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Facts
The assessee challenged a penalty levied under section 271(1)(c) following an addition for alleged bogus purchases. The Tribunal had restricted the original addition of Rs. 11,29,914/- to 12.5% (Rs. 1,41,240/-) in quantum proceedings.
Held
The Tribunal held that penalty under section 271(1)(c) is unsustainable when the addition is based on estimation of profit margin and not on concrete findings of concealment or inaccurate particulars. Purchases were supported by bills, ledger accounts, and cheque payments, and the estimation was for potential profit suppression.
Key Issues
Whether penalty under section 271(1)(c) can be levied on additions made on an estimated basis, particularly when the assessee has provided supporting documentation and made payments through banking channels?
Sections Cited
271(1)(c), 143(3), 147
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Income Tax Appellate Tribunal, ‘C’ BENCH
आदेश / O R D E R PER AMIT SHUKLA (J.M): The present appeal has been preferred by the assessee against the order dated 17.10.2025 passed by the learned National Faceless Appeal Centre (NFAC), Delhi, arising out of penalty proceedings initiated under section 271(1)(c) of the Income Tax Act, 1961 for the assessment year 2009–10.
Pravin Vasant Mehta 2. The sole grievance of the assessee is against the sustenance of penalty of Rs. 3,49,144/-, which has its genesis in the quantum addition made on account of alleged bogus purchases. The Assessing Officer, in the assessment framed under section 143(3) read with section 147 vide order dated 14.11.2014, had treated purchases aggregating to Rs. 11,29,914/- from certain parties as non-genuine and proceeded to make addition of the entire amount. However, in the appellate proceedings in quantum, the Tribunal, taking a pragmatic and settled view in such matters, restricted the disallowance to 12.5% of the alleged purchases, thereby sustaining an addition of Rs. 1,41,240/-. Despite such restriction, the Assessing Officer levied penalty on the entire amount of Rs. 11,29,914/-, which was later modified by the learned CIT(A), who directed that the penalty be confined to the addition as finally sustained.
We have heard the rival submissions and carefully perused the material available on record. It is an undisputed position that the assessee had furnished complete details of purchases, including bills and ledger accounts, and the payments have been made through account payee cheques. The purchases were duly recorded in the books of account and were not found to be fictitious per se; rather, the disallowance arose on account of doubt cast upon the genuineness of the parties, leading to an estimation of profit
Pravin Vasant Mehta element embedded in such purchases. The Tribunal, in the quantum proceedings, has also not affirmed the entire addition but has resorted to estimation by applying a gross profit rate of 12.5%, which is a well-accepted judicial approach in cases of suspected accommodation entries.
In such a scenario, the foundation of the addition itself rests on estimation and not on any concrete finding of concealment or furnishing of inaccurate particulars. The law is well settled that where income is determined on an estimated basis, particularly by applying a profit rate on purchases duly recorded in the books, the element of concealment becomes inherently nebulous and incapable of precise attribution. The assessee’s explanation, supported by documentary evidences and banking channels, has not been found to be false; rather, the addition has been sustained only to account for possible inflation of purchase price or profit suppression.
Thus, in our considered view, the very edifice of penalty under section 271(1)(c) collapses in the absence of any cogent material demonstrating either concealment of income or furnishing of inaccurate particulars. The estimation of gross profit, howsoever justified for quantum purposes, cannot ipso facto lead to penalty, as it remains within the realm of Pravin Vasant Mehta approximation and probability rather than definitive determination.
Accordingly, we hold that the penalty sustained by the learned CIT(A) is unsustainable in law and deserves to be deleted.
In the result, the appeal of the assessee stands allowed.
Order pronounced on 26th March, 2026.