SHREE GOVIND SILK MILLS PVT LTD,MUMBAI vs. INCOME TAX OFFICER 4(3)(1), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “G” MUMBAI

BEFORE SHRI OM PRAKASH KANT (ACCOUNTANT MEMBER) AND SHRI PAWAN SINGH (JUDICIAL MEMBER)

ITA No. 3584, 3585 and 3586/MUM/2026 Assessment Years: 2005-06, 2006-07 and 2009-10

Shree Govind Silk Mills Private Limited, Income Tax Officer - 4(3)(1), 158/164, 4th Floor, Laxmi Bhavan, Mumbai, Maharashtra. Kalbadevi Road, Mumbai – 400002. Vs.

PAN NO. AAFCS 1483 F APPELLANT RESPONDENT

: Shri Vimal Punmiya, C.A. Assessee by Department by : Shri Basavaraj Hiremath – CIT DR a/w Shri Rajgopal Parthasarathi - (SR. DR).

Date of Hearing : 16.07.2026 : 23.07.2026 Date of pronouncement

ORDER u/s 254(1) of Income Tax Act, 1961 PER BENCH

These three appeals, preferred by the assessee, are directed against three separate orders of the Learned Commissioner of Income-Tax (Appeals)- National Faceless Appeal Centre, Delhi ("the Ld. CIT(A)"), for Assessment Years 2005-06, 2006-07 and 2009-10 respectively , whereby the penalty levied under section 271(1)(c) of the Income-Tax Act, 1961 ("the Act") by the Assessing Officer ("the

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AO") has been confirmed. As the appeals raise a common issue in dispute , they were heard together and are being disposed of by this consolidated order for the sake of convenience and consistency. With the concurrence of both sides, the appeal for Assessment Year 2005-06 is treated as the lead case, the decision wherein shall govern the remaining appeals mutatis mutandis.

“The Ld. CIT(A) erred in confirming penalty of Rs.2,53,323/- under section 271(1) (C) of the Income Tax Act 1961.”

2.1 Briefly stated, the facts of the case are that the assessee filed its return of income for the assessment year under consideration on 26.09.2005 declaring a total loss of ₹4,612/-. Subsequently, the Assessing Officer received information from the Income Tax Officer, Ward 14(3)(2), Mumbai, stating that a survey under section 133A of the Income-tax Act, 1961 had been conducted on 13.02.2009 in the case of Shri Rakesh Kumar Gupta, Proprietor of M/s Sriram Sales and Synthetics, along with other concerns of the group. During the course of the survey, Shri Rakesh Kumar Gupta is stated to have admitted that his concern was engaged in providing accommodation

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bills for sales without effecting any actual delivery of goods, including to the present assessee.

2.2 On the basis of the aforesaid information, the Assessing Officer formed a belief that income chargeable to tax had escaped assessment and, accordingly, reopened the assessment by issuing a notice under section 148 of the Act. During the reassessment proceedings, the Assessing Officer observed that the information available on record revealed that the assessee had shown purchases aggregating to ₹16,55,705/- from M/s Sriram Sales and Synthetics. Relying upon the material gathered during the survey proceedings and the enquiries conducted during the reassessment, the Assessing Officer concluded that the impugned purchases were not genuine and treated the entire amount of ₹16,55,705/- as unexplained expenditure under section 69C of the Act. Consequently, the reassessment was completed under section 143(3) read with section 147 of the Act vide order dated 29.09.2011.

2.3 Aggrieved by the reassessment order, the assessee carried the matter in appeal before the learned Commissioner of Income-tax (Appeals). The learned CIT(A), while granting partial relief, held that only the profit element embedded in the disputed purchases was liable to be brought to tax and, accordingly, restricted the addition to 10% of the alleged bogus purchases of ₹16,55,705/-, resulting in a sustained addition of ₹1,65,570/-.

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2.4 Aggrieved by the order of the learned CIT(A), the assessee preferred a further appeal before the Coordinate Bench of the Income-tax Appellate Tribunal (in short the Tribunal) . The Tribunal, after considering the submissions advanced on behalf of the assessee and the judicial precedents relied upon, restored the matter to the file of the Assessing Officer with a direction to re- examine the issue in the light of the decisions cited by the learned counsel for the assessee and to pass a fresh order in accordance with law.

2.5 Pursuant to the directions of the Tribunal, the Assessing Officer framed the assessment afresh. Upon examination of the material available on record, he concluded that no actual delivery of goods had taken place in respect of the purchases purportedly made from M/s Sriram Sales and Synthetics and that the invoices issued by the said concern were merely accommodation bills. Accordingly, the Assessing Officer once again treated the entire purchases of ₹16,55,705/- as non-genuine and made an addition of the said amount.

