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Facts
The assessee preferred an appeal against the penalty order under section 271(1)(c) of the Income Tax Act, 1961. The reopening assessment resulted in an addition of Rs. 51,10,389/- based on 12.5% of non-genuine purchases, leading to a penalty of Rs. 15,79,109/-. The CIT(A) had confirmed the penalty.
Held
The Tribunal held that penalty cannot be levied when the addition is made on an estimated or ad-hoc basis. Reliance was placed on the Hon'ble Bombay High Court's decision in PCIT vs. Colo Colour Pvt. Ltd., which stated that penalty under Section 271(1)(c) is not leviable when additions are sustained purely on an estimate or guesswork. The AO had already taken a position based on available materials for assessment, and using the same for penalty proceedings under the garb of concealment or inaccurate particulars was not permissible.
Key Issues
Whether penalty under section 271(1)(c) is leviable when additions to income are made on an estimated basis. Whether the penalty order was passed without jurisdiction due to procedural lapses.
Sections Cited
271(1)(c), 275(1)(a)
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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: HON’BLE JUSTICE (RETD.) C.V. BHADANG & SHRI ARUN KHODPIA, AM
: Shri Devang Sheth, CA Assessee by Revenue by : Shri Leyaqat Ali Aafaqui, Sr. DR Date of Hearing 22.01.2026 : : 02.03.2026 Date of Pronouncement O R D E R
Per Arun Khodpia, AM:
The captioned appeal is preferred by the assessee against the order of Commissioner of Income Tax (Appeals) / National Faceless Appeal Centre (NFAC), Delhi [in short “Ld. CIT(A)]”, dated 07.07.2025, for the Assessment Year (AY) 2009-10, which in turn arises against the penalty order passed under section 271(1)(c) of the Income Tax Act, 1961 (the Act) by ITO, Ward- “1. That the Ld. Assessing Officer (AO) of Income Tax has erred in facts and in law in levying penalty u/s. 271(1)(c) of the Income Tax Act, 1961 ('the Act') on the Appellant vide order dated 12.03.2018.
The penalty order is without jurisdiction, in as much as it has been passed in breach of the proviso to s.275(1)(a).
That the Ld. AO ought to have taken cognizance of the subject assessment order being challenged before the Commissioner (Appeals) and subsequently before the Hon. Income Tax Appellate Tribunal and kept in abeyance the penalty proceedings till the disposal of the said appeals.
That the Ld. AO has erred in law in passing the penalty order prior to the approval of the Jt. CIT dt. 23.03.2018 and thus the said order is without proper jurisdiction.
5. That the Ld. AO has issued invalid notice u/s. 271(1)(c) of the Act since he erred in Not strucking out the inapplicable portion of the said notice and that the penalty is initiated on one ground and concluded on another ground. ”
2. Briefly stated that the reopening assessment in the present case was completed on 12.03.2015, making therein an addition of Rs. 51,10,389/- being 12.5% of total non-genuine purchases made by the assessee and consequently a penalty of Rs. 15,79,109/- being 100% of the tax sought to be evaded by the assessee was imposed under the impugned penalty order dated 12.03.2018. Aggrieved with the aforesaid penalty imposed, the assessee preferred an appeal before the ld. CIT(A), who did not find any substance in the contentions raised by the assessee therein, had accordingly confirmed the penalty imposed by the ld. AO.
4. At the outset, the ld. Counsel of the assessee submitted that the quantum addition in the present matter is already dealt with by the Co-ordinate Bench of ITAT, Mumbai “B” Bench vide order dated 24.05.2019 in and the estimated addition of 15% sustained by the ld. CIT(A) has been directed to scaled down at 5% of the bogus purchases. It was the submission that as per settled principle of law, no penalty can be levied when the addition is made on estimation /adhoc basis. The ld. AR placed his reliance on the following decisions:
1. Mangal Singh Rathore vs. ACIT Circle - 32(2) Mumbai dt. 30.10.2025 (refer para 4) 2. Khodiyar Impex Vs. ITO, Ward 19(2)(2), Mumbai 2025(9) TMI 231 (ITA No. 2199/MUM/2025) dt. 26.08.2025 (refer for 4) 3. The Principal Commissioner of Income Tax-6 vs. Colo Colour Pvt. Ltd. Bom. HC, Income Tax Appeal No. 48 of 2022 dt. 16.09.2025 (refer para 20-21) 4. Vijay Proteins Ltd. vs. Commissioner of income Tax, Guj. HC 2015 (1) TMI 828 dt. 9.12.2014 (refer para 19)
Some more propositions are raised by the ld. AR that, the penalty order was passed by the ld. AO before passing of the appellate order by First Appellate Authority (FAA) in the quantum appeals i.e. the quantum appeal was disposed off on 19.03.2018, whereas the ld. AO had levied the penalty on 12.03.2018 i.e. prior to the order of ld. CIT(A) in quantum appeals. It is Bhairav Tube (India) submitted that the penalty order passed by the ld. AO is contrary to the provisions of section 275(1)(a) and is therefore liable to be annulled. Reliance was placed on the decision of Hon’ble Bombay High Court in the case of R.B. Shreeram Durgaprasad vs. CIT, Nagpur [2016] 65 taxmannc.om 293 (Bombay), wherein the Hon’ble Bombay High Court has held that, where the appeal of assessee against the addition made was pending before the Tribunal, order imposing penalty under section 271(1)(c) of the Act was premature.
