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Facts
The assessee, a partnership firm, filed its return for AY 2011-12. During a search, it was found that the assessee obtained accommodation entries for bogus purchases amounting to Rs. 2,66,46,994. The AO added 8% of this amount as profit to the total income and initiated penalty proceedings.
Held
The Tribunal held that the penalty imposed u/s 271(1)(c) was not sustainable as the addition was made on an estimation basis. Furthermore, the penalty notice issued was deemed defective as it did not strike off the irrelevant limb of the charge, rendering it void ab initio.
Key Issues
Whether penalty u/s 271(1)(c) is leviable when the addition is made on an estimation basis and whether the penalty notice was validly issued.
Sections Cited
250, 271(1)(c), 148, 143(3), 147, 274, 69C, 133(6)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI. RAJ KUMAR CHAUHAN
O R D E R PER RAJ KUMAR CHAUHAN (J.M.): 1. The revenue has instituted the present appeal challenging the order dated 06.03.2025 of National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as the “CIT(A)”], passed under section 250 of the Income Tax Act, 1961 [hereinafter referred to as “the Act”] for the A.Y.
The facts in brief as culled out from the orders of the lower authorities are that the assessee is a partnership firm has filed return of income for the year 2011-12 on 30.3.2012 declaring a total income of Rs. 70,430/-. During the search and seizure action conducted by Investigation Wing on Rajendra Jain Group on 03.10.2013, it is found that the assessee had obtained accommodation entry totaling to Rs.2,66,46,994/ during the year under consideration. On the basis of information, notice u/s 148 of the Act was issued on 03.03.2016. After considering the submission of the assessee, the assessment was completed and it was observed that an amount of Rs. 21,31,760/- being 8% of the total non genuine purchase of Rs. 2,66,46,994/- was added to the total income of the assessee as profit earned from such purchases. The assessment was completed on 28.12.2016 u/s 143(3) r.w.s. 147 of the Act on a total income of Rs. 22,02,190/-. Penalty proceedings were also initiated before issuing notice u/s 274 of the Act on 14.06.2021.
3. Against the quantum order, assessee filed the appeal before the Ld. CIT(A) who vide order dated 27.02.2019 partly confirmed the appeal by A. J. Diam taking GP rate of 3% for the purpose of addition. Thereafter, AO vide order dated 01.02.2022 imposed the penalty of Rs. 2,68,781/- u/s 271(1)(c) of the Act. The said penalty order was challenged before the Ld. CIT(A) who vide impugned order set aside the penalty imposed on the ground that the penalty levied u/s 271(1)(c) of the Act on estimated addition was not sustainable. It was held by Ld CIT(A) that the notice issued for imposing penalty was not valid notice because it has mentioned both the limbs i.e. concealment of income or furnishing inaccurate particulars of income despite the fact that AO has initiated for furnishing inaccurate particulars of income only.
Aggrieved by the order of the Ld. CIT(A), the department is in appeal before us and has raised the following grounds of appeal.
“1. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in deleting the penalty Rs. 2,68,781/-levied by the AO on the restricted addition @ 3% of Rs.22,02,190/-by ignoring the fact that the disallowance of purchase made on ad-hoc basis were not arbitrary but based on undisputed fact that the assessee has taken accommodation entries in the form of bogus purchase. The quantification of income out of bogus purchases was made but it does not alter the fact that the assessee has concealed the particulars of his income by way of non-genuine purchases through the bogus parties. The assessee cannot get away with the penalty levied on estimation of undisclosed income when the fact of undisclosed income is beyond doubt and in the absence of exact A. J. Diam determination of undisclosed income the knowledge of which is within the domain of the assessee, an estimation of undisclosed income was made which was held by the judicial authorities to be proper?
2. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in deleting the penalty levied, by ignoring the fact that there was a conscious concealment of particulars of income and a deliberate failure to furnish accurate particulars of the income and relevant evidences by the assessee, even at the penalty proceedings, which attracts the provision of section 271(1)(c) and explanation thereto, as held in the case of K.P. Madhusudhan Vs. CIT reported in 251 ITR 99 (SC) ?
Whether on the facts and circumstances of the case and in law, the decision of the Ld. CIT(A) is right in deleting the penalty, in view of the decision of the Hon'ble High Court Mumbai, in the case of Pr. Commissioner of Income-Tax- 5, Mumbai Vs Kanak Impex (India) Ltd (2015)172 Taxmann.com 283(Bombay) Dated. 03.03.2025, wherein it was held that the 100% addition made on the bogus purchases has been allowed, by rejecting the Hon'ble ITAT decision of estimating the profit rate @ 12.5% on bogus purchases and thereby impliedly grant deduction of such unexplained expenditure incurred u/s 69C of the Act, even though, the assessee failed to discharge its onus to prove genuineness of alleged purchases and has offered no explanation of the sources of expenditure incurred on account of such purchases?
4. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in deleting the penalty levied, by ignoring the observations of Hon'ble High Court in the CIT Vs Chanchal Katiyal 173 Taxman 71(all), which is relevant in the facts and circumstances of this case, that if the assessce did not furnish particulars OR inaccurate explanation for the concealed income, penalty is justified?
