When addition is done on an as-needed basis, the penalty under Section 271(1)(c) of the Income Tax Act is not applicable

Fact and issue of the case

The brief facts of the case are that the assessee is engaged in the business of trading in ferrous and non ferrous metal. The assessee has filed the return of income for the A.Y 2009-10 on 28.08.2009 disclosing a total income of Rs.1,99,830/- and the return of income was processed u/s 143(1) of the Act. Subsequently, the Assessing Officer (AO) has received the information from DGIT(Inv) that the assessee has obtained accommodation entries/bogus purchases bills from the six parties as per the information from Sales Tax Department. The AO has reason to believe that there is income escaping the Assesseement and the assessee is one of the beneficiary and issued notice u/s 148 of the Act. The AO found that the assessee has obtained accommodation entries/ bogus purchase bills from six parties aggregating to Rs.63,52,693/- and therefore to test check the genuineness of the transactions, the AO has issued notices and called for the information but there was no compliance, further the AO has issued notice u/s 133(6) of the Act on the six none genuine parties and the said notices were returned un served by the postal authorities. The assessee was called to produce the books of accounts, ledger and the other documentary evidence to substantiate the genuineness of the transactions. Since the asssessee has failed to produce the details, the A.O. has dealt on facts and available material and applied Best Judgement Assesseement and alleged that the purchases are not genuine and made addition of Rs. 63,52,693/- and assessed the total income of Rs. 65,52,520/- and passed the order u/s 144 r.w.s 147 of the Act on 12.03.2015.

Subsequently, the AO has issued notice for levy of penalty but there was no compliance to notice by the assessee in penalty proceedings u/s 271(1)(c) of the Act. The A.O. found that the assessee has entered into bogus purchase transactions and relied on the findings in the assessment as the assessee has not filed the reply/explanations in the penalty proceedings. Finally, the A.O has levied penalty based on the additions of bogus purchases which worked out to Rs.21,13,920/- and passed the order u/s 271(1)(c) of the Act.

Aggrieved by the penalty order, the assessee has filed an appeal with the CIT(A). The CIT(A) considered the grounds of appeal and provisions of the Act and confirmed the action of the A.O in levy of penalty and dismissed the appeal. Aggrieved by the order of CIT(A), the assessee has filed an appeal with the Hon’ble Tribunal.

At the time of hearing the Ld. AR submited that against the quantum addition made by the AO the assessee has filed an appeal before the CIT(A) and the CIT(A) has restricted the addition considering the profit element @ 25%. Further the assessee has filed an appeal before the HonbleTribunal and addition was restricted to the extent of 9%.The Ld. AR also submitted that the penalty order cannot be sustained were the income is estimated and prayed for allowing the appeal.Per Contra, the Ld. DR supported the order of the CIT(A).

Observation by the tribunal

The tribunal has the rival submissions and perused the material on record. The sole crux of the disputed issue is with respect to levy of penalty u/s 271(1)(c) of the Act by the A.O based on the assessment order under section 144 r.w.s 147 of the Act . We find the A.O has made adhoc disallowance of bogus purchases and has accepted the sales in the books of accounts. On appeal, the CIT(A) has restricted the addition considering the profit element @ 25% and on further appeal the Honble Tribunal has restricted the addition to the extent of 9%. We are of the opinion, that where the addition is sustained on the estimated basis no penalty u/s 271(1)(c) of the Act can be levied. The disallowance of purchases on ad-hoc/estimated basis does not tantamount to furnishing inaccurate particulars of income under the provisions of Section 271(1) (c) of the Act. The A.O. has not doubted the sales and made disallowance of bogus purchases and we rely on the ratio of the Honorable Jurisdictional High Court in the case of M/s Nikunj Eximp Enterprises Vs Cit (W.P.No 2860 dated 18-06-2014). Further the assessing officer made an addition based on the information received from Sales tax department Maharashtra. Further we are of the opinion that once the revenue accepts that penalty is levied on the basis of information from the outside agency/ department, the penalty is not sustained. Accordingly, we considering the facts, circumstances and judicial decisions set aside the order of the CIT(A) and direct the assessing officer to delete the penalty and allow the grounds of appeal in favour of the assessee.

In the result, the appeal filed by the assseess is allowed.

Order pronounced in the open court on 30.11.2022.