SANTOSH SINGH HUKAM SINGH KARNAWAT,SURAT vs. ITO, WARD 2(3)(8), SURAT

.”

3. The brief facts of the case are that the assessee is engaged in the business of manufacturing, importing, exporting and trading in diamonds. The assessee had filed his return of income declaring a total income of Rs. 3,12,660/-. During the course of assessment proceedings, the Assessing Officer noted that a search and seizure operation was carried out on 03.10.2013 in the case of the Bhanwarlal Jain Group, wherein it was found that the group was issuing accommodation entries relating to bogus purchases and sales through benami concerns. Based on the information received from the Investigation Wing, Mumbai, the AO observed that the assessee had allegedly received bogus purchase entries amounting to Rs. 1,11,61,150/- from two such concerns, namely Euro Diam and Little Diam. The Assessing Officer issued a show cause notice asking the assessee to explain why these purchases should not be treated as bogus. The assessee submitted that the purchases were genuine, supported by purchase bills, ledger entries, bank statements, confirmations and that payments were made through banking channels. However, by placing reliance on statements recorded during search and findings of the Investigation Wing that the said parties were merely entry providers, the AO treated the purchases as bogus and added the entire amount to the total income of the assessee. Being aggrieved, the assessee filed an appeal before the CIT(Appeals) and contended that the purchases were duly supported and verified through notices under section 133(6) of the Act and that the parties had confirmed the transactions. The assessee also argued that Santosh Singh Hukam Singh Karnawat (Individual) vs. ITO Asst. Year – 2012-13 - 3– the statement of Shri Bhanwarlal Jain had been retracted. The CIT(A), however, held that the assessee failed to produce the suppliers or provide current addresses for verification, and that search findings clearly established that the concerns were engaged in providing accommodation entries. The CIT(A) therefore upheld the addition and held that the assessee had indulged in bogus purchases.

4. Thereafter, penalty proceedings under section 271(1)(c) were initiated and the AO held that the assessee had concealed income and furnished inaccurate particulars and levied penalty on the full amount of addition. The assessee then filed a further appeal before the ITAT in the quantum proceedings, and the Tribunal vide order dated 11.01.2019 held that although the purchases may not have been made from the parties shown in the books, the fact remained that sales were accepted and therefore the entire purchases could not be disallowed. The ITAT held that only profit element embedded in such purchases should be taxed and restricted the disallowance to 5% of the alleged bogus purchases based on industry profit rates and judicial precedents. Following this finding, the CIT(A) in the penalty proceedings held that it was clear that the assessee had inflated purchase claims and shown inaccurate particulars of income, though the disallowance had been restricted by the Tribunal to 5%. The CIT(A) therefore held that the assessee was liable for penalty under section 271(1)(c) to the extent of tax on 5% of such purchases and directed the AO to restrict the penalty accordingly. The appeal was thus partly allowed.

Santosh Singh Hukam Singh Karnawat (Individual) vs. ITO Asst. Year – 2012-13 - 4– 5. The assessee is in appeal before us against the order passed by CIT(Appeals) dismissing the appeal of the assessee. Before us, the Counsel for the assessee placed reliance on judicial precedents which have held that when the additions made been on an ad-hoc basis, then no penalty is called for u/s 271(1)(c) of the Act.

"In order to attract clause (c) of section 271(1)(c) of the Income-tax Act, 1961, it is necessary that there must be concealment by the assessee of the particulars of his income or furnishing of inaccurate particulars of such income. The provisions of section 271(1)(c) of the Act are not attracted to cases where the income of an assessee is assessed on estimate basis and additions are made therein" 10. The Hon'ble High Court further in Hari Gopal Vs. C IT (supra) held as under:-

Santosh Singh Hukam Singh Karnawat (Individual) vs. ITO Asst. Year – 2012-13 - 5– "Additions in his income were made, as already observed, on estimate basis and that by itself does not lead to the conclusion that the assessee either concealed the particulars of his income or furnished inaccurate particulars of such income. There has to be a positive act of concealment on his part and the onus to prove this is on the Department. We are also of the considered view that the Tribunal grossly erred in law in relying on Explanation I(B) to section 271(1)(c) of the Act to raise a presumption against the assessee."

In order to attract clause (c) of section 271(1) of the Income-tax Act, 1961, it is necessary that there must be concealment by the assessee of the particulars of his income or furnishing of inaccurate particulars of such income. The provisions of section 271(1)(c) of the Act are not attracted to cases where the income of an assessee is assessed on estimate basis and additions are made therein. When the additions have been made on the basis of estimate and not on account of any concrete evidence of concealment, then the penalty is not leviable.

We have heard the rival submissions of the parties and also carefully perused the materials placed on record. So far as levy of penalty on disallowance of Rs. 9,83,145/- is concerned, it is seen that the AO has made adhoc disallowance at the rate of 20% of the various expenses without pointing out any specific expenses being in the nature of non business purpose or for personal use. If the accounts have been audited, then the normal presumption is that the expenses are verifiable vis-a-vis the documents maintained by the assessee. Even though disallowances have been made in the quantum proceedings, due to non verifiability of expenses through corroborative eevidences and the same has not been challenged, however this does not lead to any inference that assessee is liable for levy of penalty for either furnishing of any inaccurate particulars or for concealment of particulars of income. The disallowance is purely based on adhoc basis, dehors any adverse material on record, therefore, no penalty is warranted u/s 271(1)(c) on adhoc disallowance of the expenses claimed by the assessee in the profit & loss account.

In such cases where the income of the assessee has been assessed on estimate basis and addition has been made on the basis of estimate and not on account of any concrete evidence of concealment being found, there is no merit in the levy of penalty for concealment u/s 271(1)(c) of the Act.

As it transpires from the record available before us that the Assessing Officer levied penalty under section 271(1)(c) of the Act on estimate basis without any evidence on record with regard to concealment of income. Penalty under section 271(1)(c) of the Act is leviable to be imposed only where the assessee has concealed its particulars of income or furnished inaccurate particulars. Action of making addition on ad–hoc basis does not result into imposition of penalty u/s 271(1)(c) of the Act and hence cannot be termed as either concealment or furnishing of inaccurate particulars of income…..

& 5960/MUM/2014, while vacating penalty proceedings initiated on account of disallowance of 70% of commission and 30% of other expenses on an estimate basis for not maintaining proper accounts, observed as under:

“We have heard the rival submissions, perused the orders of the Authorities below. On a perusal of the Assessment Order and the Ld.CIT(A) order, we find that the Assessing Officer disallowed the commission as well as the expenses on an estimate basis which was further reduced by the Ld.CIT(A). None of the authorities below have conclusively proved that there is neither concealment of income nor furnishing of inaccurate particulars by the assessee. It is only a mere disallowance of expenses on estimates on Santosh Singh Hukam Singh Karnawat (Individual) vs. ITO Asst. Year – 2012-13 - 8– an adhoc basis. Penalty U/s.271(1)(c) of the Act is not attracted when there is an adhoc estimation of disallowance of expenses. Hence, we direct the Assessing Officer to delete the penalty levied U/s. 271(1)(c) of the Act. This ground is allowed.”

Sd/- Sd/- (BIJAYANANDA PRUSETH) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 25/11/2025 TANMAY, Sr. PS TRUE COPY आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant ��थ� / The Respondent. 2. 3. संबंिधत आयकर आयु� / Concerned CIT 4. आयकर आयु�(अपील) / The CIT(A)- िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, सूरत / DR, ITAT, Surat 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER,