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Facts
The assessee claimed expenditure on magazines and journals paid to a sister concern. The Assessing Officer (AO) disallowed a portion of this expenditure on an ad hoc basis. The AO initiated penalty proceedings under Section 271(1)(c) of the Income Tax Act. The CIT(A) confirmed the penalty.
Held
The Tribunal held that the penalty was not leviable because the initial assessment order did not specify the charge for concealment of income or furnishing inaccurate particulars. Furthermore, since the disallowance was made on an ad hoc/estimate basis, and not on concrete evidence of concealment, penalty under Section 271(1)(c) cannot be levied.
Key Issues
Whether penalty under Section 271(1)(c) is leviable when the assessment order lacks a specific charge and the addition is based on an estimate.
Sections Cited
143(3), 271(1)(c), 145
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Income Tax Appellate Tribunal, DELHI BENCH ‘A’: NEW DELHI
Before: SHRI MAHAVIR SINGH & SHRI MANISH AGARWAL
PER MAHAVIR SINGH, VP: This appeal by Assessee is arising out of order passed by National Faceless Appeal Centre, (NFAC), Delhi vide order dated 11/09/2024 for Assessment Year 2010-11 passed in Appeal No. ITBA/NFAC/S/250/2024-25/1068574793(1) pertaining to assessment year 2010-11.
Bright Enterprise Pvt. Ltd. vs. PCIT 2. The assessment was framed by DCIT, Central Circle-II, Jalandhar for Asst. Year 2010-11 u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 28/03/2013. The impugned penalty u/s. 271(1)(c) of the Act was levied by ACIT, Circle 5(1), New Delhi vide order dated 29/09/2019.
The assessee has raised two issues, the first on jurisdiction and second on merits. As regards first issue regarding assumption of the jurisdiction by the AO for levy of penalty u/s 271(1)(c) was initiated by the assessment order, where there is no specific charge, i.e. either for concealment of income or for furnishing of inaccurate particulars of income have been mentioned, qua this, assessee has raised the said issue vide Ground No. 4, which reads as under:- . “4. Notwithstanding the above said ground of appeals, the levy of penalty u/s 271(1) (c) is unjustified, since no specific charge, either for concealment of income or for furnishing inaccurate particulars of income have been made while passing the order u/s 143(3) dated 28.03.2013 and, as such, on the basis of binding judgments of Apex Court and different High Courts and Benches of the ITAT, the said levy of penalty is otherwise not valid.”
4. As regards to merits of the case, the assessee stated that the Ld. CIT(A) erred in confirming the levy of penalty u/s 271(1)(c) on disallowance of expenditure on account of “Magazine and Journal” to the tune of Rs.92,92,170/-.
Brief facts of the case are that the assessee is engaged in the business of publication of Magazine and Journal and also in educational activity being a group of M/s MBD Printographics (P) Ltd. The assessee during the year claimed expenditure of Rs.9,29,21,703/- under the head of Magazine and Journal which is paid to its sister concern namely M/s MBD Printographics (P) Ltd. The assessee claimed that all the expenses were incurred on account of Magazine and Journals to promote the business and also the same is required in the Hotel Industry. It was explained before the AO that these were various magazines like hospitality Bright Enterprise Pvt. Ltd. vs. PCIT upgrade magazines, Event Magazines, Tourist Magazines/City Guides, Health & Fitness Magazines, Beauty & Fashion Magazines, Entertainment & Celebrity Magazines, Sports Magazines and Professional Journals etc. which serves as a backbone in the hotel industry. To upkeep people about the events hosted by the hotels. Tends in Hotel Industry, services provided by the hotels, to keep guests more comfortable these magazines are always desirable. The Assessing Officer considering the trading result of another sister concern which is similarly placed i.e., carrying the “Radisson” brand is 14.42% but comparing with the assessee’s case the expenses are much more but AO has not pointed out how much is the turn over of the assessee. But ultimately the Assessing Officer estimated the disallowance @10%. For this proposition, he gave his finding vide 5.9 which reads as under:- “5.9 Therefore, in view of the above, i.e. comparable ratios, non- justification of huge numbers of magazines, no justification for rate charged, generic bills from related party and no correlation in sale of scrap/raddi, 10% of the total expenses claimed under the head “Magazine and Journal” i.e. (10% of Rs.9.29,21,703/-) = Rs.92,92,170/- is treated as unjustified, excessive and unreasonable and hence disallowed and added to the total income for the year.” 5.1 The Assessing Officer initiated penalty proceedings u/s 271(1)(c) for furnishing of inaccurate particulars and concealment of income in regard to the disallowance of expenses under the head of Magazine and Journals. Similarly, the Assessing Officer also initiated penalty proceedings on the similar adhoc disallowance of “Repair and Maintenance” disallowed by the Assessing Officer at Rs.93,38,268/, but quantum addition was deleted by CIT(A). The Assessing Officer levied the penalty u/s 271(1) (c) on this disallowance of expenditure under the head Magazine and Journals disallowance made at Rs.92,92,170/-.