2.6 The assessee carried the matter in appeal before the learned CIT(A). The learned CIT(A), in second round of quantum proceedings, while not accepting the Assessing Officer's action in making the addition of the entire purchase amount, also did not find it appropriate to delete the addition in its entirety. Taking an

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overall view of the facts and circumstances of the case, he held that the assessee had, in all probability, procured the goods from the open market and merely obtained accommodation purchase bills from M/s Sriram Sales and Synthetics. He further observed that the assessee was engaged in trading activities and not in manufacturing, and that the gross profit disclosed by the assessee was approximately 24%. According to him, the profit embedded in purchases made outside the regular books would ordinarily be substantially higher than that reflected in accounted purchases. Considering these aspects, and relying upon judicial precedents wherein only the profit element embedded in alleged bogus purchases had been brought to tax, the learned CIT(A) estimated such profit at 50% of the disputed purchases and sustained the addition to that extent, while deleting the balance. The relevant findings of the learned CIT(A) are reproduced below:

“3.6. In the totality of circumstances of present case, I find that it would not be fair to confirm the addition of entire purchases, while at the same time it would also not be fair to delete the entire addition made. To give benefit of doubt to the assesse, one possible logical inference can be taken that the assesse might have made purchases from open market and obtained accommodation bills from the aforesaid concern. Two more things require consideration here. Firstly, assessee is a trading concern and not a manufacturing one. Hence, entire addition is not justified. Secondly, GP shown by the appellant otherwise is around 24%. So, GP on unaccounted purchases would naturally be more, at least twice the FP on accounted purchases. Otherwise, why would anybody take so much botheration! So, in my opinion, an estimated profit @50% of disputed purchases can be considered to be fair and reasonable to cover the difference of GP from alleged party as well as to plug any leakage of revenue. I also find that in several case laws involving bogus purchases, additions have been confirmed in the like manner to the extent of estimated Gross Profit on alleged bogus purchases wherein the percentage of profits on unaccounted purchase has been held to be

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higher than on accounted purchases. Accordingly, I confirm the addition @50% of disputed purchases i.e. Rs.9,05,256/- and delete the balance disallowance. Accordingly, the ground is partly allowed.” 2.7 Aggrieved by the order of the learned CIT(A), the assessee preferred a further appeal before the Coordinate Bench of the Tribunal. In the second round of quantum proceedings, the Tribunal, after considering the facts of the case and the judicial precedents governing the issue of alleged bogus purchases, held that only the profit element embedded in such bogus purchases was liable to be brought to tax. Accordingly, the Tribunal restricted the disallowance to 12.5% of the impugned purchases in place of the addition sustained by the learned CIT(A). The relevant finding of the Tribunal is reproduced as under:-

“9. In view of our above discussion and respectfully following the decision of the Hon’ble Gujarat High Court in the case of Bholonath Polyfab Pvt. Ltd (supra) and CIT v. Simit P. Seth (supra), we direct the Assessing Officer to restrict the disallowance of purchases which were treated as non-genuine for the A.Y. 2009- 10 to 12.5% bringing to tax the profit element from these purchases.”

2.8. Consequent upon the order of the learned CIT(A) sustaining the addition to the extent of 50% of the disputed purchases, the Assessing Officer initiated penalty proceedings under section 271(1)(c) of the Act and levied a penalty of ₹2,53,323/-, being 100% of the tax sought to be evaded. The assessee carried the matter in appeal before the learned CIT(A). The learned CIT(A), after considering the assessment order, the material available on record and the judicial precedents relied upon, upheld the levy of penalty.

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The ld CIT(A) in paragraph 5.2.2 of impugned order noted that appellant was reopened u/s 147 of the Act on the basis of the above mentioned facts. During the course of reassessment proceedings summon u/s 131 was issued to Smt. Hema Gupta Prop. Of Shree Ram Sales & Synthetics wherein she has reconfirmed that she has provided accommodation entries to Shree Govind Silk Mills Private Limited, in lieu of commission @1%. Further, he observed that the assessee had neither furnished any written submissions during the appellate proceedings nor offered any satisfactory explanation during the penalty proceedings to substantiate the genuineness of the impugned purchases. The learned CIT(A) further held that the order of the Tribunal in the quantum proceedings had merely restored the matter to the file of the Assessing Officer for fresh adjudication and did not contain any finding on the merits of the addition. According to him, the assessee had failed to discharge the burden cast upon it under Explanation 1 to section 271(1)(c) of the Act. Placing reliance on the decisions of the Hon'ble Supreme Court in MAK Data (P.) Ltd. v. CIT (358 ITR 593), the Hon'ble Calcutta High Court in CIT v. Bijay Iron Stores (252 ITR 408), the Hon'ble Madras High Court in S. Sathyanarayanan v. ACIT (2014) 50 taxmann.com 200 and the Hon'ble Delhi High Court in CIT v. Zoom Communication (P.) Ltd. (327 ITR 510), the learned CIT(A) affirmed the penalty imposed by the Assessing Officer.

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3.1 The learned counsel further submitted that it is now a well- settled proposition of law that penalty under section 271(1)(c) is not leviable where the addition is sustained purely on an ad hoc or estimated basis. In support of this contention, reliance was placed on the judgment of the Hon'ble Bombay High Court in Principal Commissioner of Income-tax v. Elcon Pipe and Fittings (P.) Ltd. [(2026) 187 taxmann.com 886 (Bom.)], wherein it has been held

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that where the addition on account of alleged bogus purchases is ultimately sustained only by estimating the profit element, the levy of penalty under section 271(1)(c) is unsustainable. Reliance was also placed on the subsequent decision of the Hon'ble Bombay High Court in Principal Commissioner of Income-tax v. Colo Colour (P.) Ltd. [(2025) 178 taxmann.com 458 (Bom.)], wherein it was reiterated that penalty cannot be imposed where the quantum addition is based merely on estimation and there is no clear finding establishing concealment of income or furnishing of inaccurate particulars.