5.1 Another contention raised by the ld. AR that the order passed by ld. AO is without jurisdiction i.e. in the present case the order of penalty is passed on 12.03.2018, whereas the approval was obtained from JCIT Range-19(1)(2), Mumbai vide letter no. JT.CIT/Rg.19(1)(2)/PenaltyApproval/2017- 18/dt.23.03.2018. On perusal of the penalty order itself the aforesaid fact is evident. The ld. AR placed his reliance on the decision of Shri Julius Francis Pereira vs. ITO-4(3) in & 2957/Mum/2012.
5.2 The ld. AR also made the submission that the notice under section 271(1)(c) in the present case was issued without striking off of the irrelevant limb which was not applicable in the case of assessee, therefore the case of assessee is squarely covered by the decision of Hon’ble Bombay High Court in the case of Farhan A. Shaikh vs. DCIT (125 taxmann.com 253). Copy of notice 5.3 It is also submitted by the ld. AR that the reassessment in present matter was based on borrowed satisfaction, therefore the re-assessment order as well as penalty order are without jurisdiction.
5.4 It is further, without prejudice, submitted by the ld. AR that consequent to reduction of the quantum addition to the total income, as directed by the ITAT in assessee’s case, the ld. AO ought to have rectified the penalty amount, however such effect was not given by the ld. AO, also the ld. CIT(A) while sustaining the penalty has not considered such submission of assessee regarding reduction of quantum addition by the ITAT.
5.5 It was, thus, the prayer that on account of various violations and discrepancies in penalty proceedings and order by the ld. AO, the penalty levied on the assessee is liable to be quashed. Alternatively, it is requested that in case the penalty is upheld, the amount of penalty should be reduced on prorata basis as the quantum has been scaled down by the ITAT in the quantum appeal.
Per contra, the ld. DR representing the revenue vehemently supported the orders of revenue authorities. 5
We have considered the rival submissions and perused the material available on record and case laws relied upon by the assessee. On first aspect that the addition in present matter was made on estimated basis, therefore no penalty can be levied. We find substance in the submissions of the assessee based on various decisions of ITAT, Mumbai referred to supra and further the observations of Hon’ble Bombay High Court in the case of PCIT vs. Colo Colour Pvt. Ltd. in Tax Appeal No. 48/2022 dated 16.09.2025, wherein the Hon’ble Bombay High Court had held as under:
“20. We also find that the reliance on behalf of the assessee on the decision of the Gujarat High Court in Vijay Proteins Ltd. Vs. Commissioner of Income-tax is quite apt. In such decision the Division Bench while referring to the decision in Commissioner of Income Tax vs. Krishi Tyre Retreading and Rubber Industries held that penalty could not have been imposed under Section 271(1)(c) of the Act, when the addition was sustained purely on estimate basis or when the addition was made which was on a pure guess work, hence, no penalty under Section 271(1)(c) of the Act could be said to be leviable on such guess work or estimation. The Court accordingly answered the question in favour of the assessee, rejecting levy of penalty under Section 271(1)(c).
The aforesaid discussion would make us conclude, that the Assessing Officer could not have come to a conclusion of the present case attracting proceedings for levy of penalty, when the Assessing Officer had already taken a position on materials which were available before him in the course of assessment proceedings, in computing the amount of tax payable by the assessee, by making appropriate additions on the basis of estimates derived in passing of the assessment order. In other words, for the purpose of assessment proceedings, the relevant materials were accepted, to be not amounting to concealment of particulars of income or furnishing of inaccurate particulars of income. In such circumstances, under the garb of penalty proceedings, there ought not to be an occasion that such material again be labelled as amounting to concealment of income or furnishing of inaccurate particulars of income. If such approach is accepted, it would Bhairav Tube (India) result in taking away the very basis of the assessment, apart from dragging the assessee into unwarranted penalty proceedings. There cannot be two opinions that Section 271(1)(c) of the Act, would be required to be strictly construed, hence in the absence of such clear position of a concealment of particulars of income or furnishing of inaccurate particulars of income, in the facts of the present case, penalty proceedings could not have been initiated. This more particularly when the penalty proceedings are initiated clearly on the basis of additions made in the re-opening proceedings thereby leaving no room for a doubt of the disclosures made by the assessee, warranting penalty proceedings. In the present case such material essentials were completely lacking.”
Considering the aforesaid findings by Hon’ble Bombay High Court, wherein it is categorically observed by the Hon’ble High Corut that, when the AO had already taken a position on materials which were available before him in the course of assessment proceedings in computing the amount of tax payable by the assessee by making appropriate addition on the basis of estimates derived in passing of the assessment order, in other words for the purpose of assessment proceedings, the relevant materials were accepted, to be not amounting to concealment of properties of income or furnishing of inaccurate particulars of income, in such circumstances under the garb of penalty proceedings their ought not to be an occasion that such material again be leveled as amounting to concealment of income or furnishing of inaccurate particulars of income. Hence, in absence of such clear position of concealment of particulars of income or furnishing inaccurate particulars of income, penalty proceedings could not have been initiated. We, thus in terms of aforesaid decision of Hon’ble Bombay High Court which is squarely applicable in the facts of the present case are convinced with argument of Ld AR that the 7 Bhairav Tube (India) proceedings under section 271(1)(c) of the Act, while the income was estimated on the basis of material available with the ld. AO, which cannot be treated as concealment of income or furnishing of inaccurate particulars of income, cannot constitute be the base for levy of penalty under section 271(1)(c) of the Act. Accordingly, the penalty levied in present case stands vacated.
Since the penalty levied in present case is directed to be deleted by us on account of the 1st propositions rendered by the ld. AR. We, thus, are not deliberating upon the other propositions referred to and pressed before us, as the same have become academic only, thus need not be dealt with separately.
9. In result, the appeal of assessee stands allowed, in terms of our aforesaid observations.
Order pronounced in the open court on 02-03-2026.