A. J. Diam 5. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in deleting the penalty levied, without appreciating the decision of the Hon'ble Supreme court in case of Union of India Vs Dharmendra Textiles Processors & ors(306 ITR 277), wherein it was held that explanation appended to sec. 271(1)(c) of the Act, entirely indicate the element of strict liability on the assessee for concealment OR for giving inaccurate particulars while filing return and that the said section has been enacted to provide for a remedy for loss of revenue ?
6. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in directing the AO to DLEETE the penalty levied, without appreciating judgment of Hon'ble Delhi High Court in the case of CIT Vs Atul Kumar Gupta in which reinforces the Revenue Authority to impose penalties under section 271(1)(c), in the cases WHARE the assessee fails to provide accurate and satisfactory explanations for discrepancies in their accounts even if the addition is made of estimate basis?
7. The Tax- Effect involved in the instant case is Rs. 2,68,781/-, which is below the 'prescribed limit as per CBDT's Circular F.No.279/Misc.142/2007-ITJ(Pt) amended vide No 09/2024 dated. 17.09.2024. However, the case fall 7 under one of the exceptions laid down in CBDT Circular No. 05/2024 Dated. 15.03.2024, wherein it is stated that in cases involving "Organized Tax Evasion" the decision to file appeal/SLP shall be taken on merit without regard to the tax effect and the monetary limit.
8. The appellant craves leave to amend OR alter any grounds OR add a new ground which may be necessary
9. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in deleting the penalty Rs. 2,68,781/- levied by the AO A. J. Diam on the restricted addition @ 3% of Rs.22,02,190/- by ignoring the fact that the Maharashtra Sales Tax Department through DGIT(Inv.), Mumbai has proved beyond doubt that the assessee has obtained accommodation entries of bogus/un-proven purchases of Rs. 2,66,46,994/- from hawala party M/s. Manibhadra to inflate the expenses and thereby suppress true profit and this act of the assessee itself established deliberate failure to furnish accurate particulars of the income, which attracts for imposition of penalty u/s 271(1)(c) of the Act, for concealment of income?"
Ground No. 1 to 6 pertains to deletion of penalty by the Ld. CIT(A) and only one ground no. 7 is with respect to direction of CBDT vide Circular No. 5/2024 dated 15.03.2024 that the cases involving "Organized Tax Evasion", hence the appeal was maintainable despite the total tax effect was below the permissible limit. The assessee has not filed any cross objection, but has moved an application under Rule 27 of Income Tax Appellate Tribunal Rules 1963 in order to support the ground decided by the Ld. CIT(A) and stated in the said application that the appeal should not be entertained as the tax effect is below the monetary limit. It is further stated that the contention of the department that the appeal being covered under the exception of cases „organized tax evasion‟ is not sustainable, because the facts of the case do not come under organized tax evasion. It is further stated that in case the contention of the
6. We have heard the rival submissions and examined the record. Ld. AR on behalf of the assessee argued that imposing penalty in this case wherein alleged addition has been made on estimation basis is not legally sustainable in view of the judgment of Coordinate Bench of ITAT and the Judgment of Hon‟ble High Courts. Ld. AR submitted that initiating the notice is bad in law because the AO issued the notice dated 28th December 2016 u/s 274 for levy of penalty u/s 271(1)(c) of the Act without striking off any of the two limbs, which shows that the notice was vague and hence void ab intitio. In support of his arguments, Ld. AR relied on the decision of Hon‟ble Bombay High Court in the case of Mohd. Farhan A. Shaikh vs. DCIT (125 taxmann.com 253 – Bom HC) wherein it was held that the notice in which the limb of charge is not specifically chosen is bad in law. It is therefore argued that the impugned order does not suffer from any illegality and the same is required to be upheld and appeal of the revenue is liable to be dismissed. In addition, Ld. AR has filed the legal paper book containing 143 pages wherein various decisions have been referred in support of its case.
A. J. Diam 7. On the other hand, Ld. DR submitted that the monetary limit prescribed in CBDT for revenue does not apply in this case as it is covered by exception as involving organized tax evasion. With regard to the issue raised by the assessee on account of the department did not strike off any of the two limbs, Ld. DR argued that this is mere an irregularity or not illegality and the notice issued for initiating penalty was valid and legally sustainable.
