2016 (6) TMI 1349 - AT - Income Tax

Penalty u/s 271(1)(c) - rejection of books of account and made an estimate of profit rate of 4.9% to work out an addition - HELD THAT - Estimate made by the AO there is nothing to show that the assessee suppressed the income in any manner. This divulges that the addition has been made only on the basis of estimate made by the AO which again stood reduced by the tribunal. It is a settled legal position that when income is estimated then there can be no question of imposing penalty u/s 271(1)(c) of the Act. The Hon ble Delhi High Court in CIT vs. Aero Traders Pvt. Ltd. 2010 (1) TMI 32 - DELHI HIGH COURT has held that no penalty u/s 271(1)(c) can be imposed when income is determined on estimate basis. Similar view has been taken in Harigopal Singh vs. CIT 2002 (8) TMI 65 - PUNJAB AND HARYANA HIGH COURT and in CIT vs. Subhash Trading Company 1995 (11) TMI 37 - GUJARAT HIGH COURT . In view of the foregoing precedents including the one from the Hon ble jurisdictional High Court it is apparent that when the bedrock of instant penalty is the estimate of income the same cannot be sustained. Overturning the impugned order order for the deletion of penalty. - Decided in favour of assessee.

Summary

Issues:
- Penalty imposed under section 271(1)(c) of the Income-tax Act, 1961 for assessment year 2007-08 based on estimated income.

Analysis:
The appeal was filed by the assessee against the penalty imposed by the AO under section 271(1)(c) of the Income-tax Act, 1961, which was upheld by the CIT(A). The case involved the purchase of timber from abroad where the price varied based on quality, but the sale bills did not specify the quality. Due to the lack of proper stock register maintenance, the AO rejected the books of account under section 145(3) of the Act and made an addition to the income. The AO imposed a penalty on the estimated income, which was upheld by the CIT(A).

Upon review, the tribunal found that the AO had merely estimated the profit rate at 4.9% leading to an addition in income. However, in a previous order, the tribunal had reduced the profit rate to 3.53%. It was noted that there was no evidence of income suppression by the assessee apart from the estimate made by the AO. The tribunal referred to legal precedents, including judgments from the Delhi High Court, P&H High Court, and Gujarat High Court, stating that penalties cannot be imposed when income is determined on an estimated basis. Citing these precedents, the tribunal concluded that since the penalty was solely based on the estimated income, it could not be sustained.

Therefore, the tribunal overturned the decision of the CIT(A) and ordered the deletion of the penalty amounting to ?10,62,120. Consequently, the appeal was allowed, and the penalty was removed.