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Facts
The Assessing Officer rejected the assessee's books of accounts under section 145(3) and made additions to income based on an estimated net profit for AYs 2014-15 and 2015-16. A penalty under section 271(1)(c) was subsequently levied on these estimated additions, which was confirmed by the CIT(A).
Held
The Tribunal, citing High Court precedents, held that penalty under section 271(1)(c) cannot be sustained on additions made merely on estimations after rejecting the books of accounts. Therefore, the penalty levied by the Assessing Officer was unsustainable and directed to be deleted.
Key Issues
Can penalty under Section 271(1)(c) be levied on additions to income that are based solely on estimations after the rejection of books of accounts?
Sections Cited
271(1)(c), 143(3), 264, 145(3)
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Income Tax Appellate Tribunal, DELHI BENCH “SMC”, DELHI
Before: SHRI VIKAS AWASTHY
ORDER PER VIKAS AWASTHY, JM: These two appeals by the assessee are directed against the orders of Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi (hereinafter referred to as 'the CIT(A)') dated 25.08.2023, for assessment year 2014-15 and order dated 11.08.2023, for assessment year 2015-16, confirming levy of penalty u/s. 271(1)(c) of the Income Tax Act, 1961(hereinafter referred to as 'the Act).
& 2850/DEL/2023 (AY 2014-15 & 2015-16) 2. Since, facts germane to levy of penalty u/s. 271(1)(c) of the Act in both appeals are identical, these appeals are taken up together for adjudication and are decided by this common order. For the sake of convenience, facts are narrated from appeal of the assessee for AY 2014-15. (AY 2014-15) 3. Shri P.S Kashyap, appearing on behalf of the assessee submits that the Assessing Officer (AO) vide order dated 29.12.2017 passed u/s. 143(3)/264 of the Act made addition of Rs.37,06,618/-, merely on estimations by rejecting books of accounts of the assessee u/s. 145(3) of the Act. The AO vide order dated 23.06.2017 levied penalty u/s. 271(1)(c) of the Act in respect of estimated additions of Rs.37,06,618/-. He submitted that it is a well settled law that no penalty can be levied in respect of additions based on estimations. The assessee filed appeal before the CIT(A). The CIT(A) vide impugned order dismissed appeal of the assessee and confirmed penalty order. The Ld. AR in support of his submissions placed reliance on following decisions: (i) CIT vs. Aero Traders P Ltd. 322 ITR 216 (Del) (ii) Harigopal Singh vs. CIT 258 ITR 85 (P & H) (iii) CIT vs. Subhash Trading Company 221 ITR 110 (Guj.) 4. On the other hand, Shri Rajesh Tiwari representing the department strongly supporting the impugned order prayed for confirming levy of penalty u/s. 271(1)(c) of the Act. The ld. DR submits that but for scrutiny assessment the income would have escaped tax net.
Both sides heard, orders of the authorities below examined. A perusal of assessment order dated 29.12.2017 reveals that same has been passed consequent to order pass u/s. 264 of the Act. The AO vide assessment order dated 30.12.2016 passed u/s. 143(3) of the Act had rejected books of the assessee and had estimated net profit on gross turnover at the rate of 5%. Against said assessment order, the assessee filed petition u/s. 264 of the Act before the Principal CIT, however, the same was rejected vide order dated 06.04.2017. Consequent, to said order the AO passed order dated 24.12.2017 and initiated penalty proceedings u/s. 271(1)(c) of the Act. The penalty was levied by the AO vide order dated 23.06.2017. It is now well accepted legal position that penalty u/s. 271(1)(c) of the Act on estimated additions is unsustainable. The Hon'ble Jurisdictional High Court in the case of Aero Traders P. Ltd. (supra) has held that where profit was estimated after rejection of books, imposition of penalty for furnishing inaccurate particulars of income was not justified. Similar view has been expressed in the case of CIT vs. Subhash Trading Company (supra) and in the case of Harigopal Singh vs. CIT (supra). Thus, in light of undisputed fact of addition on estimations and decisions referred above, I am of considered view that penalty levied u/s. 271(1)(c) in the instant case is unsustainable. The AO is directed to delete the penalty.
In the result, impugned order is set aside and appeal of the assessee is allowed.
AY 2015-16 7. Both sides are unanimous in stating that facts in the impugned assessment year are identical to AY 2014-15. Penalty has been levied on account of estimated & 2850/DEL/2023 (AY 2014-15 & 2015-16) additions after rejection books of account u/s. 145(3) of the Act. The AO has estimated net profit at the rate of 5% of gross turnover. Thereafter, penalty proceeding u/s. 271(1)(c) of the Act were initiated and penalty was levied vide order dated 13.06.2018.
I find that penalty in the impugned assessment year has been levied on estimated additions as was the case in AY 2014-15. Thus, the findings given in AY 2014-15 would mutatis mutandis apply to the impugned assessment year, as well. Penalty levied u/s. 271(1)(c) of the Act is deleted for party of reasons.
In the result, impugned order is set aside and appeal of assessee is allowed.