2025 (2) TMI 650 - AT - Income Tax

Penalty u/s 271(1)(c) - Addition made applying NP rate of 24.50% while the books of account were rejected - HELD THAT - When the AO resorts to estimating income rather than relying on documented financial records it cannot be inferred that the taxpayer has engaged in concealment or provided inaccurate particulars of income. Consequently since the additions arise from estimation rather than deliberate misrepresentation penalty is unwarranted. In the present case AO estimated the profit at 24.50% as opposed to the 22.72% declared by the assessee pursuant to the provisions of Section 145(3) due to the rejection of the books of accounts. The assessee however has provided financial statements from comparable resorts demonstrating that the net profit declared by the assessee was reasonably high in comparison to that of other taxpayers engaged in the same line of business. This evidence suggests that the profit margin declared by the assessee is not only justifiable but also aligns with industry standards thereby undermining the AO s rationale for estimating a higher profit percentage without adequate justification. Assessee has relied upon following decisions in support of their plea that when income of the assessee is determined on an estimated basis it follows that no penalty u/s 271(1)(c) of the Act can be imposed for concealment or furnishing inaccurate particulars of income. Thus we are of the considered view that since quantum assessment order was based on application of estimated rate of NP @ 24.50% which was found to be applicable and that same was accepted by the Revenue the charge of penalty u/s 271(1)(c) does not survive. Accordingly impugned order is set aside and penalty is deleted. Assessee appeal allowed.

Summary

The appeal in this case was filed by the assessee under Section 253 of the Income Tax Act, 1961, challenging the penalty imposed under Section 271(1)(c) for concealment of income and furnishing inaccurate particulars. The relevant assessment year is 2016-17.**Issues Presented and Considered:**1. Whether the penalty imposed under Section 271(1)(c) is justified.2. Whether the estimation of income justifies the imposition of penalty.3. Whether the penalty should be upheld based on the facts and legal provisions.4. Whether the penalty imposed is consistent with previous assessments.5. Whether additional grounds of appeal should be permitted.**Issue-wise Detailed Analysis:****Factual Matrix:**The assessment order made an addition to the income based on rejection of books and application of a net profit rate. Penalty proceedings were initiated under Section 271(1)(c) as the assessee did not respond to show-cause notices.**Court's Interpretation and Reasoning:**The AO imposed a penalty under Section 271(1)(c) due to the assessee's failure to respond and the estimation of income. The assessee contended that penalty cannot be imposed on estimation alone.**Key Evidence and Findings:**The AO estimated the net profit rate at 24.50% and imposed a penalty of Rs. 1,62,330. The assessee provided evidence to support the reasonableness of the declared profit margin.**Application of Law to Facts:**The Tribunal considered the legal provisions and precedents cited by the assessee to determine whether penalty can be imposed based on estimation of income.**Treatment of Competing Arguments:**The assessee argued that penalty cannot be imposed when income is determined on an estimated basis. The Revenue supported the lower authorities' orders.**Significant Holdings:**The Tribunal held that when income is determined on an estimated basis and accepted by the Revenue, penalty under Section 271(1)(c) cannot be imposed. The penalty was set aside, and the appeal of the assessee was allowed.**Core Principles Established:**- Penalty cannot be imposed solely on estimation of income.- Lack of precise evidence regarding actual income precludes penalty for concealment or inaccurate particulars.- When additions are based on estimation, penalty under Section 271(1)(c) is unwarranted.**Final Determinations on Each Issue:**The Tribunal set aside the penalty imposed under Section 271(1)(c) and allowed the appeal of the assessee.In conclusion, the Tribunal found that the penalty imposed on the assessee was not justified based on the estimation of income and the acceptance of the declared profit margin. The penalty under Section 271(1)(c) was deemed unwarranted in this case, and the appeal of the assessee was allowed.