Case Law Details
ITO Vs Micro Plantae Limited (ITAT Mumbai)
The Mumbai ITAT upheld deletion of penalty levied u/s 271(1)(c), holding that routine disallowances made in a 153C assessment without any incriminating material found during search cannot automatically lead to penalty for concealment or furnishing inaccurate particulars. The Tribunal observed that the additions relating to society charges and depreciation were merely based on examination of books and earlier assessment records and not on any seized incriminating documents.
The assessee company was subjected to proceedings u/s 153C pursuant to search action in the case of Temptation Foods Group. During assessment, the AO disallowed society charges of ₹1.96 lakh and depreciation of ₹29.65 lakh mainly on the ground that supporting evidences were not furnished and similar depreciation had been disallowed in earlier years. Based on these additions, penalty of ₹9.76 lakh u/s 271(1)(c) was levied for alleged furnishing of inaccurate particulars.
Before the CIT(A) and the Tribunal, the assessee contended that the disallowances were not based on any incriminating material found during search and all details relating to expenses and depreciation were already disclosed in the books of account and audited financial statements. It was further argued that merely because a claim is disallowed, penalty cannot automatically follow.
The ITAT noted that the assessment year involved was an unabated assessment year, and the assessment order nowhere referred to any seized material proving that the expenditure claims were bogus or false. The Tribunal observed that the society charges and depreciation claims were routine business claims fully reflected in the return and books of account and therefore could not amount to concealment or furnishing of inaccurate particulars merely because the AO disallowed them.
The Tribunal heavily relied upon its own earlier decision in assessee’s case for AY 2007-08, wherein similar penalty arising from ad hoc disallowances in 153C proceedings had already been deleted. Reiterating that additions beyond the permissible scope of Section 153C in absence of incriminating material cannot form the basis for penalty, the ITAT held that no independent material existed to establish deliberate concealment by the assessee.
Accordingly, the ITAT dismissed the Revenue’s appeal and confirmed deletion of penalty, while treating the assessee’s cross-objections challenging validity of Section 153C proceedings as academic in nature.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
In this bunch of matters, the Revenue has preferred the present appeal against the order dated 16.12.2025 passed by the learned Commissioner of Income Tax (Appeals)-51, Mumbai [hereinafter referred to as “the CIT(A)”] under section 250 r.w.s. 254 of the Income Tax Act, 1961 [hereinafter referred to as “the Act”] for A.Y. 2006-07 arising out of penalty order passed under section 271(1)(c) of the Act dated 26.06.2012 by the ACIT, Central Circle-13, Mumbai[hereinafter referred to as “Assessing Officer or AO”]. The assessee has also filed Cross Objection challenging the validity of initiation of proceedings under section 153C of the Act and consequential penalty proceedings under section 271(1)(c) of the Act.
Facts of the Case
2. Brief facts of the case are that a search and seizure action under section 132 and survey action under section 133A of the Act were carried out on 24.09.2009 in the case of Temptation Foods Group by ADIT (Inv.), Unit-III, Mumbai. During the course of such search proceedings, residential premises and bank lockers of the assessee were also covered and certain documents pertaining to the assessee for the relevant assessment year were found and seized. On the basis of such material, proceedings under section 153C of the Act were initiated against the assessee and notice under section 153C came to be issued. Consequent to the search, the case of the assessee was centralised to the charge of ACIT, Central Circle-11, Mumbai and subsequently transferred to ACIT, Central Circle-13, Mumbai.
3. The original return of income for A.Y. 2006-07 was filed electronically on 01.04.2008 declaring loss of Rs. 32,47,898/-. In response to notice issued under section 153C dated 23.03.2010, the assessee filed return on 16.04.2010 reiterating the returned loss at Rs. 32,47,898/-. Thereafter, notices under sections 143(2) and 142(1)along with questionnaire were issued and served upon the assessee.
4. The Assessing Officer completed the assessment under section 143(3) r.w.s. 153C of the Act vide order dated 21.12.2011. During the course of assessment proceedings, the Assessing Officer noticed that the assessee had debited society charges amounting to Rs. 1,96,685/- in the Profit & Loss Account. The assessee was specifically asked to furnish details and documentary evidences in support of such expenditure and also to establish nexus of such expenditure with business activities. According to the Assessing Officer, despite query dated 12.12.2011, the assessee failed to furnish supporting documentary evidences in support of the said expenditure. The Assessing Officer therefore held that the society charges were not related to the business activities of the assessee and accordingly disallowed the amount of Rs. 1,96,685/- and added the same to the total income of the assessee.
