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Facts
The assessee, engaged in manufacturing valves, filed its return of income for AY 2014-15. The Assessing Officer made additions for disallowance u/s 14A and disallowed depreciation on a helicopter. The CIT(A)/NFAC restricted these disallowances. The AO then initiated penalty proceedings u/s 271(1)(c) based on these additions, which were upheld by the CIT(A)/NFAC.
Held
The Tribunal held that the penalty was not leviable as the additions/disallowances were made on an estimated basis. The Tribunal followed its own earlier decision and various High Court precedents stating that penalty cannot be imposed when income is determined on an estimate basis.
Key Issues
Whether penalty u/s 271(1)(c) can be imposed when the additions/disallowances are based on an estimate, and not on furnishing of inaccurate particulars or concealment of income.
Sections Cited
143(2), 142(1), 143(3), 14A, 271(1)(c), 8D
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI R. K. PANDA & MS. ASTHA CHANDRA
This appeal filed by the assessee is directed against the order dated 28.01.2025 of the Ld. CIT(A) / NFAC, relating to assessment year 2014-15.
Facts of the case, in brief, are that the assessee is engaged in the business of manufacturing of valves. It filed its return of income on 30.11.2013 declaring total income of Rs.4,05,62,500/-. The case was selected for scrutiny and statutory notices u/s 143(2) and 142(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) were issued and served on the assessee in response to which the AR of the assessee appeared before the Assessing Officer from time to time and filed the requisite details. The Assessing Officer completed the assessment u/s 143(3) of the Act on 29.03.2016 determining the total income of the assessee at Rs.6,05,22,727/- wherein apart from other additions, he made the disallowance of Rs.4,35,375/- u/s 14A and disallowed depreciation of Rs.89,42,896/- which is the subject matter for levy of penalty.
The assessee filed an appeal before the Ld. CIT(A) / NFAC and the Ld. CIT(A) / NFAC restricted the disallowance u/s 14A to Rs.1,82,234/-. Subsequently, the Assessing Officer initiated penalty proceedings u/s 271(1)(c) of the Act. He noted that the assessee in its computation of income has disallowed meager amount of Rs.5,000/- as expenditure incurred for earning the dividend income to the tune of Rs.24,57,376/-. The Assessing Officer invoking the provisions of section 14A read with Rule 8D made the disallowance of Rs.4,40,375/- which was confirmed by the Ld. CIT(A) / NFAC. Therefore, the Assessing Officer levied the penalty on this amount.
Similarly, the Ld. CIT(A) / NFAC restricted the disallowance of depreciation on Helicopter to 1/7th of Rs.2,23,57,241/- i.e. Rs.31,93,891/- in light of the decision of the Pune Bench of the Tribunal in the case of the assessee. Thereafter, the Assessing Officer initiated penalty proceedings u/s 271(1)(c) of the Act on this addition. Accordingly, the Assessing Officer levied penalty of Rs.10,95,387/- being 100% of tax sought to be evaded on the above two additions / disallowances.
In appeal the Ld. CIT(A) / NFAC upheld the penalty levied by the Assessing Officer.
Aggrieved with such order of the Ld. CIT(A) / NFAC, the assessee is in appeal before the Tribunal by raising the following grounds: 1] The assessee submits that the penalty order passed u/s 271(1)(c) is bad in law, since the notice issued dated 29.03.2016 was null and void. 2] The learned CIT(A) erred in confirming the levy of penalty in respect of disallowance u/s 14A Rs.1,82,234/- without appreciating that no penalty was leviable on the facts of the case. 3] The assessee submits that the CIT(A) erred in confirming the levy of penalty on disallowance of 1/7th depreciation on helicopter without appreciating that the disallowance made was on an estimated basis and hence, no penalty was leviable.
The Ld. Counsel for the assessee at the outset submitted that both the additions on which penalty has been levied are on estimate basis. He submitted that in the immediately succeeding assessment year no penalty has been levied on these additions. Similarly, for assessment year 2010-11 the Assessing Officer has dropped the penalty proceedings. He submitted that no addition has been made for assessment years 2011-12 and 2012-13 and the orders have been passed u/s 143(3) and there was no reopening of assessment nor any revisionary proceedings u/s 263 of the Act. Relying on various decisions, he submitted that when the addition has been made on estimate basis, no penalty is leviable. Referring to the decision of the Pune Bench of the Tribunal in the case of M/s. Rajmal Lakhichand vs. DCIT vide for assessment year 2010-11, order dated 10.09.2024, he submitted that the Tribunal in the said decision has held that mere addition / disallowance does not warrant the levy of penalty u/s 271(1)(c) of the Act. He accordingly submitted that the penalty levied by the Assessing Officer and sustained by the Ld. CIT(A) / NFAC should be deleted.
