2019 (10) TMI 246 - AT - Income Tax

Levy penalty u/s 271(1)(c) - quantum protective addition being the commission income from sale of DEPB licenses - HELD THAT - In the instant case there has been a shift in the estimation of commission rate. The assessee has claimed that @ 0.10% to 0.025%. AO estimated the commission @ 3.5% of the transaction value. In appeal, the CIT(A) reduced it to 2% for all type of transactions. In further appeal the Tribunal reduced it to 1% for all type of bogus transactions entered into by the assessee. As evident from the above, there was no certainty in the rate to be applied while estimating the commission on bogus transactions entered into by the assessee. In view of the above background facts, we set aside the order of the CIT(A). As the above matter has been decided by us on merits of the case, we are not adverting to the technicalities raised by the assessee in this appeal.

Summary

Issues Involved:
1. Legality of penalty levied under Section 271(1)(c) of the Income Tax Act, 1961.
2. Estimation of commission income on accommodation entries.
3. Admissibility of penalty when income is determined on an estimated basis.
4. Violation of principles of natural justice by not providing reasonable opportunities to the appellant.

Detailed Analysis:

1. Legality of Penalty Levied Under Section 271(1)(c):
The primary issue revolves around the legality of the penalty levied under Section 271(1)(c) of the Income Tax Act, 1961. The appellant argued that the CIT(A) erred in directing the Assessing Officer (AO) to levy penalty after re-quantifying quantum additions as per the ITAT, Mumbai order dated 16.08.2017. The appellant contended that the penalty was not justifiable as the income was determined based on estimates rather than concrete evidence.

2. Estimation of Commission Income on Accommodation Entries:
The AO initially made additions on account of commission income on total accommodation entries (?37,90,250/-), commission income on sale and purchase bills (?15,05,204/-), and DEPB (?33,06,523/-). The CIT(A) reduced these amounts to ?21,65,857/-, ?8,60,117/-, and ?33,06,523/- respectively. The ITAT further reduced the commission rate to 1% for all types of bogus transactions, noting that the rate of commission for bogus transactions cannot be determined by applying a rule of thumb and depends on various factors.

3. Admissibility of Penalty When Income is Determined on an Estimated Basis:
The appellant argued that the penalty should not be levied since the income on accommodation transactions was determined on an estimated basis. The CIT(A) rejected this contention, stating that the quantum of accommodation entries was not estimated, only the profit earned was estimated. The CIT(A) relied on the decision of the Hon'ble Delhi High Court in the case of Kalindi Rail Nirman Engg. Ltd., which upheld the levy of penalty on estimated income. The ITAT, however, noted the variation in the estimation of the commission rate and concluded that there was no certainty in the rate to be applied, thus setting aside the CIT(A)'s order.

4. Violation of Principles of Natural Justice:
The appellant claimed that the AO did not provide reasonable opportunities to represent the case, violating the principles of natural justice. The ITAT did not specifically address this issue in detail but focused on the merits of the case, ultimately deciding in favor of the appellant based on the uncertainty in the estimation of the commission rate.

Conclusion:
The ITAT concluded that the case was not fit for the imposition of penalty under Section 271(1)(c) due to the significant variations in the estimation of the commission rate. The appeals filed by the assessee were allowed, setting aside the order of the CIT(A). The ITAT emphasized that the rate of commission for bogus transactions cannot be determined by a fixed rule and must consider various factors, leading to the decision to adopt a 1% commission rate for all types of bogus transactions.

Order Pronounced:
The order was pronounced in the open court on 25/09/2019.