Section 271(1)(c) Penalty not imposable on Estimated Bogus Purchase Addition

Supertech Construction Company Vs ACIT (ITAT Mumbai)

Case Overview: The case involves an appeal against the order of the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, relating to the Assessment Year 2009-10. The Assessing Officer (AO) had imposed a penalty under Section 271(1)(c) of the Income Tax Act, 1961, which the appellant contested.

Grounds of Appeal: The appellant raised two key grounds of appeal:

• Validity of Penalty Notice: The appellant argued that the penalty notice issued under Section 271(1)(c) was defective as it did not specify whether the penalty was for concealment of particulars of income or furnishing inaccurate particulars of income. The appellant contended that such a defect in the notice rendered the penalty proceedings void.
• Penalty on Estimated Addition: The appellant contended that the penalty levied on the estimated addition (12.5% of alleged bogus purchases) was not valid. The addition in the quantum proceedings was made on an estimation basis, and the appellant argued that penalty under Section 271(1)(c) cannot be levied for additions made on an estimate.

Observations by ITAT Mumbai:

• The ITAT observed that the penalty notice was issued without striking off the irrelevant part, leading to ambiguity about whether the penalty was for concealment or furnishing inaccurate particulars of income.
• Referring to a Full Bench decision of the Bombay High Court (Farhan A Shaikh vs. DCIT), the ITAT held that a defect in the notice, such as not striking off irrelevant matter, would vitiate the penalty proceedings. The ITAT emphasized that the notice must clearly convey the grounds for the penalty.
• The ITAT acknowledged that the addition in the quantum proceedings was based on estimation (12.5% of alleged bogus purchases) and cited legal precedents stating that penalties cannot be levied when additions are made on an estimate.
• It noted that the penalty notice and subsequent notices were ambiguous regarding the charges under Section 271(1)(c), and the AO failed to clearly convey the specific limb for which the penalty was imposed.

Decision of ITAT Mumbai: The ITAT, relying on the Full Bench decision and legal precedents, concluded that the penalty notice was defective and lacked clarity on the grounds for penalty. Additionally, it highlighted that penalties cannot be levied on additions made on an estimate. Consequently, the ITAT allowed the appeal, deleting the penalty of INR 38,716/- imposed under Section 271(1)(c) of the Act.

Key Takeaways:

Defective Notice: The case reiterates the significance of a properly drafted penalty notice. A notice that fails to specify the grounds for penalty clearly may render the penalty proceedings invalid.

Estimation Basis: Penalties under Section 271(1)(c) may not be valid if the additions in the quantum proceedings are made on an estimated basis. The case underscores the importance of distinguishing between concealed income and estimated income for penalty purposes.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

1. By way of the present appeal the Appellant has challenged the order, dated 28/02/2023, passed by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘the CIT(A)’] for the Assessment Year 2009-10, whereby the Ld. CIT(A) had dismissed the appeal of the Assessee against the Penalty Order, dated 16/03/2022, passed under Section 271(1)(c) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).

2. The Appellant has raised following grounds of appeal:

“1) That the Ld. CIT(A) wrongly confirmed penalty u/s 271(1)(C) by ignoring that the Ld. A.O. initiated penalty u/s 271(1)(c) in quantum order dtd. 05-03-15 for furnishing inaccurate particulars of income but issued notice u/s 271(1)(c) dtd. 05/03/15 on both limbs i.e; not striking of any limb or not indicating limb on which he is relying and kept both limbs alive, levy of penalty u/s 271(1)(c) is bad-in-law and void-ab-initio.

2) That the Ld. CIT(A) wrongly confirmed penalty u/s 271(1)(c) by ignoring that Ld. A.O. has levied penalty, on peak credit of Rs.1002379/- as addition made in quantum order dtd. 05-03-15 by A.O and that addition was reduced by estimated rate of 12.5% = Rs125297/- in quantum order dtd. 03-06-19 by Ld. CIT(A) and that quantum order of CIT(A) was confirmed by Honorable ITAT in their quantum order dtd. 10-03-21 and levy of penalty u/s 271(1)(c) on estimated addition is bad-in-law.”

