Estimated Addition of Rs. 42.37 Lakh Bogus Purchases Insufficient for Penalty u/s 271(1)(c): ITAT dismisses Revenue Appeal [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) dismissed the revenue’s appeal and upheld the deletion of penalty under Section 271(1)(c) on the confirmed addition of 7.5% of boguspurchases amounting to Rs. 42.37 lakh.

In the instant case, during the course of scrutiny assessment proceedings, the AO noticed that the assessee Bhupesh Sevantilal Shah had shown purchases of Rs. 42,37,376/- from Shree Ram Steel.

The assessee was asked to substantiate the genuineness of the purchases as the information received in respect of such purchases was that the assessee is a beneficiary of accommodation entry. The assessee was asked to furnish the seller along with his books of accounts for verification.

Since the assessee failed to produce the seller Shree Ram Steel and also failed to produce the books of accounts of Shree Ram Steel, the AO added the entire purchases as bogus and added 12.5% i.e., Rs. 5,29,672/- as income of the assessee.

The assessee carried the matter before the CIT (A) and the CIT(A) reduced the addition by 5% thereby sustaining 7.5% of the alleged bogus purchases. The AO levied a penalty on such confirmed alleged bogus purchases amounting to Rs. 98,200/-, which was deleted by the CIT (A)

The CIT(A) relied upon the decision of the Co-ordinate Bench in the case of M/s. V. K. Ispat & Alloys Vs. ITO and ACIT vs. M/s.Fancy Diamonds India Pvt. Ltd, where in it was held that in a case where an addition is based on an estimated basis, a penalty u/s 271(1)(c) of the Act cannot be levied.

The Revenue argued that 7.5% has been confirmed on account of the alleged purchases; therefore, there is concrete evidence to show that the assessee has filed inaccurate particulars and, therefore, the levy of penalty is justified.

The Tribunal observed that It was true that purchases of Rs. 42,47,376/- from Shree Ram Steel have been treated as bogus. But nowhere has the AO given any reasoning for estimating the profit at 12.5%, no comparable cases have been brought on record which could justify the alleged profit rate of 12.5%.

By reducing the said percentage by 5% even the CIT (A) has not given any reasoning for depicting 7.5% as the profit rate. It appears that both the AO and the CIT (A) as estimated the profit rate for making the impugned additions.

The two-member bench comprising Saktijit Dey (Vice President) and Narendra Kumar Billaiya (Accountant Member) held that estimating the profit without bringing any cogent material evidence on record, penalty under Section 271(1)(c) of the Act cannot be levied for filing inaccurate particulars of income.

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