Case Law Details
Dombivali Paper Mfg. Co. Pvt. Ltd Vs ACIT (ITAT Mumbai)
The Income Tax Appellate Tribunal (ITAT) Mumbai recently rendered a decision in the case of Dombivali Paper Mfg. Co. Pvt. Ltd vs. ACIT, addressing the imposition of a penalty under Section 271(1)(c) of the Income Tax Act, 1961. This analysis aims to provide insights into the facts, arguments, and the tribunal’s reasoning leading to the decision.
Background: The appellant, engaged in the manufacture of craft paper, filed its return of income for A.Y. 2011-12, declaring total income of Rs. 1,34,48,577. The case was reopened based on information from the Sales Tax Department, alleging bogus purchases. The Assessing Officer (AO) made an addition of Rs. 7,17,020 as a result of accommodation entries during the financial year 2010-11.
Assessment and Appeal: The AO completed the assessment under Section 143(3) read with section 147, and the CIT(A) confirmed the addition. The ITAT partially allowed the appeal, restricting the addition to 12.5% of the alleged bogus purchases (Rs. 89,628) in a previous order dated 25.03.2019.
Penalty Proceedings: Subsequently, the AO imposed a penalty of Rs. 2,38,176 under Section 271(1)(c) on 29.03.2018. The appellant challenged this penalty order before the CIT(A), which was dismissed on 09.06.2023. The present appeal is against the confirmation of the penalty.
Arguments and Analysis: The appellant argued that since the ITAT had restricted the addition to 12.5% of the alleged bogus purchases based on an estimate, the AO was not justified in imposing a penalty. Citing decisions of the Hon’ble Rajasthan High Court and Hon’ble Gujarat High Court, the appellant contended that when an addition is made based on an estimate, no penalty should be levied.
The ITAT acknowledged that in cases where the First Appellate court’s order is ex-parte and the assessee is not at fault, remanding the matter back is typical. However, considering that necessary facts and circumstances were already on record, the ITAT proceeded to decide the appeal on its merits.
The ITAT emphasized that the addition was initially made at 100% of the alleged bogus purchases but was restricted to 12.5% by the ITAT. This limitation was essentially based on an estimate of gross profit. The tribunal referred to decisions of the Hon’ble Rajasthan High Court and Hon’ble Gujarat High Court, highlighting that no penalty should be levied when an addition is based on an estimate.
Conclusion: The ITAT concluded that the imposition of a penalty, where an addition is made on the basis of an estimate, is not justified. The tribunal set aside the penalty order, emphasizing that the CIT(A) did not consider the effect of the restriction on the addition to 12.5% when confirming the penalty. The ITAT held that the appeal deserves to succeed, allowing the appeal and setting aside the penalty.
Implications: This decision by the ITAT reinforces the principle that when additions are made based on estimates, imposing a penalty may not be warranted. It provides clarity on the distinction between assessment and penalty proceedings, emphasizing that the estimation of income in the former does not automatically justify the imposition of a penalty.
Taxpayers and practitioners should take note of the importance of restricting penalties to cases where there is clear evidence of concealment or furnishing inaccurate particulars. The decision also highlights the significance of considering the impact of appellate orders on penalty proceedings, particularly when additions are based on estimates.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present appeal by the assessee is directed against the imposition of penalty of Rs.2,38,176/- under section 271(1)(c) of the Income Tax Act, 1961 (in short ‘the Act’), which order has been confirmed by the learned Commissioner of Income Tax (Appeals) (in short ‘CIT(A)’).
2. The brief facts are that the appellant-assessee is a company engaged in the manufacture of craft paper. The assessee filed its return of income for Assessment Year 2011-12 declaring total income of Rs.1,34,48,577/-. It appears that the case was reopened on the basis of information received from the Sales Tax Department, Mumbai alleging bogus purchases. It was found that the assessee was one of the beneficiaries and had availed accommodation entries during the financial year 2010-11 (Assessment Year 2011-12) for Rs. 7,17,020/-. The Assessing Officer completed the assessment under Section 143(3) read with section 147 of the Act on 26.02.2015 assessing the total income at Rs.1,41,65,597/- thereby making an addition of Rs.7,17,020/-. The assessee carried the matter in appeal. The learned CIT(A) confirmed the addition by order dated 14.11.2017, which was challenged by the assessee before this Tribunal in ITA No. 1035/Mum/2018. This Tribunal by an order dated 25.03.2019 has partly allowed the appeal thereby restricting the impugned addition to 12.5% of the alleged bogus purchases of Rs.7,17,020/-, which comes to Rs.89,628/-. Consequently, the balance addition was deleted.
