2018 (10) TMI 724 - AT - Income Tax

Levy of penalty u/s 271(l)(c) - defective notice - addition towards 25% gross profit on alleged bogus purchase made from hawala dealers - Held that - although the AO has estimated 25% gross profit on alleged bogus purchases, never made any observations with regard to the incorrectness in details filed by the assessee to prove such purchases. The AO never disbelieved information filed by the assessee, but he proceeded on the basis of information received from sales-tax department to make additions. The AO has made such addition on adhoc basis by estimating gross profit on alleged bogus purchases. From these facts, it is very clear that the AO failed to make a case of deliberate attempt by the assessee to furnish inaccurate particulars of income. Therefore, we are of the considered view that mere disallowance of purchases on adhoc basis does not tantamount to willful furnishing inaccurate particulars of income within the meaning of section 271(1)(c) of the Income-tax Act, 1961. - No penalty - Decided in favor of assessee.

Summary

Issues Involved:
1. Confirmation of penalty levied under Section 271(1)(c) of the Income-tax Act, 1961.
2. Alleged concealment of particulars of income or furnishing of inaccurate particulars of income.
3. Addition based on estimated gross profit from alleged bogus purchases.
4. Validity of penalty notice issued by the Assessing Officer.
5. Impact of the assessee's net loss on the applicability of penalty.

Issue-wise Detailed Analysis:

1. Confirmation of Penalty Levied Under Section 271(1)(c):
The main issue revolves around the confirmation of the penalty levied by the Assessing Officer (AO) under Section 271(1)(c) of the Income-tax Act, 1961. The AO levied a penalty of ?3,40,980, which is 100% of the tax sought to be evaded, on the grounds that the assessee failed to offer any satisfactory explanation regarding the alleged bogus purchases from hawala dealers. The AO determined that the assessee had furnished inaccurate particulars of income, thereby concealing the particulars of its income.

2. Alleged Concealment of Particulars of Income or Furnishing of Inaccurate Particulars of Income:
The assessee argued that there was neither concealment of particulars of income nor furnishing of inaccurate particulars of income. The AO, however, concluded that the assessee had failed to substantiate the genuineness of the transactions and could not produce the suppliers for verification. The AO relied on the information from the Sales Tax Department, which indicated that the parties involved were non-existent and had admitted to not making any sales or purchase transactions. The AO, therefore, deemed the purchases as bogus and added them to the total income of the assessee.

3. Addition Based on Estimated Gross Profit from Alleged Bogus Purchases:
The assessee contended that the addition was made purely on an estimated basis, and such an addition does not amount to concealment of income. The AO made an addition towards 25% gross profit on the alleged bogus purchases. The assessee argued that the addition was based on estimation and that all necessary evidences and quantitative details of purchases and sales were provided. The AO, however, ignored these evidences and proceeded with the addition based on the report from the Sales Tax Department.

4. Validity of Penalty Notice Issued by the Assessing Officer:
The assessee claimed that the penalty notice issued by the AO was defective. However, this argument did not find favor with the authorities, as the penalty was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT).

5. Impact of the Assessee's Net Loss on the Applicability of Penalty:
The assessee argued that since there was a net loss even after the addition, there was no loss to the revenue, and therefore, no penalty should have been levied. The assessee believed that the acceptance of the addition was to avoid litigation and under the bona fide belief that penalty provisions would not attract. The ITAT found merit in this argument, noting that the AO made the addition on an ad hoc basis without disbelieving the information provided by the assessee. The ITAT concluded that mere disallowance of purchases on an ad hoc basis does not amount to willful furnishing of inaccurate particulars of income.

Conclusion:
The ITAT held that the AO erred in levying the penalty under Section 271(1)(c) of the Income-tax Act, 1961. The appeal filed by the assessee was allowed, and the AO was directed to delete the penalty levied. The ITAT emphasized that the mere disallowance of purchases on an ad hoc basis does not constitute a deliberate attempt to furnish inaccurate particulars of income. The order was pronounced in the open court on 05th October 2018.