ASSESSMENT BASED ON ESTIMATED RATE OF NET PROFIT – PENALTY UNDER SECTION 271(1) (c) WILL NOT SURVIVE

[DR.MARIAPPAN GOVINDARAJAN]

In AKM RESORTS VERSUS THE ACIT, CIRCLE-5 (1) , CHANDIGARH. - 2025 (2) TMI 650 - ITAT CHANDIGARH , the appellant in the present appeal filed the income tax return for the assessment year 2016 – 17, declaring an income of Rs.67,14,314/-.  The Assessing Officer rejected the books of account submitted by the appellant.  The assessee was asked via ITBA to submit relevant bills and vouchers in respect of various expenses as claimed by him in the return of income filed for the year under consideration.  The Assessing Officer issued a show cause notice on 02.02.2018 as to why the expenses of which bills have not been produced, should not be disallowed.

The department filed reply in which he submitted the following-

• The net profit is 22.72% which is higher than the other companies at that time.
• The said net profit is reasonable since the huge expenditure incurred for maintenance and upkeep of the resort.
• The Department accepted the net profit as declared by the assessee in its return.

However, the Department fixed the net profit @ 24.5% on estimation basis since the assessee did not produce the relevant bills and vouchers.  By applying this net profit rate, the net profit would be Rs. 72,36,475/-.  The profit shown by the assessee is Rs.67,14,314/-.    Vide questionnaire dated 04.12.2018, the assessee was show caused as again on account of expenses to be disallowed and also was asked as to why the office should not accept the fact that AKM Resorts willingly wanted to peg their net profit rate at 24.50%.  The assessee did not reply by the given date of 07.12.2018. Taking into consideration, the earlier reply of the assessee and the further opportunity provided to the assessee which the assessee did not avail, the assessee's declaration of net profit rate at 24.50% (from 22.72% in ITR) is accepted. Applying 24.50% of

• NP rate on the gross receipts: Rs. 2,95,49,632/- x 24.50%= Rs. 72,39,660/-.
• The net profit comes to Rs. 72,39,660/-as against Rs. 67,14,314/-.
• Different = Rs.5,25,346/-.

The Assessing Officer made an addition of Rs.5,25,346/- on application of net profit @ 24.5%.  As per sub section (3) of section 145, the satisfaction has been recorded by the Assessing Officer about the incompleteness of books of accounts and accordingly, the books of account are being rejected by the Assessing Officer.

The Assessing Officer also concluded that since the income has been concealed, the assessee is liable for penal action under Section 271(1) (c) of the Act.  The Assessing Officer imposed penalty on the assessee to the tune of Rs.1,62,330/- vide its order dated 25.06.2019.

Being aggrieved against the order of Assessing Officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), National Faceless Assessment Centre (‘NFAC’  for short).  The First Appellate Authority dismissed the appeal filed by the Assessee upholding the order of the Assessing Officer. 

Against the order of the First Appellate Authority, the assessee filed the present appeal before the Income Tax Appellate Tribunal (‘ITAT’ for short).  The appellant submitted the following grounds of appeal before the Appellate Tribunal-

• The Commissioner of Income Tax, (Appeals), NFAC has erred in upholding the penalty order passed by the Assessing Officer under Section 271(1)(c) of the Income Tax Act 1961. The decision by Commissioner of Income Tax, (Appeals), NFAC contradicts the facts of the case and the provisions of law.
• The Commissioner of Income Tax, (Appeals), erred in confirming a penalty of Rs. 1,62,330/- imposed by the Assessing Officer, disregarding the fact that the show-cause notice issued by the Assessing Officer failed to specify whether the penalty was levied for concealment of particulars or furnishing inaccurate particulars of income. It is evident that the notice under Section 274 did not strike off either limb but initiated the penalty under both.
• Without prejudice to the above, the Commissioner of Income Tax, (Appeals), erred in confirming the penalty based on the estimated addition of Rs. 5,25,346/- made by the Assessing Officer in the assessment order passed under Section 143(3). The Commissioner of Income Tax, (Appeals), NFAC failed to acknowledge that penalty under Section 271(1)(c) cannot be imposed on estimated income.
• The Commissioner of Income Tax, (Appeals), erred in affirming the penalty of Rs. 1,62,330/- imposed by the Assessing Officer, overlooking the fact that neither any inaccurate particulars were identified by the Assessing Officer nor was any concealment of income established. The addition concerning the quantum was solely based on an estimation and cannot be construed as concealment or furnishing inaccurate particulars.
• The Commissioner of Income Tax, (Appeals), erred in confirming the penalty of Rs. 1,62,330/- imposed by the Assessing Officer under Section 271(1)(c) for the AY 2016-17, despite the Assessing Officer dropping the penalty in earlier assessment years AY 2013-14 and AY 2014-15, which involved similar facts.

The appellant contended that penalty cannot be imposed on ‘estimation’.  The Department supported the orders of the lower authorities.  The assessee quoted various judgments in favour of the contentions that penalty cannot be imposed on estimation.  The ITAT perused the facts of the entire cases.  The ITAT observed that in view of the facts, the Assessing Officer is satisfied that it is a fit case for initiation of penalty under Section 271(1) (c) of the Act.  The assessee has contended that once estimation of net profit rate of 24.50% was found to be just, fair and reasonable and accepted by Revenue, the question of any willful concealment of income does not arise at all and that no penalty should be imposed.  The ITAT observed that estimation indicates a lack of precise evidence regarding the taxpayer’s actual income, thereby failing to demonstrate any intention to conceal or misrepresent income.  The ITAT held that when the Assessing Officer 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.  The ITAT further observed that 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. Therefore, the rationale for estimating a higher profit percentage by the Assessing Officer is without adequate justification.  Therefore, the ITAT considered that no penalty cannot be imposed on the appellant.  The ITAT set aside the impugned order and deleted the addition made to the income of the appellant by the Assessing Officer.