3. When the appeal was taken for hearing none present on behalf of the Appellant. On perusal of the memorandum of appeal, we find that the solitary issue raised in the present appeal pertains to the levy of penalty under Section 271(1)(c) of the Act. We have perused the penalty order, dated 16/03/2022, and the order, dated 03/06/2019, passed by the CIT(A); and have heard the Learned Departmental Representative who relied upon the aforesaid orders.

4. The relevant facts as emerging from the records are for the Assessment Year 2009-10, assessment under Section 143(3) read with Section 147 of the Act of the Act was framed on the Appellant vide order dated 05/03/2015 at Income of INR 30,16,469/- after making addition of INR 10,02,379/- under Section 69 of the Act in relation to the alleged bogus purchases holding the same to be unexplained expenditure. In appeal, the CIT(A) restricted the addition to 12.5% of the alleged bogus purchases vide order, dated 03/06/2019 which was confirmed by the Tribunal, vide order, dated 10/03/2021, passed in ITA No. 5721/Mum/2019.

5. The Assessing Officer had also initiated penalty proceedings under Section 271(1)(c) of the Act, and vide order dated 16/03/2022 penalty of INR 38,716/- was levied on the Appellant under Section 271(1)(c) of the Act being tax on 12.5% of alleged bogus purchases.

6. Being aggrieved, the Appellant preferred appeal before CIT(A) challenging the levy of the aforesaid penalty. Before the CIT(A), it was contended on behalf of the Appellant that (a) the penalty notice, dated 05/03/2015 issued under Section 271(1)(c) read with Section 274 of the Act was bad in law as the same had been issued without deleting or striking off inapplicable part, and (b) no penalty could be levied in the present case as the addition was based upon estimation on income. However, the CIT(A) was not convinced and dismissed the aforesaid appeal vide order, dated 28/02/2023.

7. The Appellant is now in appeal before us challenging the order dated 28/02/2023, passed by the CIT(A) on the grounds reproduced in paragraph 2 above.

8. We have perused the Assessment Order, dated 05/03/2015, passed under Section 143(3) read with Section 147 of the Act, penalty order, dated 16/03/2022, passed under Section 271(1)(c) of the Act and the order, dated 28/02/2023, passed by the CIT(A) under Section 250 of the Act; and have heard the Learned Departmental Representative who relied upon the aforesaid orders. We note that in paragraph 6.1 of the order impugned, the CIT(A) has recorded as under:

“As seen from the above, the AO was clear in his mind while initiating the penal proceedings that is on account of furnishing inaccurate particulars of income. Therefore, the non-striking off the clause “concealing the particulars of income” needs to be considered merely as venial breach which would not go to the root of the transaction in question.”

9. The full Bench of the Hon’ble Bombay High Court in the case Farhan A Shaikh Vs. DCIT, Central Circle-1, Belgaum: 434 ITR 1 (Bombay), has held that a mere defect in the notice – not striking off the irrelevant part/limb, would vitiate the penalty proceedings. The relevant extract of the aforesaid judgment reads as under:

“Answers:

Question No. 1: If the assessment order clearly records satisfaction  for imposing penalty on one or the other, or both grounds  mentioned in Section 271(1)(c), does a mere defect in the notice—  not striking off the irrelevant matter—vitiate the penalty proceedings?

181. It does. The primary burden lies on the Revenue. In the assessment proceedings, it forms an opinion, prima facie or otherwise, to launch penalty proceedings against the assessee. But that translates into action only through the statutory notice under section 271(1)(c), read with section 274 of IT Act. True, the assessment proceedings form the basis for the penalty proceedings, but they are not composite proceedings to draw strength from each other. Nor can each cure the other’s defect. A penalty proceeding is a corollary; nevertheless, it must stand on its own. These proceedings culminate under a different statutory scheme that remains distinct from the assessment proceedings. Therefore, the assessee must be informed of the grounds of the penalty proceedings only through statutory notice. An omnibus notice suffers from the vice of vagueness.” (Emphasis supplied)

