2024 (10) TMI 535 - AT - Income Tax

Penalty levied u/s 271(1)(c) and 271AAA - unexplained investment - addition by adopting net profit as per the books of accounts @ 12.85% on the suppressed sales - HELD THAT - It is undisputed fact that the entire basis of addition made by the AO have been modified from Gross Profit basis to Net Profit as per the books of accounts by the CIT(A) on the alleged suppressed turnover. Whereas the Hon ble ITAT restricted the addition to 1% of the turnover as per the audited books of accounts. Every appellate authority has justified the reasons for modifying the income with clear reasons. As further seen in assessee s own case, CIT(A) allowed the quantum addition in favour of the assessee, which was not challenged by the Revenue before this Tribunal and thus the order attained finality. Therefore different estimates have been adopted by different authorities while determining the income of the assessee company which ranges from GP/NP as recorded in the books of accounts on the alleged suppressed turnover on the basis of SCN issued by Central Excise Authority and finally adoption of 1% net profit of the sales recorded in the regular books of accounts. Thereby the addition made towards undisclosed investments have been deleted. This order of the Tribunal was confirmed by Hon ble Gujarat High Court in Revenue s appeal. Thus there is no change not only in the profit estimated but also the alleged turnover from the fact that the addition on account of investments have been deleted. In view of different estimates having been adopted at different stages and consequently the income determined purely on estimate basis in such cases penalty could not be leviable for filing concealment of income or furnishing inaccurate particulars of income by the assessee. The above view of ours are supported by the Jurisdictional High Court Judgment in the case of CIT Vs. Valimkbhai H. Patel 2005 (7) TMI 35 - GUJARAT HIGH COURT wherein it was held that penalty cannot be levied on an estimation of addition which was substituted by another estimation. Further Punjab and Haryana High Court in the case of CIT Vs Prem Dass 2000 (8) TMI 31 - PUNJAB AND HARYANA HIGH COURT held that when penalty was deleted on the ground that difference between returned and assessed income was due to difference of opinion about the estimate rates of income and expenditure. Thu we hereby delete the penalty levied u/s 271(1)(c). Penalty levied u/s 271AAA - addition which remains is 1% Net Profit on the declared turnover as against GP/NP of the turnover as alleged in the show cause notice issued by DGCEI - No penalty be imposed on the alleged addition which has undergone changes at various appellate stages. Therefore the addition which remains is 1% Net Profit on the declared turnover as against GP/NP of the turnover as alleged in the show cause notice issued by DGCEI. In the absence of any such identification of assets, which represent any income or expense, the question of undisclosed income on which penalty can be levied does not arise.

Summary

Issues Involved:

1. Legitimacy of penalty levied under Section 271(1)(c) of the Income Tax Act, 1961 for Assessment Year 2007-08.
2. Legitimacy of penalty levied under Section 271AAA of the Income Tax Act, 1961 for Assessment Year 2008-09.

Issue-wise Detailed Analysis:

1. Legitimacy of Penalty under Section 271(1)(c) for A.Y. 2007-08:

The case revolves around the penalty imposed on the assessee under Section 271(1)(c) for the Assessment Year 2007-08. Initially, the Assessing Officer (AO) added Rs. 10 crores to the assessee's income on the grounds of alleged undisclosed investment, based on a gross profit calculation linked to suppressed sales as per the DGCEI's show cause notice. The CIT(A) later adjusted this by using the net profit percentage from the books of accounts, reducing the addition. The ITAT further reduced the addition to 1% of the turnover as per audited accounts, effectively deleting the addition related to undisclosed investments. The Gujarat High Court upheld this decision.

The assessee argued that the penalty for concealment of income was unjustified as the basis of income addition had significantly changed throughout the appellate process. The Tribunal noted that the income determination was purely based on estimates, which varied at different stages, and thus, penalty for concealment of income was not appropriate. Citing various precedents, including CIT v. Valimkbhai H. Patel and CIT v. Subhash Trading Company, the Tribunal concluded that penalty cannot be levied when the income is determined on an estimated basis, especially when the estimation has been altered by appellate authorities. Consequently, the penalty of Rs. 55,14,076/- under Section 271(1)(c) was deleted.

2. Legitimacy of Penalty under Section 271AAA for A.Y. 2008-09:

For the Assessment Year 2008-09, the AO initially made an addition of Rs. 18.93 crores for alleged undisclosed investments. The CIT(A) reduced this by using the net profit percentage, and the ITAT further reduced it to 1% of the turnover as per audited accounts. The AO then imposed a penalty under Section 271AAA, which the CIT(A) confirmed.

The Tribunal applied the same rationale as in the previous year, emphasizing that the income addition was based on estimates that had been modified at various appellate stages. Without concrete identification of assets representing income or expenses, the basis for undisclosed income was not substantiated. Following the reasoning in the 2007-08 case, the Tribunal deleted the penalty of Rs. 20,29,394/- under Section 271AAA, citing that the penalty was not justified when based on estimated income.

Conclusion:

The Tribunal allowed the appeals for both Assessment Years 2007-08 and 2008-09, deleting the penalties imposed under Sections 271(1)(c) and 271AAA, respectively. The decisions were grounded in the principle that penalties cannot be levied when income is determined on an estimated basis, especially when such estimations have been revised or reduced by appellate authorities. The Tribunal's judgment was pronounced on 09-10-2024.