of charging to tax are deemed to be so by creating legal fiction absolving the department from its initial duty to prove that any such is the income of the assessee. But for these provisions, it was for the revenue to prove that any sum, not disclosed by the assessee but which is sought to be taxed as income of the assessee, is the income of the assessee for the previous year relevant to the assessment year. The fiction created under sections 68, 69, 69A, 69B and 69C by itself cannot be extended to penalty proceedings to raise the presumption about concealment of such income.

Note: It is pertinent to note that while introducing the provision of section 270A, the revenue has also amended the provision of Section 115BBE which is triggered in case the addition has been made under sections 68 to 69C. As a result of invoking of the provisions of section 115BBE, the AO will levy penalty u/s 270AAC and not u/s 270A. Hence, that requires a separate dealing while drafting the reply.

[CIT vs. Baroda Tin Works (221 ITR 661) (Guj)]

18. Explanation given not false or untrue: Merely the explanation offered by the assessee was disbelieved but it was not found to be untrue or false, the penalty cannot be levied being no mens rea or mala fide intention.

In the instant case, the cash credits were not satisfactorily explained by evidence and documents. The parties who had advanced the alleged temporary loans were neither disclosed with their particulars nor any supporting documents were on record. Only two entries were explained. The accountant who had arranged the loan was not produced stating that he had left the service and relations with him were strained. On this state of accounts and evidence in the quantum proceedings, the department was justified in treating the cash credits Section 68 as income of the assessee but merely on that basis by recourse to Explanation 1, penalty under section 271(1)(c) could not have been imposed without the department making any other effort to come to a conclusion that the cash credits could in no circumstances had been amounts received as temporary loans from various parties. The assessee in the quantum proceedings failed to produce the accountantbut the department also in penalty proceedings made no effort to summon him. Applying the test (ii) discussed above, therefore, it was a case where there was no circumstance to lead to a reasonable and positive inference that the assessee’s case, that the cash credits were arranged as temporary loans, was false. The facts and circumstances were equally consistent with the hypothesis that it could have been sundry loans in small amounts obtained from different parties. Therefore, even taking recourse to Explanation 1, the circumstance or state of evidence on which the cash credits were treated as income, could not by themselves justify imposition of penalty without anything more on record produced by the assessee or the department.

[National Textiles Vs. CIT (249 ITR 125) (Guj)]

19. Efforts by the assessee: The assessee surrendered the amount of booking advance received form one party with the explanation that despite its best effort, it could neither produce the said party nor any evidence in the form of confirmation. The explanation of the assessee prima facie appears to be bona fide in view of the fact that in all other cases assessee could furnish the necessary evidence to the satisfaction of the AO. Hence, not penalty leviable.

[Megh Malhar Developers Vs. Asstt. CIT (31 taxmann. com 349) (Ahd)]

20. Difficulty: The assessee failed file full details of expenses as there was difficulty in procuring documents form its different offices all over India. considering bona fide of explanation of assessee, penalty was deleted.

[CIT vs. Electrolux Kelvenatro Ltd. (357 ITR 665) (Delhi HC) ]

21. Benefit of Doubt should be given to assessee : The benefit of doubt in the proceedings had to be given to the assessee, particularly, in view of the fact that assessing officer had not made a full inquiry to establish the explanation of assessee was not bona fide, therefore, penalty is not exigible. In the instant case, the assessee has contended that he had received advance from Salim Mussa Mohmed against sale of his house. However, the CIT(A) has recorded that the assessee could not substantiate its explanation with evidence. We find that the AO has made no effort to summon Shri Salim Mussa Mohmed to ascertain the truth.

[Ayyub Vali Patel vs. Asstt. CIT (ITA No. 1425 / Ahd/ 2011) (dtd.04.07.2014)(Ahd)]

(b)  Cases Estimate :

Where any addition is made on estimate basis, no penalty shall be levied under section 270A. It was held by the Hon’ble Apex Court in case of Sangrur Vanaspati Mills Ltd. (308 ITR 18 statute), that penalty on estimate cannot be levied. Giving respect to such landmark judgments, the same has been incorporated in the new penal section itself. The following judicial precedents will help us in substantiating our claims and contentions while replying the show cause notices.