Aggrieved, the assessee preferred the appeal before Ld. CIT(A)/ NFAC.
Bright Enterprise Pvt. Ltd. vs. PCIT 7. In appeal, Ld. CIT(A)/NFAC confirmed the penalty in regard to disallowance made under the head “Magazine and Journals’ by stating that in every case it cannot be argued that the addition has been made at estimate basis and, accordingly, penalty cannot be levied. The Ld. CIT(A)/NFAC stated that there is an estimating addition but it was stated that the assesse has admittedly incurred expenses as expenditure which has been brought on record by the AO by comparing the trading concern of another i.e., “Radisson”. The Ld. CIT(A)/NFAC finally confirmed the penalty by observing vide para nos. 7.4 & 7.5 which read as under:- “7.4 In the present case, the fact that the appellant has deliberately incurred excess expenditure has been brought on record by AO by comparing the case of appellant with similar concern with similar turnover and by bringing out clear discrepancy between value/quantum of purchase of magazines vis a vis scrap income admitted for the year and by bringing out the fact that appellant failed to provide evidence for actual utilization of huge number of magazines/Journals shown to have purchased from sister concern. The fact that appellant has claimed excess expenditure under the head 'Magazines and journals' has been confirmed by both CIT(A) vide order dated 08.05.2014 and ITAT vide order dated 17-01-2019. Therefore, claim of appellant that there is no furnishing of inaccurate particulars of income can't be accepted. However, AO levied penalty on amount disallowed Rs.3,28,67,765/- as per ITAT order dated 17.01.2019. The Appellant enclosed ITAT Order vide Misc. application No.9/Asr./2018 in ITA No.354/Asr./2014 dated 17.08.2020 by which Hon'ble ITAT directed AO to restrict disallowance to the extent of Rs.92,92,170/-against disallowance ordered of Rs.3,28,67,765/- vide order cited above (ITA No.354/Asr./2014 dated 17.08.2020). The relevant para of the ITAT order reproduced as under for the sake of convenience: 5. In the present case also by the direction of the ITAT vide the aforesaid referred to order dt. 17/01/2019, the disallowance was enhanced resulting into enhanced assessment which is not permissible, therefore we modify the said order dt. 17/01/2019 Bright Enterprise Pvt. Ltd. vs. PCIT in to this extent that for the A.Y. 2010- 11 the disallowance to be made, may not exceed the disallowance which has been made by the A.O. at Rs. 92,92,170/-. 7.5 Since penalty u/s 271(1) (c) is on tax sought to be evaded on income w.r.t. which inaccurate particulars of income are furnished by assessee, the AO is directed to recompute penalty leviable considering disallowance of Rs.92,92,170/- instead of Rs.3,28,67,765/- on which penalty is levied. The AO is directed to delete Excess penalty. Consequently, Grounds of appeal of appellant are Partly Allowed.”
8. Aggrieved, the assessee is in appeal before the Tribunal.
9. As regards issue of non-mentioning of specific charge on the assessment order is concerned, Ld. Counsel for the assessee argued and drew our attention towards the assessment order dated 28.3.2013, whereby the Assessing Officer has initiated penalty proceedings vide para 8 which read as under: “8. Assessed as above, Charge interest as per law. Issued notices of demand and challenge. Penalty proceedings u/s 271(1)(c) are initiated separately as the undersigned is satisfied of the fact of furnishing of inaccurate particulars and concealment of income in the case as referred in para no.3.7, 4.4. 5.9 and 6.3.”
