MUBARAK HUSSAIN FIRTA SHAIKH,SAKINAKA, MUMBAI vs. CIT, 41(1)(3), APPEAL, MUMBAI

In this appeal, the assessee has raised the following grounds: -

We have considered the submissions of both sides and perused the material available on record. The brief facts of the case are that the assessee is an individual and is a proprietor of M/s Saba Engg Works, which is engaged in the business of manufacturing washers. For the year under consideration, the assessee filed its return of income on 30/09/2011, declaring a total income of INR 5,54,960. The return filed by the assessee was processed under section 143(1) of the Act. Subsequently, based on the information received from DGIT (Investigation), Mumbai, it was found that the assessee had shown purchases amounting to INR 89,41,332 from parties who were only providing accommodation entries without conducting any actual business. Accordingly, on the basis of the aforesaid information, proceedings under section 147 of the Act were initiated, and notice under section 148 of the Act was issued on 21/01/2016. During the assessment proceedings, notice under section 133(6) of the Act was issued to these parties. However, the same were returned unserved. Further, the assessee also failed to produce these parties or furnish any address where notice could be served on them. Since the assessee failed to establish the genuineness of the purchases shown to have been made from the aforementioned parties, the Assessing Officer (“AO”) vide order dated 24/10/2016 passed under section 143(3) read with section 147 of the Act concluded that purchases made by the assessee from these parties are bogus and non-genuine, and therefore, the purchase rate mentioned in the alleged sales bills cannot be accepted. The AO, on the basis that the goods purchased were consumed for manufacturing the goods sold by the assessee, held that only the profit element embedded in the goods purchased can be added to the income of the assessee. Accordingly, the AO considered 25% of the non- genuine purchases to be the purchase price, which was inflated by the assessee from the aforesaid bogus purchases, and made the addition of INR 22,25,333. In further appeal, the learned CIT(A) reduced the percentage of addition to 12.5% of the bogus purchases.

Meanwhile, penalty proceedings under section 271(1)(c) of the Act were initiated separately. After considering the submissions of the assessee, the AO vide order dated 11/12/2021 passed under section 271(1)(c) of the Act levied a penalty of INR 1,48,627. The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee and upheld the levy of penalty under section 271(1)(c) of the Act.

Thus, it is evident from the record that the AO treated 25% of the alleged bogus purchases as bogus and non-genuine, which was further reduced by the learned CIT(A) to 12.5%. Therefore, the entire addition has been made merely on the basis of estimation.

We find that the Hon'ble Rajasthan High Court in CIT v/s Krishi Tyre Retreading and Rubber Industries, reported in [2014] 360 ITR 580 (Raj.) held that where an addition is made purely on an estimate basis, no penalty under section 271(l)(c) of the Act is leviable. Similar view has been expressed by the Hon'ble Punjab & Haryana High Court in CIT v/s Sangrur Vanaspati Mills Ltd., reported in [2008] 303 ITR 53 (P&H), wherein the Hon'ble High Court held that when the addition has been made on the basis of estimate and not on any concrete evidence of concealment, penalty under section 271(l)(c) of the Act is not leviable. Further, the Hon'ble Gujarat High Court in CIT v/s Subhash Trading Co. Ltd., reported in [1996] 221 ITR 110 (Guj.) has taken a similar view in respect of levy of penalty under section 271(l)(c) of the Act on estimated additions. Therefore, it is evident that the issue about, justification of imposition of penalty, where the addition is made on the basis of an estimate, is no longer res integra.

Thus, respectfully following the aforesaid decisions, we are of the considered view that the penalty under section 271(1)(c) of the Act cannot be levied merely on the basis of an estimated addition. Accordingly, we direct the AO to delete the same.

In the result, the appeal by the assessee is allowed. Order pronounced in the open Court on 03/07/2025