2020 (1) TMI 400 - AT - Income Tax

Penalty u/s 271(1)(c) - AO made disallowed @25% of bogus purchases - HELD THAT - Sales were actually made. As purchases were not made from the bills providers as it is and evident that the purchases were made from the third party. Since the goods were exported the same were routed through customs authorities hence, the corresponding sales are not in dispute. The bills were from accommodation entries provider were recorded in the books of accounts and quantities were entered into books The purchase amount was not verifiable and as such,5% profit rate on bogus purchases was applied by the Tribunal. From the order of the AO, we found that the AO has estimated the income on the bills of purchases of diamonds. The similar issue had come before the Hon'ble M.P. High Court in the case of CIT vs. Shivnarayan Jamnalal 1996 (5) TMI 9 - MADHYA PRADESH HIGH COURT wherein the Hon'ble High Court has held that the books of accounts maintained by the assessee were not properly maintained and if assessee has not concealed any material and not tried to defraud the authorities, the penalty cannot be levied, because the income was assessed on estimate basis. Just because Appellant s explanation was not found acceptable by the AO, it does not follow that that the Appellant was unable to substantiate his explanation by providing various evidences and judicial opinions. Explanation 1 to section 271(1)(c) of the Act does not therefore cover the case of the Assessee. Based on the above facts of the case; it can be held that the Assessee had made all the necessary disclosures on a bonafide belief, which is not agreeable to the AO, it will not automatically lead to a case for penalty under section 271(1)(c). We are therefore of the considered view that the penalty is not sustainable in law in the ratio laid down by the Hon ble Supreme Court in case of CIT v Reliance Petro-products Pvt. Ltd. 2010 (3) TMI 80 - SUPREME COURT wherein it was held that merely because the assessee has claimed the expenditure, which claim was not accepted or was not acceptable by the revenue, penalty under section 271(1) (c) of the Act cannot be attracted. - Decided in favour of assessee.

Issues Involved:
1. Confirmation of penalty levied under section 271(1)(c) of the Income Tax Act.
2. Validity of the assessment based on alleged bogus purchases.
3. Estimation of income and its impact on penalty proceedings.
4. Compliance with procedural requirements for imposing penalty.
5. Applicability of judicial precedents in penalty cases.

Detailed Analysis:

1. Confirmation of Penalty Levied under Section 271(1)(c):
The primary issue in this appeal is the confirmation of a penalty amounting to ?1,32,50,902/- levied under section 271(1)(c) of the Income Tax Act. The penalty was imposed for furnishing inaccurate particulars of income and concealment of income. The assessee contended that the penalty was unjustified as the disallowance of purchases was based on an estimate, and all necessary documents were provided to substantiate the purchases.

2. Validity of the Assessment Based on Alleged Bogus Purchases:
The assessment was reopened under section 147 based on information from a search and seizure operation involving the Bhanwarlal Jain Group, which was found to be providing accommodation entries. The assessee had allegedly received bogus purchase entries totaling ?15,74,67,842/- from two entities controlled by this group. The Assessing Officer (AO) disallowed 25% of these purchases, treating them as bogus based on statements recorded during the search. However, the assessee argued that the purchases were genuine, supported by confirmations, purchase bills, and bank statements.

3. Estimation of Income and Its Impact on Penalty Proceedings:
The AO estimated the profit from the bogus purchases at 25%, resulting in an addition of ?3,93,66,960/-. The Tribunal later reduced this disallowance to 5%, following the Gujarat High Court's decision in the case of Mayank Diamonds Pvt. Ltd. Consequently, the quantum of income on which the penalty was levied was reduced to ?78,73,390/-. The assessee argued that since the addition was based on an estimate, it did not warrant a penalty for concealment of income or furnishing inaccurate particulars.

4. Compliance with Procedural Requirements for Imposing Penalty:
The assessee contended that the penalty proceedings were invalid as the AO was not certain whether the penalty was for concealment of income or furnishing inaccurate particulars. The Tribunal noted that the AO had initiated penalty proceedings for both defaults, which is not permissible. The Tribunal referred to judicial precedents, including the cases of New Sorathia Engineering Co. and Manu Engg. Works, to support this contention.

5. Applicability of Judicial Precedents in Penalty Cases:
The Tribunal considered several judicial precedents, including the Supreme Court's decision in Reliance Petro-products Pvt. Ltd., which held that mere disallowance of a claim does not automatically lead to a penalty for furnishing inaccurate particulars. The Tribunal also referred to the Gujarat High Court's decision in Subhash Trading Co., which held that penalty cannot be imposed when income is assessed on an estimated basis after rejecting book results. The Tribunal concluded that the penalty was not sustainable as the addition was based on an estimate and the assessee had made all necessary disclosures.

Conclusion:
The Tribunal allowed the appeal, deleting the penalty of ?1,32,50,920/-. It held that the penalty could not be sustained as the addition was based on an estimate and the assessee had provided sufficient evidence to substantiate the purchases. The Tribunal emphasized that merely because the AO did not accept the assessee's explanation, it did not automatically justify the imposition of a penalty under section 271(1)(c).

← Previous Next →