3. In the meantime, the Assessing Officer issued a communication dated 15.03.2018 in pursuance of which the assessee submitted its submissions on 23.03.2018 furnishing all the supporting documents and proof of payment thereby claiming that there was no concealment of any facts with regard to the purchases from these parties. However, the Assessing Officer did not concur with the view of the assessee and levied penalty of Rs.2,38,176/- by order dated 29.03.2018. That order was challenged by the appellant-assessee in appeal, which appeal has been dismissed on 09.06.2023, which order is subject matter of challenge in this appeal before us.
4. Heard learned counsel for the parties. Perused record.
5. The learned counsel for the appellant has submitted that the addition as originally made has been restricted to 12.5% of the alleged bogus purchases which translates into Rs.89,628/-. He submitted that once this Tribunal in the earlier round of litigation had restricted the addition on the basis of an estimate, the Assessing Officer was not justified in imposing penalty under Section 271(1)(c) of the Act. Reliance in this regard is placed on the decision of Hon’ble Rajasthan High Court in CIT vs Krishi Tyre Retreading & Rubber Industries, 360 ITR 580 (Rajasthan) and Hon’ble Gujarat High Court in CIT vs Whitelene Chemicals, 360 ITR 385 (Gujarat).
6. It is submitted that before the Assessing Officer, appellant had produced material to show that the impugned purchases were genuine and thus, even on facts, no addition could have been made. It is alternatively submitted that, in any event, the addition was restricted to Rs.89,628/- and thus, the penalty as originally imposed on the basis of 100% addition of the alleged bogus purchases cannot be sustained. It is lastly submitted that the order of learned CIT(A) is an ex-parte order without affording sufficient opportunity to the appellant and thus cannot be sustained and deserves to be set aside.
7. The learned DR referring to the order of learned CIT(A) has submitted that the appellant had not responded to the various notices/intimations and failed to produce the necessary documents to show that the purchases were genuine. He, therefore, submitted that no case for interference is made out.
8. We have considered the rival submissions made. Normally, when the order of the First Appellate court is an ex-parte order, wherein the assessee is not found to be at fault, we would be inclined to remand the matter back to the First Appellate court. However, when the necessary facts and circumstances and material on the basis of which, the issue in the appeal has to be decided, are already on record, this Tribunal would be slow in directing such remand which may ultimately lead to multiplicity of proceedings. In the present case, we find that the circumstances which are relevant for the purpose of deciding the issue involved are matters of record and, therefore, we have heard the parties on merits and the appeal is being disposed of accordingly.
9. It is a matter of record that initially an addition of 100% of alleged bogus purchases was made, which was restricted by this Tribunal to 12.5% by order dated 25.03.2019. Thus, the addition as restricted by this Tribunal works out to Rs.89,628/-, which was essentially on the basis of estimate of gross profit. The issue about, justification of imposition of penalty, where the addition is made on the basis of an estimate is no longer res integra and is covered by certain decisions of this Tribunal as also various High Courts. A useful reference in this regard can be made to the decision of Hon’ble Rajasthan High Court in the case of CIT vs Krishi Tyre Retreading & Rubber Industries (supra) and Hon’ble Gujarat High Court in the case of CIT vs Whitelene Chemicals (supra). In Whitelene Chemicals (supra) one of the reason for imposition of penalty was that there were additions made in the income after rejection of book results on the basis of fair gross profit ratio. The Tribunal in that case found that no penalty can be imposed when the profit was estimated on the basis of fair gross profit ratio, which order came to be confirmed by the Hon’ble High Court. It can thus be seen that when the addition is made on the basis of an estimate, no penalty could have been levied.
10. A perusal of the order passed by the First Appellate court in this case would indicate that this aspect about the original addition being restricted to 12.5% on the basis of an estimate as to gross profit and the consequent effect on the levy of penalty has not been considered by the learned CIT(A). This aspect being clearly borne out of record, could have been considered by the learned CIT(A), notwithstanding that, the assessee had, allegedly not responded to the various notices/communications.
11. In that view of the matter, we find that the appeal has to succeed. Consequently, the appeal is allowed and the impugned order of imposition of penalty is hereby set aside.
Order pronounced in the open court on 06/12/2023.
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