10. It is admitted position that in the present case, penalty notice was issued under Section 274 read with 271 of the Act without deleting or striking off the inapplicable part. Thus, the statutory notice issued to the Appellant does not inform the Appellant about the charge against the Appellant – whether penalty under Section 271(c) of the Act was sought to be levied for concealment of particulars of income or furnishing inaccurate particulars of income. Therefore, penalty levied under Section 271(1)(c) of the Act cannot be sustained as per the judgment of the Full Bench decision of the Hon’ble jurisdictional High Court in the case of Mohammed Farhan A Shaikh vs DCIT (supra). Further, we note that in the quantum proceedings, the Assessing Officer made addition of the entire alleged bogus purchases. However, the CIT(A) and thereafter, the Tribunal restricted the addition to 12.5% of the alleged bogus purchases. The addition has been made in the hands of the Appellant on account of bogus purchase was on estimation basis and therefore, we hold that the CIT(A) was not correct in rejecting the contention of the Appellant that no penalty under section 271(1)(c) of the Act can be levied in the present case as the additions in the quantum proceedings were made/sustained on estimate basis.

11. Our view draws strength from the decision of the Mumbai Bench of the Tribunal has, in the case of Orient Fabritech Pvt. Ltd. vs. ITO, Range-1(2)(4): ITA No. 1425/Mum/2021, wherein in identical facts and circumstances, penalty levied under Section 271(1)(c) of the Act was deleted by the Tribunal holding as under:

“4. Both sides heard, orders of the authorities below examined. The assessee is in appeal against levy of penalty in respect of assessee’s involvement in obtaining bogus purchase bills. In quantum proceedings, the AO made addition of the entire alleged bogus purchases. The matter travelled to the Tribunal, the Tribunal restricted the addition to 12.5% of the alleged bogus purchases. The addition has been made in the hands of assessee on account of bogus purchase merely on estimations. It is an accepted legal position that no penalty under section 271(1)(c) of the Act can be levied where additions are made on estimate. [Re: CIT Vs. Krishi Tyre Re-trading & Rubber Industries 360 ITR 580(Raj.), CIT Vs. Subhash Trading Company 221 ITR 110 (Guj.), CIT Vs. Sangrur Vanaspati Mills Ltd. 303 ITR 53 (P&H)].

5. We further find that the notice issued under section 274 r.w.s. 271(1)(c) of the Act dated 18.03.2015 and the subsequent notice issued under section 271(1)(c) of the Act dated 15.03.2019 falls short of the legal requirement to be a valid notice for levy of penalty. The first notice issued under section 274 r.w.s. 271(1)(c) is in Performa, without any application of mind by the AO. The irrelevant limb o f section 271(1(c) of the Act has not been struck off. The Hon’ble jurisdictional High Court in the case of Mohd. Farhan A. Shaikh (supra) has dealt with the issue where the notice was issued without striking off the irrelevant matter. The Hon’ble High Court held that non-striking off irrelevant matter would vitiate the penalty proceedings. The relevant extract of the judgment is reproduced here-in-below:

xx xx

6. In the second notice dated 15.03.2019, the AO has mentioned both the charges of section 271(1)(c) of the Act. This shows ambiguity in the mind of Assessing Officer with regard to charge under section 271(1)(c) of the Act, that is to be invoked. The Hon’ble Apex Court in the case of T. Ashok Pai Vs. CIT 292 ITR 11 has held the concealment of income and furnishing inaccurate particulars of income carry different connotations. Thus, the AO is duty bound to clearly convey to the assessee the limb for which penalty is to be levied. Where the position is unclear, penalty is unsustainable.

7. Thus, the penalty levied under section 271(1)(c) of the Act is unsustainable on account of defect in statutory notice issued under section 274 of the Act, as well for the reason that penalty is levied on addition made on mere estimations. The impugned order is set-aside and the appeal of assessee is allowed.”

12. In view of the above, we delete the penalty of INR 38,716/- levied under Section 271(1)(c) of the Act. Accordingly, Ground No. 1 and 2 raised by the Appellant are allowed.

13. In the result, appeal preferred by the Assessee is allowed.

Order pronounced on 05.12.2023.