2022 (6) TMI 1359 - AT - Income Tax

Penalty levied u/s 271(1)(c) - bogus purchases - AO made estimated addition of 12.5% of bogus purchases - HELD THAT - Undisputedly the additions made on account of bogus purchases were partially confirmed by the Tribunal. The assessee failed to discharge its onus in proving genuineness of the purchases and dealers. During assessment proceedings the addition was made on estimation @ 12.5%. In first appeal the addition was restricted to 3% and on further appeal to the Tribunal by the Revenue the addition was enhanced to 6%. The entire addition right from assessment stage to the Tribunal was merely on estimations. There is no definite finding on the quantum of concealment of income. It is an accepted legal position that penalty u/s 271(1)(c) of the Act levied on additions made merely on estimations is unsustainable. As in the case of CIT vs. Krishi Tyre Retreading and Rubber Industries 2014 (2) TMI 21 - RAJASTHAN HIGH COURT has held that where addition is made purely on estimate basis no penalty u/s. 271(1)(c) of the Act is leviable. Thus penalty levied u/s. 271(1)(c) of the Act on estimated addition has been held to be unsustainable. - Decided against revenue.

Summary

Issues:
1. Rectification sought by the Department under section 254(2) of the Income Tax Act, 1961 for dismissal of appeal on low tax effect.
2. Exception under para 10(f) of CBDT letter dated 20.08.2018 regarding prosecution filed by the Department.
3. Deletion of penalty under section 271(1)(c) of the Act for alleged bogus purchases.

Issue 1:
The Department filed a Miscellaneous Application seeking rectification under section 254(2) of the Income Tax Act, 1961 due to the dismissal of their appeal on the grounds of low tax effect. The Department argued that the appeal fell under exceptions provided in para 10(f) of CBDT letter dated 20.08.2018 as they had launched prosecution against the assessee in court after the appeal was filed. The Tribunal, upon considering the exceptions provided in the CBDT communication, found that the appeal by the Revenue fell under the exception specified in para-10(f) of CBDT letter dated 20.08.2018. As the prosecution against the assessee was filed before the Metropolitan Magistrate, Mumbai, the appeal was restored to its original number.

Issue 2:
The second issue involved the deletion of penalty under section 271(1)(c) of the Act for alleged bogus purchases. The Department argued that the CIT(A) erred in deleting the penalty without considering that the assessee had obtained bogus purchase bills, leading to profit suppression. However, the Tribunal noted that the additions made on account of bogus purchases were based on estimations, with no definite finding on the quantum of concealment of income. It was established that penalties cannot be levied on estimated additions, as supported by various High Court decisions. The Tribunal upheld the impugned order and dismissed the appeal of the Revenue.

Conclusion:
In conclusion, the Tribunal allowed the Department's Miscellaneous Application based on the exception under para 10(f) of the CBDT letter. Additionally, the Tribunal upheld the deletion of penalty under section 271(1)(c) of the Act for alleged bogus purchases, emphasizing that penalties cannot be levied on estimated additions. The judgments were pronounced on June 17, 2022.