5. The Assessing Officer further noticed that the assessee had claimed depreciation amounting to Rs. 77,43,984/-. The Assessing Officer observed that in earlier assessment years beginning from A.Y. 1998-99, depreciation on certain assets had already been disallowed in scrutiny assessments completed under section 143(3) of the Act. The Assessing Officer referred to the assessment order for A.Y. 1998-99 dated 30.03.2001 wherein depreciation aggregating to Rs. 60,64,216/- had been disallowed in respect of plant and machinery, air conditioner, factory building, office premises, furniture and fixture and electrical installation. It was further observed that excess depreciation at the rate of 25% amounting to Rs. 25,21,062.75/- had also been disallowed in earlier years. Since depreciation on such assets had consistently been disallowed in A.Ys. 1998-99, 1999-00, 2000-01, 2001-02, 2002-03, 2004-05 and 2005-06, the Assessing Officer held that depreciation claimed during the year under consideration amounting to Rs. 29,65,003/- on the balance amount of such assets was also liable to be disallowed. Accordingly, the said amount was added back to the total income of the assessee.
6. Consequent to the aforesaid additions/disallowances aggregating to Rs. 31,61,688/-, the Assessing Officer assessed the total income of the assessee at loss of Rs. 86,210/- as against returned loss of Rs. 32,47,898/- vide order passed under section 143(3) r.w.s. 153C dated 21.12.2011. Simultaneously, penalty proceedings under section 271(1)(c) of the Act were also initiated for furnishing inaccurate particulars of income and concealment thereof.
7. Thereafter, penalty proceedings under section 271(1)(c) of the Act were initiated. During the course of penalty proceedings, the assessee submitted before the Assessing Officer that the additions arose merely on account of difference of opinion and there was neither concealment of income nor furnishing of inaccurate particulars. However, according to the Assessing Officer, the assessee merely furnished general explanations without specifically justifying the claims relating to society charges and depreciation. The Assessing Officer further observed that the assessee had not challenged the additions in appeal and therefore inferred that the assessee had accepted the incorrect claims made in the return of income. Accordingly, the Assessing Officer held that the assessee had furnished inaccurate particulars of income aggregating to Rs. 31,61,688/- and consequently imposed minimum penalty under section 271(1)(c) at 100% of tax sought to be evaded amounting to Rs. 9,76,962/-.
8. Aggrieved by the penalty order, the assessee preferred appeal before the learned CIT(A). The earlier appellate order dated 10.09.2013 came to be passed ex parte dismissing the appeal of the assessee for non-compliance. Against the said ex parte order, the assessee preferred further appeal before the Tribunal in ITA No. 6434/Mum/2014. The Coordinate Bench vide order dated 19.03.2019 observed that the assessee was undergoing financial stress and several litigations before Provident Fund Authorities, Registrar of Companies, BIFR and NCLT were pending. The Coordinate Bench condoned the delay in filing the appeal and restored the matter back to the file of the learned CIT(A) with a direction to pass a speaking order on merits after granting adequate opportunity of hearing to the assessee.
9. Pursuant to the directions of the Tribunal, the learned CIT(A)-51, Mumbai adjudicated the appeal afresh vide order dated 16.12.2025 passed under section 250 r.w.s. 254 of the Act. During the appellate proceedings, the assessee filed detailed written submissions and also raised additional legal grounds challenging the validity of assessment proceedings under section 143(3) r.w.s. 153C and consequential validity of penalty proceedings under section 271(1)(c) of the Act. The assessee contended before the learned CIT(A) that the additions made in the assessment order were not based on any incriminating material found during the course of search and therefore no addition could legally be made in proceedings under section 153C of the Act. It was submitted that when the additions themselves were invalid, the consequential penalty proceedings also could not survive.
10. In respect of disallowance of society charges, the assessee submitted before the learned CIT(A) that the said expenses were incurred in respect of property owned and occupied by the assessee for business purposes and similar expenditure had been allowed in earlier years. It was further submitted that the property in respect of which society charges were paid had itself been attached by the Department for recovery proceedings and therefore the business nexus of such expenditure stood established. The assessee also furnished invoices relating to society charges as additional evidences and prayed for admission thereof. Reliance was placed on several judicial precedents including CIT vs. Bhagwati Rolling Mills [211 ITR 227], ITO vs. Mokul Finance (P.) Ltd. [110 TTJ 445], CIT vs. Rampur Timber & Turnery Co. Ltd. [129 ITR 58], Nakodar Bus Service (P.) Ltd. vs. CIT [179 ITR 506], CIT vs. Ganga Properties Ltd. [199 ITR 94] and GE Capital Transportation Financial Services Ltd. vs. ACIT [17 SOT 173] in support of the contention that expenditure incurred for keeping business alive constituted allowable business expenditure.
