ITO-32(2)(5), MUMBAI vs. PRAVIN DAYALDAS GANDHI, MUMBAI

O R D E R Per bench :-

These are Revenue’s appeals directed against respective orders of learned CIT(A) for the concerned assessment years.

2 Pravin Dayaldas Gandhi

1. "On the facts and in the circumstances of the case, the Ld. CIT (AJ erred in deleting the penalty levied by the AO u/s 271(1(c) of the Income Tax Act, 1961, of Rs. 3,57,078/- without appreciating the fact that the Assessing Officer has correctly held that the assessee has failed to substantiate the transactions claimed in its return of income thereby evaded taxes to that extent."

2. "On the facts and circumstances of the case and in the law, the Ld. CIT(A) erred in not appreciating the fact that the act of assessee clearly falls within the ambit of provisions of Explanation-1 to section 271(l)(c) of the Act as the assessee had failed to offer an explanation or which was found by the A.O. to be false."

3. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the penalty levied by the A.O. u/s 271(l)(c) of the I.T. Act, 1961 of Rs. 3,57,078/- without appreciating the fact-that the assessee claimed bogus purchases in its Return of Income thereby making himself liable for Penalty u/s 271(l)(c) of the I.T. Act, 1961."

4. "On the facts and in the circumstances of the case, the Hon’ble ITAT is requested to entertain this appeal though the tax effect is below the monetary limit prescribed in the CBDT Circular no.17/2019 dated 08.08.2019 r.w. Circular No. 3/2018 dtd. 11.07.2018 as amended on 20.08,2018 as the case falls in the exception provided in para 10(e) of the said Circular in as much as the addition is based on information received from external sources in the nature of law enforcement agencies, namely, Sales Tax Authorities". 5. "The appellant prays that the order of the Ld. CIT(A) on the grounds be set aside and that of the Assessing Officer be restored".

3 Pravin Dayaldas Gandhi genuine to the total income. On appeal, the CIT(A) estimated 12.5% of the said purchases as profit. On further appeal by the assessee, ITAT Mumbai in 3532, 3533,3534 and 3535/M/2018 dated 28.06.2019 reduced the profit from the bogus purchases to 5%.

During the penalty proceedings, the assessee filed explanation as to why penalty cannot be levied on estimated addition in the assessment. However, the AO has not accepted the contention of the assessee and imposed penalty of Rs.3,;57,078 being100%% of tax evaded on estimated profit of 12.5%after the order of the CIT(A), holding that had the case was not selected for scrutiny, the income finally assessed/confirmed by the CIT(A) would have escaped tax. AO placed reliance on Explanation 1 to section 271(1)(c) of the Act.

“I have gone through the assessment order, order of the CIT(A), the Hon'ble ITAT Mumbai, the penalty order and submissions of the assessee. Appellant in its detailed submissions argued that there was neither any willful act resulting in concealment of income or furnishing of inaccurate particulars of income by the Appellant and hence no penalty should be levied under Section 271(1)(c) of the Act. He further argued that since the addition made by the learned AO was restricted by the Hon'ble CIT(A) and further by the Hon'ble ITAT and that the disallowance was merely an ad-hoc estimation of profits on alleged purchases, no penalty can be levied. He placed reliance on number of case laws for the propositions made in the arguments.

It is observed that addition was made in the assessment order u/s 69C even when the payments were made through banking channels and the source for the purchases was on the record. It is noted that the addition made by the AO was an adhoc addition on the assumption that purchases were made in grey market instead of the bills produced. An assumption however believable it is cannot take place of a fact. Be that as it may, on appeal in this case, the CIT(A) held that, even as per the assumption made, entire purchases cannot be taxed and held that only estimated profit of 12.5% of the said bogus purchases can be brought to tax. On further appeal, Hon'bel ITAT Mumbai vide order No. 3532, 3533, 3534 and 3535/M/2018 dated 2a.06.20J9 reduced the estimated profit to 5% of the alleged bogus purchases. Relevant extracts of the said order is as under;

"7. After hearing both the parties and perusing the material on record, we observe that the assesses is engaged in the business of trading of iron and steel sheets, angles, coils etc. and the GP rate varies from 1.18% to 2.20% as is apparent from the statement of comparative GP of four years filed during the course of hearing. We note that during the year under consideration, the GP returned by the assessee was 1.83%. The Ld.CIT(a) has correctly held that entire

4 Pravin Dayaldas Gandhi purchases could not be added to the income of the assessee and that only profit element in the said purchases have to be brought to tax however we are not in agreement with the rate applied on the alleged purchases. In this case, we observe that the assessee has already accounted for these purchases in the books of accounts and have returned the profits on these purchases. Under these circumstances, in our view, the only savings which the assessee may have made by purchasing the goods from the grey market have to be brought to tax. In the present case, the assessee is a dealer in iron and steel items and the applicable VAT rate is 4%. Under these circumstances, we are of the view that the purchases which are stated to be bogus should be brought to tax @ 5%. Accordingly, we set aside the order of Ld. CIT(A) and direct the AO to apply a rate of 5% on these bogus purchases."