8. The Ld. DR on the other hand relied on the orders of the Assessing Officer and the Ld. CIT(A) / NFAC.
9. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. The only issue to be decided in the present appeal is regarding the levy of penalty on the disallowance made u/s 14A and the disallowance of 1/7th depreciation on Helicopter. It is an admitted fact that both the additions / disallowances are made on estimate basis. It is also an admitted fact that in assessment year 2014-15, no penalty has been levied on these additions. It has been held in various decisions that mere addition or disallowance does not warrant levy of penalty u/s 271(1)(c) of the Act. We find an identical issue had come up before the Co-ordinate Bench of the Tribunal in the case of Ms. Rajmal Lakhichand vs. DCIT (supra) where the Tribunal deleted the penalty levied on the basis of estimated GP addition and disallowance of proportionate interest expenses and guesthouse expenses by observing as under: “7. We find that the penalty u/s 271(1)(c) was imposed on the basis of addition of Rs.1,76,53,871/- which was purely based on estimation. It was the contention of LD counsel that no penalty u/s 271(1)(c) can be imposed when income is determined on estimate basis. In this regard, LD AR relied on decision passed by the Coordinate Bench of this Tribunal in the case of J. R. Enterprises vs. DCIT in for the assessment year 2005-06 order dated 29.10.2018, wherein, the Co-ordinate Bench of this Tribunal deleted the penalty by observing as under :- “2.1 Now, the assessee is before the ITAT challenging the upholding of penalty by the Ld. Commissioner of Income Tax (A).
3.0 The Ld. AR submitted that the assessee has been maintaining regular books of accounts with respect to the hire charges and maintenance charges but the Ld. Commissioner of Income Tax (A) had rejected the assessee's plea for admitting Assessment year 2005-06 additional evidence as well as examining the books of accounts. It was also submitted that even the Ld. Commissioner of Income Tax (A) had partially sustained the disallowance on an ad hoc basis without assigning any cogent reason for sustaining a part of the disallowance. The Ld. AR further submitted that it is settled law that penalty u/s 271(1)(c) of the Act could not be sustained in case of ad hoc/estimated disallowances. 4.0 In response, the Ld. Sr. DR placed reliance on the orders of the authorities below and vehemently argued that penalty had been rightly imposed and, therefore deserved to be upheld. 5.0 We have heard the rival submissions and perused the material available on record. The only question for our consideration is whether penalty u/s 271(1)(c) is sustainable with respect to disallowance which has been partially deleted by the Ld. Commissioner of Income Tax(A) on ad hoc/estimated basis. It is undisputed in the present appeal that the quantification of the alleged concealment/inaccurate particulars is only an estimate and it is settled law that penalty is not attracted on estimated additions. The Hon'ble Delhi High Court in the case of CTT vs. Aero Traders Pvt. Ltd., reported in 322 ITR 316 (Del), has held that no penalty u/s 271(1)(c) can be imposed when income is Assessment year 2005-06 determined on estimate basis. Similar view has been taken by the Hon'ble Punjab & Haryana High Court in the case of Harigopal Singh vs. CIT reported in 258 ITR 85 (P&H) and the Hon'ble Gujarat High Court in the case of CIT vs. Subhash Trading Company reported in 221 ITR 110 (Guj). In view of the foregoing precedents including the one from the Hon'ble Jurisdictional High Court, it is apparent that when the bedrock of instant penalty is estimated disallowance, the same cannot be sustained. Accordingly, we set aside the order of the Ld. CIT (Appeals) and direct the AO to delete the penalty.”
We therefore respectfully following the above decision passed by a Co-ordinate Bench of the Tribunal in the case of J. R. Enterprises (supra) direct the Assessing Officer to delete the penalty levied u/s 271(1)(c) the IT Act on the basis of estimated GP addition of Rs.1,76,53,871/-.
We further find that while imposing penalty u/s 271(1)(c) of the IT Act disallowance of proportionate interest expenses of Rs.3,08,889/- & the disallowance of Rs.5,59,740/- on account of guest house expenses being capital in nature were also taken into consideration. In this regard, we find that it is true that both the above disallowances were confirmed by LD CIT(A) & also sustained by the ITAT. But, we are unable to accept the contention of LD CIT(A) that mere addition / disallowance warrant the imposition of penalty u/s 271(1)(c) of the IT Act. In this regard, the contention of LD AR is that the non-charging of interest on certain loans may result into a disallowance out of interest paid to others but the assessee cannot be said to have furnished inaccurate particulars of his income or concealed any income, as all the facts were disclosed truly & fully. In this regard, LD AR relied on the judgement passed in the case of CIT vs. Reliance
Petroproducts, 322 ITR 158 (SC). We further find that the expenditure of Rs.5,59,740/- towards professional fee of architect for guest house renovation was treated as capital expenditure and disallowed accordingly, but in a situation like this, question of levy of penalty u/s 271(1)(c) does not arise. In this regard, it was the contention of LD AR that the facts relating to the issue were disclosed fully & truly & when the details supplied by the assessee in the return are not found to be incorrect or false, there is no question to invite penalty u/s 271(1)(c) of the IT Act. In this regard, LD AR again relied on the judgement passed in the case of CIT vs. Reliance Petroproducts, 322 ITR 158 (SC), wherein, it was held that a claim which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars of income by the assessee. We find force in the argument of the assessee on this count and, accordingly, we direct the Assessing Officer to delete the penalty of Rs.62,95,797/- levied u/s 271(1)(c) of the IT Act. Thus, the grounds of appeal filed by the assessee are allowed.
10. In the result, the appeal filed by the assessee stands allowed.”
10. Similar view has been taken in various other decisions relied on by Ld. Counsel for the assessee. Since the additions / disallowances in the instant case are made on estimate basis, therefore, respectfully following the decision of the Co- ordinate Bench of the Tribunal cited (supra), we hold that it is not a fit case for levy of penalty u/s 271(1)(c) of the Act. We, therefore, set aside the order of the Ld. CIT(A) / NFAC and direct the Assessing Officer to cancel the penalty. The grounds raised by the assessee are accordingly allowed.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open Court on 27th May, 2025.