11. In respect of depreciation disallowance, the assessee submitted that the disallowance was not based upon any incriminating material found during search proceedings and had merely been made by relying upon findings recorded in earlier assessment years. It was submitted that depreciation in A.Y. 1998-99 had been disallowed only in relation to “mother plants” which had already been sold during that year itself and therefore no depreciation on such mother plants had been claimed during the year under consideration. According to the assessee, the Assessing Officer had mechanically followed earlier years without recording any independent finding in respect of depreciation claimed during the relevant year.
12. The assessee further contended before the learned CIT(A) that mere disallowance of expenditure could not automatically lead to levy of penalty under section 271(1)(c) of the Act. Reliance was placed upon several judicial precedents including CIT vs. Kerala Spinners Ltd. [247 ITR 541], Shiv Lal Tak vs. CIT [166 CTR 534], Vinod Kapur vs. ITO [127 Taxman 53], CIT vs. Cafco Syndicate Shipping Co. [294 ITR 134], ACIT vs. T.R.B. Exports (P.) Ltd. [134 TTJ 49], K.C. Builders vs. ACIT [265 ITR 562], CIT vs. Dalmia Dyechem Industries Ltd. [377 ITR 133] and Hindustan Steel Ltd. vs. State of Orissa [83 ITR 26] to contend that penalty proceedings are quasi-criminal in nature and penalty cannot be levied in absence of deliberate concealment or furnishing of inaccurate particulars of income.
13. After considering the submissions of the assessee and material available on record, the learned CIT(A) observed that the disallowances on which penalty had been levied related only to routine business expenditure duly recorded in the books of account and reflected in the return of income. The learned CIT(A) recorded a categorical finding that society charges and depreciation claims were neither concealed nor withheld from the Department and formed part of the audited financial statements. According to the learned CIT(A), the inability of the assessee to substantiate the claims to the satisfaction of the Assessing Officer could not automatically amount to furnishing of inaccurate particulars in absence of any material indicating falsity or deliberate misstatement. The learned CIT(A) held that merely because a claim made by the assessee was not accepted by the Department, it would not ipso facto lead to levy of penalty under section 271(1)(c) of the Act.
14. The learned CIT(A) further noted that in assessee’s own case for A.Y. 2007-08, the Coordinate Bench vide order dated 21.07.2025 in ITA No. 2926/Mum/2025 had deleted similar penalty levied on disallowance of routine expenses by observing that such disallowances were outside the scope of section 153C assessment and did not amount to furnishing of inaccurate particulars of income. Following the aforesaid decision and after independently examining the facts of the case, the learned CIT(A) held that the Assessing Officer was not justified in levying penalty under section 271(1)(c) in respect of routine disallowances of expenses duly reflected in the books of account without any finding that such expenses were bogus or ingenuine. Accordingly, the learned CIT(A) deleted the penalty of Rs. 9,76,962/- levied by the Assessing Officer and allowed the appeal of the assessee. Since the appeal was allowed on merits, the additional legal grounds challenging validity of assessment and penalty proceedings were treated as academic and therefore not separately adjudicated.
15. Aggrieved by the aforesaid order of the learned CIT(A), the Revenue is in appeal before us and the assessee has filed Cross Objection.
16. The grounds raised by the Revenue in appeal read as under:
1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A) was justified in deleting the penalty levied by Assessing Officer when assessee itself has accepted the addition made during the assessment by not filing appeal against the additions made in the assessment order?
2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A) justified in deleting the penalty when the substantial additions were not contested by assessee thereby implied that the assessee had furnished inaccurate particulars of income regarding claim of society charges and Depreciation, therefore penalty under section 271(1)(C) of the Income-tax Act, 1961 was attracted in this case?
3. The appellant prays that the order of the CIT (A) on the grounds be set aside and that of the Assessing Officer be restored.
