INCOME TAX OFFICER-19(2)(2), MUMBAI, MUMBAI vs. KHODIYAR IMPEX, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL, ‘E’ BENCH
MUMBAI

BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER
&

SHRI ARUN KHODPIA, ACCOUNTANT MEMBER
Income
Tax
Officer-
19(2)(2), Mumbai
Vs. Khodiyar Impex
15-A, Sopariwala Estate,
Prasad Chambers Opera
House, Mumbai – 400 004
PAN/GIR No.AADFK2874R
(Appellant)
..
(Respondent)

Assessee by None
Revenue by Shri Himanshu Joshi (Sr.
DR)
Date of Hearing
19/08/2025
Date of Pronouncement
29/08/2025

आदेश / O R D E R

PER AMIT SHUKLA (J.M):

The present appeal by the Revenue arises out of the order dated 05/02/2025 passed by the National Faceless
Appeal Centre, Delhi, in relation to penalty proceedings initiated under section 271(1)(c) of the Income-tax Act, 1961, for the assessment year 2007–08. The narrow controversy before us is whether the learned Commissioner of Income-tax
(Appeals) was justified in restricting the penalty to the tax sought to be evaded on an addition of ₹5,59,500/–, as against the penalty levied by the Assessing Officer on the entire
Khodiyar Impex

2
amount of ₹1,86,50,000/–, alleged to represent bogus purchases.
2. The brief facts relevant for the issue in hand are that the assessee is engaged in the business of trading in polished diamonds and had filed its return of income on 31/10/2007
declaring income of ₹16,44,320/–. The return was processed under section 143(1). Subsequently, on the basis of information received from the investigation wing that the assessee had allegedly availed accommodation entries in the nature of bogus purchases aggregating to ₹1,86,50,000/–, the case was reopened by issuance of notice under section 148 on 27/03/2014. 3. In the reassessment order, the Assessing Officer disallowed the entire purchases of ₹1,86,50,000/– treating them as non-genuine. However, in appellate proceedings, the addition was considerably scaled down. The appellate authority, relying on judicial precedents, held that what could be taxed was not the entire amount of purchases but only the profit element embedded therein. Applying a gross profit rate of 3% on the disputed purchases, the addition stood restricted to ₹5,59,500/–. Thus, in the quantum proceedings, the assessee’s income was enhanced only to the extent of the estimated profit margin, and not the full value of purchases.
4. The Assessing Officer nevertheless proceeded to levy penalty with reference to the entire disallowance of ₹1,86,50,000/–, alleging concealment of income and furnishing of inaccurate particulars. The learned CIT(A), upon appeal, examined the matter afresh. He noted that penalty
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3
under section 271(1)(c) can only be levied on the amount of income which ultimately survives after the appellate process, and not on amounts which have already been deleted or reduced. Since the addition in quantum proceedings was finally sustained only to the extent of ₹5,59,500/–, the learned CIT(A) restricted the penalty accordingly.
5. We have heard the learned Departmental Representative and carefully considered the record. The legal position is well- settled that penalty is a corollary to assessment, and its scope is confined to the income that is finally brought to tax. If an addition does not survive in the quantum proceedings, the penalty levied with reference thereto cannot survive either. To allow penalty on sums which no longer constitute the assessed income would be contrary to law and unjust in principle.
6. In the present case, the foundation of penalty, namely, the full addition of ₹1,86,50,000/–, was altered in appellate proceedings, leaving intact only the profit element of ₹5,59,500/–. Once the substantive addition itself has been curtailed, it follows that penalty, if at all leviable, must also be confined to such reduced figure. This is precisely what the learned CIT(A) has done. His action, in our considered opinion, is not only legally correct but also in conformity with the scheme of section 271(1)(c).
7. We may also observe that the approach of the Assessing
Officer in levying penalty on the entire purchases reflects a disregard of the appellate outcome in the quantum assessment. The law does not envisage penalising an assessee
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on amounts which are no longer treated as concealed income.
What survives for the purpose of penalty is only that portion of income which has been finally determined to be taxable.
8. In the light of these considerations, we see no infirmity in the order of the learned CIT(A) restricting the penalty to the income of ₹5,59,500/–
sustained in the quantum proceedings. The order is sound in fact as well as in law, and does not call for interference.
Accordingly, the appeal filed by the Revenue is dismissed.
9. In the result, appeal of the Revenue is dismissed.

Order pronounced on 29th August, 2025. (ARUN KHODPIA) (AMIT SHUKLA)
ACCOUNTANT MEMBER
JUDICIAL MEMBER
Mumbai; Dated 29/08/2025
KARUNA, sr.ps

Copy of the Order forwarded to :

BY ORDER,

(Asstt.