2021 (7) TMI 1217 - AT - Income Tax

Penalty u/s 271(1)(c) - disallowance on account of direct expenses - HELD THAT - Whether or not the learned CIT(A) was justified in deleting the penalty u/s 271(1)(c) of the Act imposed by the AO. After hearing the Departmental Representative, we are of the considered opinion that penalty u/s 271(1)(c) levied by AO has no legs to stand, when the corresponding additions made by the AO has already been reduced substantially on the basis of estimation by the Tribunal - when the aforesaid quantum addition is based purely on estimation, the penalty levied u/s 271(1)(c) cannot be sustained. Such proposition of law has been laid down by the Tribunal time and again in plethora of cases. Consequently, we do not have enough reason or do not find any infirmity in the order of the learned CIT(A) deleting the penalty under section 271(1)(c) of the Act imposed by the AO. Accordingly, the order of the learned CIT(A) is hereby upheld. The grounds raised by the Revenue are dismissed.

Summary

Issues:
Challenge to deletion of penalty under section 271(1)(c) of the Income Tax Act, 1961 by the learned Commissioner of Income Tax (Appeals).

Analysis:
The appeal was filed by the Revenue against the impugned order deleting the penalty imposed under section 271(1)(c) of the Act by the Assessing Officer for the assessment year 2011-12. The assessee, a partnership firm engaged in civil construction works, filed its return of income declaring total income of ?50,72,870. The Assessing Officer made an addition of ?16,06,00,655 on account of disallowance of direct expenses due to incomplete details and initiated penalty proceedings. The learned CIT(A) confirmed the disallowance, leading to the imposition of a penalty of ?24,81,280.

The learned CIT(A) deleted the penalty, emphasizing the distinction between penalty and assessment proceedings. It was highlighted that the penalty is not an automatic consequence of an addition to income, and the acceptability of the explanation offered by the assessee is crucial. The Tribunal had restricted the disallowance on an estimated basis, reducing it substantially. As the quantum addition was based on estimation, the penalty was deemed unsustainable. Legal precedents were cited to support this reasoning.

The Tribunal upheld the order of the learned CIT(A), stating that when the quantum addition is based on estimation, the penalty under section 271(1)(c) cannot be sustained. The grounds raised by the Revenue were dismissed, and the appeal was consequently rejected. The judgment highlighted the importance of the acceptability of the explanation provided by the assessee and the impact of estimation on the imposition of penalties under the Act.

In conclusion, the Tribunal's decision focused on the legal principles governing the imposition of penalties under section 271(1)(c) of the Income Tax Act, emphasizing the need for a valid explanation from the assessee and the impact of estimation on the quantum of penalties. The judgment underscored the Tribunal's consistent stance on penalties based on estimation and upheld the deletion of the penalty by the learned CIT(A) in this case.