We have considered the rival submissions and examined the record. Since this case is allegedly involved accommodation entry and the addition was made on the basis of profit out of non genuine purchase and the quantum proceeding has been finalized and no further appeal before the Ld. CIT(A) has been filed by the assessee, therefore the said fact is finally concluded and the case of the assessee is covered within the exception of Circular no. 5/2024 dated 15.03.2024. Hence, the contention of the assessee with regard to maintainability on account of low tax effect is dismissed. With regard to non-sustainability of the penalty imposed on account of estimation basis, the assessee has relied the case of the Coordinate Bench of ITAT in dated 18.02.2025 in which both of us were the member of that Bench and had decided the same issue in favour of the assessee. We have Page | 8 A. J. Diam noticed that Ld. CIT(A) while setting aside the penalty proceeding has relied on the decision of Mumbai Tribunal in the case of Jatin Enterprises (ITA No. 3885/Mum/2023) order dated 21.03.2023 wherein the Coordinate Bench held as under:-
“5. The Hon'ble Rajasthan High Court in the case of CIT vs. Krishi Tyre Retreading and Rubber Industries reported as 360 ITR 580 has held that where addition is made purely on estimate basis, no penalty u/s. 271(l)(c) of the Act is leviable. Similar view has been expressed by the Hon'ble Punjab & Haryana High Court in the case of CIT vs. Sangrur Vanaspati Mills Ltd. reported as 303 ITR 53. The Hon'ble High Court approving the order of Tribunal held that when the addition has been made on the basis of estimate and not on any concrete evidence of concealment, penalty u/s. 271(l)(c) of the Act is not livable. The Hon'ble Gujarat High Court in the case of CIT vs. Subhash Trading Co. Ltd. reported as 221 ITR 110 has taken a similar view in respect of penalty levied u/s. 271(l){c) of the Act on estimated additions. There are catena of decisions by different High Courts and various Benches of the Tribunal wherein penalty levied u/s. 271(l)(c) of the Act on estimated additions has been held to be unsustainable.
Thus, in the facts of the instant case and the decisions referred above, we hold penalty levied u/s. 271(1)(c) of the Act unsustainable. Ergo, the Assessing Officer is directed to delete the penalty.
Further, during the study of appeal file we find that the assessee has placed on record penalty notice u/s. 274 r.w.s 271 of the Act dated 25/03/2015. A perusal of the notice reveals that it is in a pre drafted Performa and mentions both limbs of section 271(1)(c) of the Act as, “ *have Concealed the particulars of your income or …….. Furnished inaccurate particulars of such income.” The Assessing Officer has not struck off Page | 9 A. J. Diam irrelevant clauses in the notice. The Hon’ble Jurisdictional High Court in the case of Mohd. Farhan A. Shaikh vs. DCIT, 125 taxmann.com 253 ( Bombay) held that where Assessing Officer clearly records satisfaction for imposing penalty on one or other or both grounds mentioned in section 271(1)(c) of the Act, non-striking of irrelevant matter would render the notice defective and such defective notice vitiate the penalty proceedings. In the present case, we find that in assessment order the Assessing Officer had initiated penalty proceedings for furnishing inaccurate particulars of income only. Since, both limbs i.e. “concealed particulars of income and furnished inaccurate particulars of income” are recorded in the notice, the notice is defective. The penalty levied u/s. 271(1)(c) is liable to be deleted on the ground of defective notice as well.”
In a similar facts, the Coordinate Bench of ITAT in dated 22.07.2024 in which one of us was the member of this Bench has decided the similar issue in favour of the assessee and rejected the appeal of the revenue. The relevant portion of the order of Coordinate Bench are reproduced below:-
“5. As is evident from para 5.6 of the Ld. AO’s order, the Ld. CIT(A) has restricted the additions of @25% of non-verifiable purchases debited to the trading account, this shows that that Ld. CIT(A) while confirming the addition in quantum appeal has done so on estimate basis. The Hon'ble Karnataka High Court in the case of CIT Vs. Parasamal Babulal Jain, of 2006, order dated 14.09.2011, has held that the penalty u/s. 271(1)(c) is not attracted where addition made on estimate basis. The said order reads as under: “Penalty cannot be levied on the disallowance of expenses made on estimate basis. If no facts are brought on record that any income has Page | 10 A. J. Diam been concealed by the assessee or the assessee has furnished inaccurate particulars. It is because of the disallowance of the expenditure the total amount representing total income is enhanced to the extent of disallowance. Conditions which are to be fulfilled before section 271(1)(c) is attracted do not exist."
6. In this case as is evident from the observation of the para 5.1 of the Ld. AO’s order, the addition was made on estimation of total turnover after rejecting the books of accounts. Notice u/s. 133(6) were also issued to the various purchase parties and all the notice were returned by the postal authority and the assessee has not produced the party to confirm the same. These observation of the lower authorities shows that it is not established by the revenue that the assessee had concealed the particulars of income or has submitted inaccurate particulars of income so as to attract Section 271(1)(c) of the Act. Admittedly, the addition has been made on estimate basis, therefore, the ratio of judgment of the Karnataka High Court referred (supra) and various pronouncements of the judicial ITAT covers the facts of the present case of the assessee. Since the addition was made on the estimate basis and for the aforesaid discussion, the penalty is not sustainable and rightly deleted by the Ld. CIT(A). We find no illegality in the order of the Ld. CIT(A) and same is accordingly confirmed.
7. Both the grounds of appeal
of the revenue are accordingly dismissed.
8. In the result, appeal filed by the revenue is dismissed in the above terms.”
10. On the basis of above discussion, we are of the considered opinion that it is an admitted fact that penalty has been imposed on estimation basis. Further, we have noticed that the case relied by Ld. CIT(A) referred (supra) as well as has perfectly covered the facts of the case in hand. For these reasons, we do not find any
In the result, the appeal filed by the revenue is dismissed in above terms.
Order pronounced in the open court on 28.11.2025