4. The Department craves leave to add, amend, modify, or delete any ground of appeal at the time of hearing.
17. The grounds raised by the assessee in Cross Objection read as under:
1. The Ld. CIT(A) ought to have held that no valid satisfaction u/s. 153C of the Act was recorded for initiating the proceedings leading to invalid assessment order passed by the Ld. A.O. and therefore the penalty on the basis of the same was also void ab initio.
2. The Ld. CIT(A) ought to have appreciated that the initiation of penalty and issue of notice u/s. 271(1)(c) of the Act is bad in law and invalid.
3. The respondent craves leave to add, amend, modify, rescind, supplement or alter any of the grounds stated here in above, either before or at the time of hearing of this appeal.
18. During the course of hearing before us, the learned Authorised Representative (AR) for the assessee reiterated the submissions made before the lower authorities and strongly supported the order passed by the learned CIT(A) deleting the penalty levied under section 271(1)(c) of the Act. The learned AR submitted that the additions/disallowances made by the Assessing Officer in the assessment completed under section 143(3) r.w.s. 153C of the Act were not based on any incriminating material found during the course of search proceedings conducted on 24.09.2009 in the case of Temptation Foods Group. It was contended that the impugned disallowances relating to society charges and depreciation were made merely on the basis of examination of books of account and by following findings recorded in earlier assessment years and therefore such additions were beyond the permissible scope of assessment under section 153C of the Act in an unabated assessment year.
19. The learned AR submitted that the Assessing Officer had nowhere referred to any seized material or incriminating document evidencing that the expenditure claimed by the assessee was bogus or not incurred for the purpose of business. It was further submitted that the disallowances made by the Assessing Officer were merely ad hoc disallowances and all particulars relating to such claims had duly been disclosed in the books of account and return of income filed by the assessee. Therefore, according to the learned AR, no penalty under section 271(1)(c) of the Act could be levied in respect of such additions/disallowances.
20. In support of the aforesaid contentions, the learned AR placed heavy reliance upon the decision of the Coordinate Benchin assessee’s own case for A.Y. 2007-08 in ITA No. 2926/Mum/2025 and CO No. 123/Mum/2025 dated 21.07.2025. The learned AR specifically invited our attention to the findings recorded by the Coordinate Bench wherein it was observed that the assessment had been framed under section 153A pursuant to jurisdiction assumed under section 153C on the basis of search conducted in the case of another person and nowhere in the assessment order had it been stated that any incriminating material was found to establish that the expenses claimed by the assessee were not genuine or not incurred for the purpose of business. The Coordinate Bench further observed that such ad hoc disallowances were outside the purview of assessment under section 153C/143(3) in an unabated assessment year and therefore no penalty under section 271(1)(c) could be levied on such additions. The learned AR accordingly submitted that the issue involved in the present appeal stood squarely covered in favour of the assessee by the aforesaid decision of the Coordinate Bench.
21. So far as the grounds raised in the Cross Objection are concerned, the learned AR invited our attention to the notice dated 23.03.2010 issued under section 153A of the Act and further referred to letter dated 30.08.2011 issued by the Assessing Officer whereby the assessee was informed that the notice earlier issued under section 153A be treated as notice issued under section 153C of the Act. The learned AR submitted that the proceedings under section 153C of the Act were invalid in law inasmuch as the mandatory satisfaction contemplated under section 153C had not been properly recorded prior to assumption of jurisdiction. It was contended that issuance of notice under section 153A and subsequent conversion thereof into notice under section 153C by way of letter dated 30.08.2011 itself demonstrated non-application of mind and jurisdictional infirmity in assumption of jurisdiction under section 153C of the Act. According to the learned AR, once the assessment proceedings themselves were invalid and void ab initio, the consequential penalty proceedings initiated under section 271(1)(c) of the Act were also liable to be quashed.
22. We have heard the rival submissions and perused the material available on record including the orders of the lower authorities and the judicial precedents relied upon before us. The solitary issue arising in the present appeal of the Revenue relates to deletion of penalty levied under section 271(1)(c) of the Act amounting to Rs. 9,76,962/- in respect of disallowance of society charges and depreciation made in assessment completed under section 143(3) r.w.s. 153C of the Act.