1. AO Estimated u/s 44AD on surrender: On detailed scrutiny with regard to amounts spent & covered u/s 40A(3), the assessee offered the AO to estimate the income at 8% under section 44AD. The additions based on such circumstances held to be voluntary surrender and not liable for penalty.

[CIT vs. Vatika Construction Pvt. Ltd. (45 Taxmann. com 471) (Delhi HC)]

2. Consistency – Accounting practice accepted by department for several year: Assessee was doing agricultural activities as well as doing mfg of bricks. Accounting practice followed by the assessee was accepted by the department for several years. Assessing officer added certain amount being payment to self. It was held in this case that it could not be said that the assessee disclosed incorrect particulars or there was failure to return the correct income. There was no gross or willful neglect on the part of the assessee.

[Naranbhai Virabhai & Co Vs. CIT (203 ITR 1017) (Guj)]

3. Different estimates by AO and ITAT: Both the authorities i.e. assessing authority as well as appellate authority made different estimates of Gross profits. In these circumstances, it cannot be said that the assessee had under reported the income with a deliberate conscience.

[Harigopal Singh Vs. CIT (258 ITR 85) (P&H)]

4. Different Estimates by assessee vs. estimate by AO: The assessee filed return showing estimated income from truck. The AO made addition after making another estimate. Penalty cannot be levied on such transformation from one estimate to another estimate.

[CIT vs. Raj Bans Sinh (276 ITR 351) (All HC)]

5. Addition due to Low Gross Profit: Merely because the addition had been made on estimate under the proviso to section 145(1) by adopting the view that the gross profit shown in the books of account was too low as there were defects in the method employed for the account, did not automatically lead to the conclusion that there was failure to return the correct income by means of fraud or gross or wilful neglect.

[CIT Vs. Metal Products of India (150 ITR 714) (P&H) ]

6. Gross Receipt accepted – Net Profit estimated: The AO had not disputed the gross receipt of the assessee. The undisputed facts that particulars furnished by the assessee regarding receipt in the relevant financial year had not been found inaccurate and it was also not the case of the revenue that the assessee concealed any income. Merely because the addition with regard to estimate of NP had been upheld does not tantamount to any wilful or deliberate act on the part of assessee. Hence, no penalty is exigible.

[CIT vs. Vijay Kumar Jain (325 ITR 378) (Chhattisgarh HC)]

7. Estimate due to non-maintenance of quantitative Stock details: The book result of the assessee was rejected as no day to day stock register was maintained and the assessment was framed by applying flat rate of profit. It was held by the court that only on this ground no penalty could be levied when it was not proved that the assessee was guilty of either fraud or wilful neglect.

[CIT Vs. Nawab & Other (107 ITR 681) (All HC)]

8. Low House Hold Exps: Burden of proof is on the department to prove deliberate concealment. Finding in assessment proceedings that H.H.Exps. of assessee were low is not conclusive. There was no evidence of concealment of income. If H.H.exps. were unbelievably low, the addition in assessment proceedings were proper but in penalty proceedings the burden is on the department to prove concealment of income. This was not discharged by the department. Penalty could not be levied.

[Jumabhai Premchand HUF vs. CIT (243 ITR 812) (Guj)]

9. Agricultural Income: Enhancement made by CIT(A) by an estimate made on the basis of Government survey data on agricultural produce of particular area, no penalty is exigible.

[Haribhai Chhaganbhai Bharwad Vs. ITO (ITA No.1628 & 1629 /Ahd/2010) (Ahd)]

10. Agricultural Expenditure: In absence of any content evidence with regard to expenditure in relation to agricultural income, the AO disallowed the expenditure @30%. No penalty leviable in absence of any wilful neglect on part of the assessee.

[Ashok Ramdas Sonawane Vs. ITO (ITA No.187 /PN/2016) (dtd.14.07.2016) (Pune)]

I hope these legal pronouncements will help you while dealing with the show-cause notices and drafting the reply. It will provide you the support in your rebuttals under different circumstances when the AO is of the prejudicial opinion to the assessee.