9.1 Ld. Counsel for the assessee argued that the AO has initiated penalty proceedings for furnishing of inaccurate particulars and concealment of income on account of disallowance of expenses of Magazine and Journals. The Ld. Counsel for the assessee filed the copy of initiation of penalty notice filed before us, wherein the assessee was intimated that it had concealed the particulars of income. The Ld. Counsel for the assessee argued that this issue is now settled by various decisions of Hon’ble High Courts and he relied upon the Full Bench decision of Hon’ble Bombay High Court in the case of Mohd. Farhan A. Shaikh vs. DCIT as reported in [2021] 125 Taxmann.com 253 (Bombay) vide order dated 11/03/2021 wherein, Hon’ble Bombay High Court has considered the decisions Bright Enterprise Pvt. Ltd. vs. PCIT of Hon’ble Karnataka High Court in the case of Manjunatha Cotton and Ginning Factory [2013] 359 ITR 565 (Kar.). The Ld. Counsel also relied on the decision of Hon’ble Delhi High Court in the case of PCIT vs. Sahara India Life Insurance Company Ltd. in date 02/08/2019 wherein it has been held that the notice issued by the Assessing Officer is bad in law if it did not specify under which limb of section 271(1)(c) the penalty proceedings had been initiated, i.e., whether for concealment of particulars of income or for furnishing of inaccurate particulars of income. In view of the above, the Ld. Counsel for the assessee argued that above penalty cannot survive.
On the other hand, the Ld. Sr. DR could not controvert the above factual situation.
We have heard the rival contentions and perused the records. Upon careful consideration, we find considerable cogency in the contention of the ld. AR that penalty u/s. 271(1)(c) of the Act is not leviable, since there is no specific charge, either for concealment of income or for furnishing inaccurate particulars of income have been made while passing the assessment order passed u/s. 143(3) of the Act dated 28.3.2013, hence, on the anvil of settled law on this issue, as referred above, the penalty in dispute does not survive and hence, the same is deleted on this point of view.
Further, it could be seen from the assessment order that the Assessing Officer has made addition on ad hoc basis by disallowing 10% of the total expenses in the head Magazine and Journals treating the same unjustified and excessive and unreasonable. Ultimately the said addition was made on adhoc/estimate basis, however, the AO has tried to justify the same by comparing the similarly placed concern, but the facts of that case has not been discussed at all. We noted that this issue is now covered by the decision of ITAT, Delhi Bench in the case of ACIT vs. Technip Italy Spa passed in vide order dated 28/06/2013, wherein, it has been held as under:
Bright Enterprise Pvt. Ltd. vs. PCIT “7. So far as the penalty levied on the addition made on account of offshore supply of equipment is concerned, the addition has been finally deleted by the Tribunal vide order dt. 30th Sept., 2010 in (supra). Similarly, the Tribunal has also deleted the addition made on account of income from foreign exchange fluctuation gain. Thus there is no question of levy of penalty under s. 271(1)(c) of the Act on these additions. So far as penalty levied on the addition made on account of onshore supply of equipment is concerned, we find that in the penalty order, the AO has dealt with this issue at page Nos. 12 to 17 of the penalty order. The genuineness of the foreign expenditure incurred was not accepted on the basis that the books of accounts pertaining to dollar payments were not verifiable, payments have been made in dollar accounts to non- residents and the assessee company had filed only photocopies of vouchers. It was held that the onus was on the assessee to produce the original books of account and other relevant documents regarding payment in dollar. The AO accordingly rejected the books of account and estimated the profit @ 8 per cent. It was held that the assessee failed to establish the claimed loss and hence it has furnished inaccurate particulars of income. In this regard, the learned CIT(A) has given his finding in para Nos. 9 to 9.7 at page Nos. 36 to 38 of the first appellate order against penalty. In crux the assessee had offered the income from onshore supply and other contract receipts to tax on the basis of the audited books of accounts as maintained by them. The AO was of the opinion that there were various discrepancies in the books of account maintained by the assessee and accordingly the books were