No Penalty can be Imposed u/s 271(1)(c) When Income Addition is based on Estimation: ITAT [Read Order]

The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) uled that no penalty can be imposed under Section 271(1)(c) of Income Tax Act,1961 when income addition is based on estimation.

Maruti Infrastructure Ltd, appellant-assessee,engaged in real estate development and construction, filed its return of income for AY 2013-14 on September 21, 2013, declaring ₹39,46,540. The Assessing Officer (AO) completed the assessment under Section 143(3) and disallowed 40% of subcontract payments made to M/s. Limestone Properties Pvt. Ltd., treating ₹2,63,44,508 as bogus expenses and rejecting the books of accounts.

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On appeal, the Commissioner of Income Tax(Appeals)[CIT(A)] reduced the disallowance, estimating profit at 7% instead of 40%. The ITAT upheld this decision and dismissed both the assessee’s and Revenue’s appeals.

The AO then imposed a penalty of ₹4,07,772 under Section 271(1)(c) for concealment of income. The assessee appealed, but the CIT(A) upheld the penalty after granting only one hearing.

Aggrieved, the assessee has now filed the present appeal before the ITAT.

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The assessee's counsel argued that the penalty under Section 271(1)(c) was not justified since the disallowance was based on an income estimation. The CIT(A) had reduced it from 40% to 7%, and the ITAT had upheld this decision. Citing case laws, the counsel requested the penalty be deleted.

The Revenue’s representative supported the penalty and sought its confirmation.

Read More: Penalty u/s 271(1)(c) Cannot be Imposed when Income Determined on Estimate Basis: ITAT

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The two member bench comprising T.R.Senthil Kumar ( Judicial Member ) and Annapurna Gupta ( Accountant Member ) reviewed the records and noted that the Co-ordinate Bench had upheld a profit estimation of 7% since the A.O. had no basis for estimating it at 40%. As the addition was made purely on estimation, the key issue was whether a penalty under Section 271(1)(c) could be imposed.

The Jurisdictional High Court in ITO vs. Bombaywala Readymade Stores and the Co-ordinate Bench in Thakorbhai & Company vs. ITO held that when income was assessed on estimation, no penalty under Section 271(1)(c) could be levied.

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Since the AO's addition was based on estimation and later reduced, the tribunal held that the penalty was not justified and directed its deletion.

In conclusion,the appeal filed by the assessee was allowed.

To Read the full text of the Order CLICK HERE

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