Department is not in further appeal on the order of the ITAT, It is seen that finally the income assessed in the hands of the appellant is based on estimation of profit. Estimation is a pure guess work and where income is estimated, it cannot be said that 'inaccurate particulars' have been furnished. Appellant argued that he genuinely purchased the goods based on the bills in his possession which the AO has not accepted. Furnishing of inaccurate particulars been not been established by the Assessing Officer, therefore, in such a case penalty u/s 271(1)(c) cannot be levied. In support of this proposition, reliance is placed on the decision of jurisdictional ITAT in the case of Earthmoving Equipment Service Corporation v. Dy. CIT, 22(2), Mumbai [2017] 84 taxmann.com 51 (Mumbai - Trib.) wherein, on similar set of facts, it has been held that penalty u/s 271(1)(c) cannot be levied. Relevant part of the decision is reproduced by the appellant in his submissions. Further, in the case of M/s Chempure vs. ITO (ITA No’s 451,452 & 453/M/2006), the income was estimated at 25% of alleged bogus purchases and penalty u/s 271(1)(c) was levied on estimated income. The ITAT, Mumbai has held that penalty u/s 271(1)(c))cannot be levied on ad hoc addition. The facts of the instant case are exactly identical to the facts of M/s. Chempure discussed above.

Reliance is also placed on the decision on Hon’ble Punjab Haryana High Court in the case of Harigopa Singh v. CIT[258 ITR 85] wherein it was held as under:

"In order to attract clause (c) of section 271(1), it is necessary that there must be concealment by the assessee of the particulars of his income or if he furnishes inaccurate particulars of such income. What is to be seen is whether the assessee in the present case had concealed his income as held by the Assessing Officer and the Tribunal. He had not maintained any accounts and he filed his return of income on estimate basis. The Assessing Officer did not agree with the estimate of the assessee and brought his income to tax by increasing it to Rs.2,07,500/-. This, too, was on estimate basis. The Tribunal agreed that the income of the assessee had to be assessed on an estimate of the turnover but was of the view that the 5 Pravin Dayaldas Gandhi estimate as made by the Assessing Officer was highly excessive and it fixed the total income of the assessee at Rs. 1,50,000/- for the year under appeal. It is, thus, clear that there was a difference of opinion as regards the estimate of the income of the assessee. Since the Assessing Officer and the Tribunal adopted different estimates in assessing the income of the assessee, it cannot be said that the assessee had 'concealed the particulars of his income' so as to attract clause (c) of section 271(1)." Reliance is further placed on the decision of Hon'ble Mumbai in case of Sushil Chhatrabhuj Raheja v. ACIT [ITA No.1375/Mum/2017] dated 29.09.2017 wherein on the estimation of profits, the Hon'ble Tribunal has deleted penalty u/s 271(1)(c) of the Act. Relevant extracts are reproduced as under: "We have considered the rival submission of the parties and have gone through the orders of authorities below. The perusal of assessment order reveals that the assessing officer, while passing the assessment order under section 143(3) rws 147, made the addition on the basis of estimation. The assessing officer made addition (g? 25% of the alleged bogus purchases. The revenue has not disputed that additions were made merely on the basis of estimation. It is settled law that no penalties is leviable under section 271(1)(c) for ad hoc /estimated additions. Similar view has been taken in the various decisions cited by learned AR for the assessee. Accordingly, we are of the opinion that this is not a fit case for levy of penalty. In the result the grounds of appeal raised by the assessee is allowed.

In the light of above, the levy of penalty of Rs.3,57,078/- u/s. 271(1)(c) of the Act is held not to be justified on the estimated income. The AO is therefore directed to delete the penalty levied u/s 271(1)(c) of the Act. Accordingly, the aforesaid Ground no. 3 raised in the appeal is allowed.”

6 Pravin Dayaldas Gandhi opinion, on the facts and circumstances of the case assessee cannot be said to have been guilty of concealment or furnishing of inaccurate particulars of income. In this regard, we draw support from the decision of a larger bench of the Hon’ble Supreme Court in the case of the State of Orissa 82 ITR 26, where in it was held that the authority may not levy the penalty, if the conduct of the assessee is not found to be contumacious.

Pronounced in the open court on 20 /09/2021