3.2 The learned counsel also relied upon the decisions of the Coordinate Benches of the Tribunal in Mun Gems v. ACIT [(2023) 155 taxmann.com 1 (Mum. - Trib.)] and ITO v. Sunil Bhagwandas Vorani (HUF) [(2024) 169 taxmann.com 23 (Mum. - Trib.)], wherein it was consistently held that once the quantum addition represents only an estimated profit on alleged bogus purchases, the necessary ingredients for levy of penalty under section 271(1)(c) are absent. Further reliance was placed on the judgment of the Hon'ble Delhi High Court in CIT v. Vatika Construction (P.) Ltd. [(2014) 45 taxmann.com 471 (Delhi)], wherein it was held that where the income is ultimately determined on an estimated basis and there is no material to establish concealment or furnishing of inaccurate

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particulars, imposition of penalty under section 271(1)(c) is not warranted.

3.3 On the strength of the aforesaid judicial pronouncements, the learned counsel urged that the penalty levied under section 271(1)(c) deserves to be deleted, as the addition finally sustained by the Tribunal represents only an estimated profit element and not any conclusively established concealed income.

4.1 It is an undisputed position that the Assessing Officer treated the entire purchases amounting to ₹16,55,705/- as non-genuine and made an addition of the full amount. The learned CIT(A) restricted the addition to 50% of the disputed purchases. Thereafter, in the second round of quantum proceedings, the Coordinate Bench of the Tribunal further restricted the addition to 12.5% of the impugned purchases, holding that only the profit element embedded therein was liable to tax. Thus, the addition which ultimately survived was not based upon any definitive finding that the entire purchases were fictitious or that the assessee had

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concealed its income, but was merely an estimate of the profit attributable to such purchases. What is thus taxed, and what stood confirmed in quantum, is not a specific, ascertained sum representing concealed income traceable to any particular item of inaccurate or false particulars furnished by the assessee, but an estimated profit element embedded in purchases held to be non- genuine. Penalty under section 271(1)(c) is a quasi-criminal imposition and must rest on a definite finding that the assessee has concealed particulars of income or furnished inaccurate particulars thereof; it cannot be sustained merely because an estimated addition, arrived at to balance equities between the Revenue and the assessee, has attained finality

4.2 We further find that the judicial precedents relied upon by the learned counsel, particularly the decisions of the Hon'ble Bombay High Court in PCIT v. Elcon Pipe and Fittings (P.) Ltd. (supra) and PCIT v. Colo Colour (P.) Ltd. (supra), lay down the principle that where the quantum addition is sustained merely on an estimated basis, in the absence of a categorical finding of concealment of income or furnishing of inaccurate particulars, the provisions of section 271(1)(c) cannot be invoked. The same principle has consistently been followed by the Coordinate Benches of the Tribunal in Mun Gems and Sunil Bhagwandas Vorani (HUF).(supra). We are unable to accede to the reasoning of the Ld.

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CIT(A), for the decisions relied upon by him in MAK Data (P.) Ltd. (supra), Bijay Iron Stores (supra), S. Sathyanarayanan (supra) and Zoom Communication (P.) Ltd. (supra), which proceed on the premise of a failure to offer any bona fide explanation for a specific, quantified concealment, and do not address the distinct question of penalty on estimated addition.

4.3 Respectfully following the aforesaid binding decisions and the consistent judicial view, we hold that the addition sustained in the present case being purely on an estimated basis, no penalty under section 271(1)(c) of the Act is exigible. The impugned penalty, therefore, cannot be sustained.

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Proceeding as per Ld. AO 10% 1,65,571 1,81,051 1,28,458 Hon'ble CIT(A) Hon'ble ITAT - - - Set aside back to Ld. AO

Appellate Stage Estimation made Amount (Same for all 3 Involved years) (Quantum) 2005-06 2006-07 2009-10 Assessment 100% 16,55,705 18,10,512 12,84,579 Proceeding as per Ld. AO Hon'ble CIT(A) 50% 8,27,853 9,05,256 6,42,290 Hon'ble ITAT 12.50% 2,06,963 2,26,314 1,60,572 Penalty levied by 50% 2,53,323 2,77,008 1,98,468 Ld. AO after Hon'ble CIT(A) Order (Amount disputed in current appeal) Penalty levied by 12.50% 75,733 69,252 49,617 Ld. AO after Hon'ble ITAT Order

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Order pronounced in the open Court on 23/07/2026.

Sd/- Sd/- (PAWAN SINGH) (OM PRAKASH KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 23/07/2026

M. Ranganath Vittal , Sr. P.S.

Copy of the Order forwarded to :

BY ORDER, //True Copy// (Assistant Registrar) ITAT, Mumbai