rejected under s. 145 of the Act and the income from the above activity was estimated by the AO by applying 8 per cent profit rate on the gross receipts from this activity. Since the assessee had claimed loss which it was not able to justify, therefore, the AO held that the assessee had furnished inaccurate particulars of income and has levied penalty. The AO has not given reason for applying 8 per cent rate. Of course, there is no finding beyond doubt by the AO that any false claim was made by the assessee and there is no dispute that income from onshore supply and other contract receipts has been estimated by the AO after rejection of books of account under s. 145 of the Act. The estimation of income in this regard has also been made on the basis of the disclosure made by the assessee. It is now a well- established proposition of law that penalty under s. 271(1)(c) of the Bright Enterprise Pvt. Ltd. vs. PCIT Act cannot be levied on an estimated income. One of such cited decisions is of Hon'ble Allahabad High Court in the case of CIT vs. K.L. Mangal Sain (supra) wherein it has been held that merely because books of the assessee were rejected and income was assessed on estimate basis, it could not be held that the assessee was guilty of fraud or gross or wilful neglect for the purpose of levy of penalty under s. 271(1)(c) of the Act. Similar view has been taken by the Hon'ble Gauhati High Court in the case of CIT vs. Chhaganlal Shankarlal (supra) wherein accounts maintained on regular basis on the basis of which return was filed, was rejected and income was estimated. Respectfully following ratio laid down in these decisions on this issue, we are of the view that the learned CIT(A) has rightly deleted the penalty. The reason being in such an estimation of income it cannot be held beyond doubt that there was furnishing of inaccurate particulars of the income on the part of the assessee to justify the penal action under s. 271(1) (c) of the Act. The material finding of the learned CIT(A) that the income from the activity of onshore supply and contract receipts was duly disclosed by the assessee in its return of income has also not been rebutted. The action of the learned CIT(A) in this regard is thus upheld.”
Even Hon’ble Punjab and Haryana High Court has considered the similar issue in the case of CIT vs. Sangrur Vanaspati Mills Ltd. as reported [2008] 303 ITR 53 (P&H) wherein, it has been held that when addition has been made on the basis of estimate and not on account of any concrete evidence of concealment, then penalty u/s 271(1) (c) cannot be levied. The Hon’ble Punjab and Haryana High Court vide para no. 7 held as under: “7. The order passed by the ITAT is based upon two decisions of this Court in CIT v. Ravail Singh & Co. [2002] 254 ITR 191 and Hari Gopal Singh v. CIT [2002] 258 ITR 85. In both these decisions, this Court has held that in order to attract clause (C) of section 271(1) of the Act, it is necessary that there must be concealment by the assessee of the particulars of his income or furnishing of inaccurate particulars of such income. The provisions of section 271(1)(c) of the Act are not attracted to cases where the income of an assessee is assessed on estimate basis and additions are made therein. It was held that when the addition had been made on the basis of estimate and not on account of any concrete evidence of Bright Enterprise Pvt. Ltd. vs. PCIT concealment, then the penalty was not leviable. The similar view was also taken by this Court in CIT v. Dhillon Rice Mills [2002] 256 ITR 447, where the addition was made by the Assessing Officer by estimating the yield of super phak as well as of chhilka and also the price of chhilka, that addition was reduced by the CIT(A). However, the penalty levied by the Assessing Officer was deleted by the CIT(A). The order of CIT(A) was confirmed by the ITAT and the appeal filed by the revenue against the said order of the ITAT was dismissed by this Court, on the ground that the Assessing Officer had made the additions on the basis of estimate of the yield of phak and chhilka and an estimate of the price and that the estimate would not ipso facto lead to penalty.”
In view of the aforesaid discussions and respectfully following the aforesaid precedents, the disallowance made by estimating the expenses on adhoc basis @ 10% is not sustainable, hence, in our considered view, the penalty on this disallowance deserve to be deleted. We hold and direct accordingly.
In the result, the appeal of the Assessee is allowed. Order pronounced on 16/05/2025.