Estimated Profit Addition Not a Ground for Penalty: ITAT Deletes ₹42.68 Lakh Levy u/s 271(1)(c) [Read Order]

The Mumbai bench of Income Tax Appellate Tribunal ( ITAT ) in a recent case has deleted ₹42.68 Lakh under section 271(1)(c) as the mere estimation of profit is not a ground for penalty.

The present appeal by NMC Industries Pvt. Ltd. challenged the confirmation of a penalty of ₹42,67,797 under section 271(1)(c) by the CIT (A) for the assessment year 2010-11. The penalty arose from additions made by the AOr on certain purchases deemed non-genuine, where profit was estimated using the gross profit rate.

The assessee, NMC Industries Private Limited, engaged in the trading of iron and steel bars, had filed its return declaring a total income of ₹3.63 crore.

The case was initially selected for scrutiny under section 143(3) and subsequently reopened under section 147 based on information received from the Sales Tax Department regarding certain dealers allegedly providing accommodation bills.

During reassessment, the AO alleged that purchases from eight parties were inflated and unverifiable, and applied the peak-credit method to compute the incremental credit of ₹6.52 crore.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

The assessee contended that all transactions were routed through banking channels, supported by purchase invoices, ledger accounts, bank statements, and sales records. However, the AOr rejected this evidence, noting the absence of transport documents such as lorry receipts or octroi records.

In the first appeal, the CIT(A) rejected the peak-credit method but allowed an ad hoc disallowance of 17% of the alleged unverifiable purchases. Both the assessee and the Revenue filed appeals with the Tribunal.

The Co-ordinate Bench, after examining remand reports, held that purchases from four parties aggregating ₹5.43 crore were genuine, and estimated profit at 15% for the remaining four parties, totalling ₹1.26 crore. It was this estimated addition that became the basis for the penalty under section 271(1)(c).

On appeal, the Tribunal examined whether the levy of a penalty was justified. The Tribunal observed that all purchases were duly recorded in the books of account and corresponding sales accepted by the Department.

The quantitative details of the trading account were not disputed. The penalty was based solely on presumptive addition using a gross profit rate, which the Tribunal held could not constitute furnishing of inaccurate particulars of income.

Know How to Investigate Books of Accounts and Other Documents, Click Here

Citing consistent judicial precedent, the two-member bench comprising Amit Shukla (Judicial Member) and Padmavathy S (Accountant Member) emphasised that where income is determined on an estimated basis, a penalty under section 271(1)(c) cannot be imposed unless there is positive evidence of deliberate concealment.

The assessee had produced primary evidence, including invoices and banking proofs, to substantiate purchases. The absence of transport or octroi documents alone could not render the transactions fictitious. Further, the AOr had accepted half of the purchases as genuine during remand proceedings.

As the trading account remained intact and there was no evidence of concealment, the penal provisions of section 271(1)(c) could not be sustained. The penalty of ₹42,67,797 imposed by the AOr and confirmed by the CIT(A) was therefore deleted.

Support our journalism by subscribing to Taxscanpremium. Follow us on Telegram for quick updates