2015 (10) TMI 1705 - AT - Income Tax

Penalty u/s 271(1)(c) - assessee has furnished inaccurate particulars of its taxable income by treating the purchases from three parties as bogus - CIT(A) deleted the penalty - Held that - The work performed as reflected in the trading Account has been accepted by the AO which implies that work could be completed only after having taken into account the ostensible bogus purchases. Thus without the purchases, the work executed as well as the closing stock which has been accepted by the AO could not have been possible. These purchases are building materials and the assessee is stated maintaining stock register which were also filed before the AO. No doubt the books of accounts were held not reflecting the correct state of affairs of the assessee s business but there has been no rejection of the same. Needless to say assessment proceedings are independent from penalty proceedings and imposition of the penalty depends on the facts and circumstances of each case. In this case at hand, the addition made by the AO was rightly deleted in appeal to be replaced by a trading addition by applying an estimation of the GP rate of 27% instead of 16% as shown by the assessee. This naturally becomes an addition sustained on estimate basis. A fact or allegation based on estimation cannot be said to be correct only; it can also be incorrect. Judgment of Punjab and Haryana High Court in the case of MM Rice Mills as reported in 2000 (10) TMI 4 - PUNJAB AND HARYANA High Court is quite relevant in which it has been held that where the addition merely sustained on account of application of GP., the penalty would not be leviable. - Penalty deleted - Decided in favour of assessee.

Summary

Issues involved:
1. Deletion of penalty under section 271(1)(c) of the Income Tax Act, 1961 by the Ld. CIT(A).
2. Justification for deleting the penalty by the CIT(A) based on various circumstances and judgments.
3. Assessment of the penalty based on unverifiable purchases and subsequent deletion by CIT(A).
4. Applicability of penalty provisions under section 271(1)(c) in cases of estimation and trading additions.
5. Comparison of AO's findings with CIT(A)'s decision regarding penalty imposition.
6. Validation of CIT(A)'s decision by the ITAT Delhi Bench 'H' in a quantum appeal.

Analysis:

1. The Department raised concerns regarding the deletion of a penalty of Rs. 22,63,450 imposed by the AO under section 271(1)(c) of the Income Tax Act, 1961. The Ld. CIT(A) had deleted the penalty based on certain grounds, including the failure of the assessee to establish the genuineness of purchase parties and authenticate the entries in the books of account. The Department questioned the reliability of the assessee's trading results and the justification for penalty deletion.

2. The Assessee, on the other hand, argued in their Cross Objection that the penalty was unjustified as the trading addition was based on an imaginary estimate and did not represent actual income. They cited judgments of the Punjab and Haryana High Court to support their claim that penalties should not be levied solely on the basis of gross profit additions. The CIT(A) was also criticized for not recording satisfaction to initiate the penalty during the assessment process.

3. The ITAT Delhi Bench 'H' reviewed the case and found that the AO had initiated penalty proceedings due to inaccurate particulars of income related to unverifiable purchases. However, the CIT(A) had emphatically deleted the basis for penalty imposition, focusing on the estimation of average gross profit rates instead. The ITAT agreed that the penalty could not be justified when the very basis for initiation was nullified.

4. The ITAT emphasized that penalty imposition depends on the facts and circumstances of each case, separate from assessment proceedings. The addition based on estimation of gross profit rates was considered unsustainable for penalty purposes, as per relevant judgments. The ITAT upheld the CIT(A)'s decision to delete the penalty, especially since the trading addition was replaced by an estimate and the quantum appeal had already nullified the disputed addition.

5. Ultimately, the ITAT affirmed the CIT(A)'s decision to delete the penalty, noting that the assessment and penalty proceedings were distinct. The dismissal of the Revenue's appeal and the Assessee's Cross Objection being not pressed led to the final decision in favor of the Assessee, based on the detailed analysis and legal precedents cited in the judgment.