23. On careful consideration of the facts available on record, we find that the assessment for the year under consideration was completed under section 143(3) r.w.s. 153C of the Act pursuant to search action conducted in the case of Temptation Foods Group on 24.09.2009. It is an undisputed fact emerging from the assessment order that the additions/disallowances made by the Assessing Officer in respect of society charges amounting to Rs. 1,96,685/- and depreciation amounting to Rs. 29,65,003/- were not based upon any incriminating material found during the course of search proceedings. The disallowance of society charges was made merely for want of supporting documentary evidences and the depreciation disallowance was made by following the treatment given in earlier assessment years. The assessment order nowhere refers to any seized material or incriminating document evidencing that the claims made by the assessee were bogus or false.
24. We further note that the assessment year under consideration was an unabated assessment year on the date of search and therefore, in absence of any incriminating material found during the course of search, no addition/disallowance could have been made while framing assessment under section 153C of the Act. The Coordinate Bench in assessee’s own case for A.Y. 2007-08 in ITA No. 2926/Mum/2025 and CO No. 123/Mum/2025 dated 21.07.2025 had occasion to consider an identical controversy arising out of levy of penalty under section 271(1)(c) on disallowance of routine expenses made in assessment completed under section 143(3) r.w.s. 153C of the Act.
25. We find that in the aforesaid decision, the Coordinate Bench after considering identical facts observed as under:
6. After hearing both the parties and on perusal of the impugned orders and material placed before us, it is seen that here in this case assessment u/s.153A was made as jurisdiction was acquired u/s.153C based on search conducted in case of some other person. Nowhere, in the assessment order it had been stated that there were some incriminating material found to prove that claim of expenses by the assessee are not genuine or not for the purpose of business. First of all, such adhoc disallowance itself was outside the purview of the assessment u/s.153C / 143(3). because it was an unabated assessment year. Secondly, these expenses have been duly shown in the profit and loss account and declared in the return of income and such details and information furnished alongwith return has neither been found to be incorrect or false. Nor explanation of the assessee has been found to be incorrect or false. Nowhere, the ld. AO in the assessment order has stated how these disallowances are justified on the facts and has simply made adhoc disallowance. Accordingly, no penalty can be levied on such adhoc disallowance as firstly, it does not tantamount to furnishing of inaccurate particulars of income and secondly, the addition itself was beyond the scope of assessment u/s.153C. Accordingly, the penalty deleted by the ld. CIT (A) is confirmed and the appeal of the Revenue is dismissed.
26. We find that the facts involved in the year under consideration are materially identical to the facts considered by the Coordinate Bench in assessee’s own case for A.Y. 2007-08. In the present year also, the impugned additions/disallowances are merely routine disallowances made on examination of books of account without reference to any incriminating material found during the course of search proceedings. The Assessing Officer has nowhere recorded any finding that the details furnished by the assessee in the return of income or financial statements were false or inaccurate. The expenditure claims were duly reflected in the books of account and return of income and therefore merely because such claims came to be disallowed, the same by itself cannot lead to levy of penalty under section 271(1)(c) of the Act.
27. We also find merit in the contention of the assessee that the additions themselves being beyond the permissible scope of assessment under section 153C of the Act in an unabated assessment year, consequential penalty proceedings founded on such additions cannot survive. It is well settled that penalty proceedings are distinct from assessment proceedings and levy of penalty requires positive satisfaction regarding concealment of income or furnishing of inaccurate particulars thereof. In the present case, except relying upon disallowances made in the assessment order, no independent material has been brought on record by the Assessing Officer to establish deliberate concealment or furnishing of inaccurate particulars by the assessee.
28. The learned CIT(A), while deleting the penalty, has recorded a categorical finding that the claims made by the assessee were routine business claims duly disclosed in the books of account and no material existed to establish falsity or deliberate misstatement on the part of the assessee. The Revenue has failed to controvert the aforesaid factual findings recorded by the learned CIT(A) by bringing any contrary material on record. Therefore, respectfully following the decision of the Coordinate Bench in assessee’s own case for A.Y. 2007-08, we do not find any infirmity in the order passed by the learned CIT(A) deleting the penalty levied under section 271(1)(c) of the Act.
29. Since we have upheld the order of the learned CIT(A) deleting the penalty on merits, the legal grounds raised by the assessee in the Cross Objection challenging validity of proceedings under section 153C and consequential penalty proceedings have become academic in nature and therefore do not require separate adjudication. Accordingly, the Cross Objection filed by the assessee is dismissed as infructuous.
30. In the result, the appeal filed by the Revenue is dismissed and the Cross Objection filed by the assessee is dismissed as infructuous.
Order pronounced in the open court on 22.05.2026.
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