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Facts
The assessee appealed against a penalty order related to Assessment Year 2010-11. The penalty was imposed for alleged bogus purchases and interest disallowance. The original addition for bogus purchases was reduced by the CIT(A) and further by the Tribunal, and the interest disallowance was also reduced.
Held
The Tribunal held that penalties under Section 271(1)(c) cannot be levied on additions made based on estimation or presumption without direct evidence of concealment or inaccurate particulars. Since the penalty was based on estimated GP addition and proportionate interest disallowance without such evidence, it was deemed unsustainable.
Key Issues
Whether penalty under Section 271(1)(c) can be levied on additions based on estimation and presumption rather than on concrete evidence of concealment or furnishing of inaccurate particulars. Whether the disallowance of interest under Section 36(1)(iii) for alleged diversion of interest-bearing funds for interest-free advances is sustainable for penalty purposes.
Sections Cited
271(1)(c), 36(1)(iii), 143(3), 147
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘B’ BENCH
आदेश / O R D E R PER AMIT SHUKLA (J.M): The present appeal has been preferred by the assessee against the order dated 24 June 2025 passed by the learned Commissioner of Income Tax (Appeals)-52, Mumbai, confirming the penalty imposed under Section 271(1)(c) of the Income Tax Act, 1961, for the Assessment Year 2010-11. 2. The assessee is aggrieved by the levy of penalty amounting to ₹6,30,000/-, which arises from two disallowances firstly, on account of the gross profit addition Balaji Impex made on alleged bogus purchases, and secondly, on account of the interest disallowance under Section 36(1)(iii). The Assessing Officer, while framing the assessment under Section 143(3) read with Section 147, made an addition of ₹3,40,80,030/- towards alleged bogus purchases and a further disallowance of ₹3,03,706/- under Section 36(1)(iii), apart from other minor disallowances which were later deleted. In the appellate and Tribunal stages of quantum proceedings, the addition relating to bogus purchases was restricted to ₹17,04,001/- by estimating a GP rate of 5%, and the interest disallowance was reduced to ₹1,47,062/-. The Assessing Officer, however, proceeded to levy penalty on these sustained amounts, and the same was confirmed by the learned CIT(A).
We have heard the rival submissions and carefully perused the material placed on record. It is an undisputed fact that the Assessing Officer, based on information received from the Sales Tax Department, treated the entire purchases of ₹3,40,80,030/- made from four parties as non-genuine and disallowed them in toto. The learned CIT(A), appreciating that the purchases could not be treated as wholly bogus but only inflated, estimated a gross profit rate of 12.5%, and the Tribunal in the quantum appeal further reduced this estimation to 5%.
3.1. The entire foundation of the addition thus rested upon estimation of profit rather than any categorical finding that Balaji Impex the assessee had suppressed sales, introduced unrecorded purchases, or concealed primary facts. The assessee, engaged in the wholesale trading of sulphur, chemicals, and metals, had furnished complete quantitative details of stock and trading accounts demonstrating that the purchases and corresponding sales were duly recorded in the regular books. All payments were made through banking channels and the resultant sales were reflected in the profit and loss account. The trading results as a whole were accepted; the only shortcoming noticed by the Assessing Officer was the absence of vehicle numbers or delivery challans in some cases.
When the source of purchases is duly reflected in the books of account and the corresponding sales have been accepted, along with the quantitative details recorded in the trading account, there remains no factual foundation to suggest that such purchases emanated from undisclosed sources or were kept outside the books. The allegation of concealment of income on this score becomes wholly untenable. At best, what can be inferred is that the purchase cost may have been inflated owing to dealings with certain accommodation suppliers. However, such an inflation, if at all, has already been neutralized in the quantum proceedings by way of an estimated gross profit addition. Once the entire trading account stands disclosed, and sales have been accepted as genuine, the resultant income is already embedded therein.
Balaji Impex 4.1. It is trite law that penalty under Section 271(1)(c) cannot be levied on additions arising out of estimation or presumption. The statutory sanction of penalty presupposes a positive act of concealment or furnishing of inaccurate particulars, and not a mere difference of opinion on the degree of profit to be estimated. The present case being one of ad hoc estimation, founded neither on detection of undisclosed income nor on discovery of any fictitious transaction, the levy of penalty cannot be sustained. The penalty on this issue is, therefore, directed to be deleted.
The next issue pertains to the disallowance of interest under Section 36(1)(iii). The brief facts in this regard are that the assessee had debited a sum of ₹11,67,032/- on account of interest expenditure. The Assessing Officer observed that the assessee had extended loans and advances amounting to ₹6,20,42,751/- and, accordingly, made a proportionate disallowance of ₹3,03,706/-, reasoning that the assessee, while incurring interest cost, had simultaneously advanced interest-free funds. Although the Assessing Officer acknowledged that the assessee had sufficient own funds, he observed that no interest had been charged on such advances.
5.1. During the course of the proceedings, the assessee furnished the following detailed break-up of the interest expenditure:
Balaji Impex Sr. Particulars Amount No. 1 Interest on Bill Discounting NIL 2 Interest on Letter of Credit 5,28,615 3 Overdraft against Term Deposits 1,15,806 4 Interest on Overdraft account 4,49,299 5 Interest on CAR Loan 73,312 Total 11,67,032
The learned CIT(A) accepted the contention of the assessee that the interest on letter of credit and interest on car loan were incurred wholly for business purposes and hence should be excluded from the ambit of disallowance. However, he upheld the proportionate disallowance relating to overdraft interest.
6.1. Upon perusal of the record, it is evident that the overdraft facilities were availed in the ordinary course of business, and the corresponding transactions were routed through the same bank account which reflected business receipts and payments. The Assessing Officer’s conclusion that part of these funds might have been utilized for interest- free advances is purely presumptive and unsubstantiated by any tangible evidence linking interest-bearing borrowings to non-business advances.
Balaji Impex 6.2. It is a well-accepted proposition that ad hoc or notional disallowance cannot form the foundation for invoking penalty under Section 271(1)(c). Unless there is a clear finding that the borrowed funds were directly diverted for non-business purposes, no concealment can be inferred. In the present case, no such factual nexus has been established. Accordingly, the penalty levied on this account is also directed to be deleted.
In the totality of the facts and circumstances, we hold that the penalty imposed under Section 271(1)(c) on both counts namely, (i) the estimated GP addition on alleged bogus purchases and (ii) the proportionate disallowance of interest under Section 36(1)(iii) is unsustainable in law. Both are founded on estimation and presumption, bereft of any direct evidence of concealment or furnishing of inaccurate particulars. The essence of penal law being quasi-criminal, its rigour cannot be invoked in matters resting solely on estimation. Accordingly, the penalty levied is hereby deleted, and the appeal of the assessee stands allowed in full.
In the result, appeal of the assessee is allowed. Order pronounced on 27th October, 2025.