2023 (11) TMI 842 - AT - Income Tax

Penalty u/s 271(1)(c) - non-recording of satisfaction in the assessment order for initiation of penalty - income of the assessee was assessed at 1% as presumed that the assessee has done the business of providing accommodation entries by bogus bills of sale and purchase - HELD THAT - As noted that the AO has rejected the books of accounts as the assessee failed to produce the same for verification and thereafter, a presumption has been drawn that the assessee has provided accommodation entries by way of bogus bills of purchase and sales and thereafter, on the declared turnover of Rs 10 crores, the AO has estimated income at the rate of 1% of the gross receipts and after giving credit for income declared in the return of income, has made an addition and it has been stated that the penalty proceedings u/s 271(1)(C) are being initiated separately for furnishing inaccurate particulars of income. We therefore find that there is no prima facie satisfaction which has been recorded by the AO for initiation of penalty proceedings which can be discerned from reading of the assessment order. There is no direction for initiation of penalty proceedings and merely addition has been made to the returned income on a presumptive basis which is not sufficient for acquiring jurisdiction as contemplated by the provisions of section 271(1B) of the Act. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Sustenance of penalty under Section 271(1)(c) of the Income Tax Act.
2. Validity of penalty proceedings initiation without specific satisfaction.
3. Estimation of income and its impact on penalty proceedings.

Summary:

Issue 1: Sustenance of Penalty under Section 271(1)(c)
The assessee challenged the penalty of Rs. 1,29,203/- imposed under Section 271(1)(c) of the Income Tax Act. The Assessing Officer (AO) assessed the income at 1% of the gross sales amounting to Rs. 10,06,636/- due to the assessee's failure to produce documentary evidence to support his claims. The penalty proceedings were initiated for furnishing inaccurate particulars of income. The assessee did not attend the penalty proceedings nor filed any submissions, leading the AO to levy the penalty.

Issue 2: Validity of Penalty Proceedings Initiation without Specific Satisfaction
The assessee argued that the AO did not draw any specific satisfaction at the time of initiating penalty proceedings, citing the Full Bench decision of the Hon'ble Delhi High Court in Rampur Engg. Co. Ltd. and other judicial precedents. The Tribunal noted that the AO's failure to record specific satisfaction for initiating penalty proceedings is a jurisdictional defect. The Tribunal referred to the Punjab & Haryana High Court's decision in CIT vs Munish Iron Store, which emphasized the necessity of recording satisfaction for assuming jurisdiction to levy penalty.

Issue 3: Estimation of Income and Its Impact on Penalty Proceedings
The assessee contended that the penalty cannot be levied on an estimated income, arguing that the estimation was without reference to any material evidence. The Tribunal acknowledged that the AO estimated the income at 1% of the gross turnover without specific evidence, which cannot be a basis for penalty under Section 271(1)(c). The Tribunal cited the Karnataka High Court's decision in CIT vs MWP Ltd., which held that mere initiation of penalty proceedings without a clear direction does not comply with the legal requirements.

Conclusion:
The Tribunal concluded that the AO did not record the required prima facie satisfaction for initiating penalty proceedings. The absence of specific satisfaction and clear direction constitutes a jurisdictional defect that cannot be cured. Consequently, the penalty proceedings were set aside, and the appeal of the assessee was allowed. The Tribunal emphasized that penalty proceedings must be initiated with clear and unambiguous directions as mandated by law.