2021 (7) TMI 1101 - AT - Income Tax

Levy of penalty u/s 271(1)(c) - addition by estimating the profit at 14.5% as agreed by the assessee for such estimation - HELD THAT - Hon ble Bombay High Court in the case of CIT vs. Devandas Perumal Co. 1982 (1) TMI 27 - BOMBAY HIGH COURT has held that the presumption contemplated by the Explanation to section 271(1)(c) stood rebutted by the fact that there was no suppression of any sales or inflation of any purchases. The mere fact that the Income-tax Officer proceeded to estimate the net profit at a figure higher than that what was disclosed by the assessee would not lead to the conclusion that there was a failure to return the correct income arising out of fraud or any gross or willful neglect on the part of the assessee. Hon ble Delhi High Court in the case of Aero Traders Pvt. Ltd. 2010 (1) TMI 32 - DELHI HIGH COURT has dismissed the appeal filed by the Revenue against the order of the Tribunal which in turn has upheld the order of the CIT(A) deleting the penalty on the ground that addition made by the AO on the basis of estimated profit could not be a subject matter of penalty for concealment of income. in the instant case the profit of the assessee has been estimated at a rate of 14.5% as against the profit declared at 12.37% and the assessee has given the instances of 6-7% profit declared by other assessees engaged in the same line of business therefore we are of the considered opinion that it is not a fit case for levy of penalty u/s 271(1)(c) - Decided in favour of assessee.

Summary

Issues:
Levy of penalty under section 271(1)(c) of the IT Act, 1961 based on estimation of profit ratio higher than declared by the assessee.

Analysis:
The appeal was against the penalty of ?6,63,960/- imposed by the Assessing Officer (AO) under section 271(1)(c) of the IT Act, 1961, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee, a partnership firm in the real estate business, had declared total income of ?1,78,80,820/- for the assessment year 2013-14. The AO, during assessment, added ?21,48,102/- to the income by estimating profit at 14.5%, leading to penalty proceedings. The CIT(A) affirmed the penalty. The main contention was whether penalty was sustainable when the AO rejected book results and adopted a higher profit ratio than declared by the assessee.

The assessee argued that penalty under section 271(1)(c) was not justified as the AO estimated profit higher than declared without any suppression of sales or inflation of purchases. Citing various decisions, the assessee contended that rejecting book results and adopting a higher profit ratio did not warrant penalty. The Tribunal noted that the AO added ?21,48,102/- to the income based on estimated profit at 14.5%, which the assessee accepted without appeal. The Tribunal agreed with the assessee that since the declared profit was already higher compared to similar businesses, estimating profit at 14.5% did not automatically justify penalty under section 271(1)(c). Referring to legal precedents, the Tribunal held that estimating profit higher than declared did not indicate fraud or willful neglect, thus penalty was not warranted. The Tribunal set aside the CIT(A)'s decision and allowed the assessee's appeal.

In conclusion, the Tribunal ruled in favor of the assessee, setting aside the penalty imposed under section 271(1)(c) of the IT Act, 1961. The decision was based on the grounds that estimating profit higher than declared, without evidence of fraud or willful neglect, did not warrant penalty, especially when the declared profit was already on the higher side compared to similar businesses.