Income Tax Penalty Cannot Be Levied on Estimated Additions for Alleged Bogus Purchases: Bombay HC [Read Order]

Colo Colour Pvt. Ltd., the respondent, was engaged in running a photo studio and trading in photographic material. For the assessment year 2011-12, the company filed its return declaring an income of Rs. 4,32,530.

The case was reopened, and in the reassessment completed under Section 143(3) read with Section 147, the Assessing Officer determined the total income at Rs. 12,32,570 after adding Rs. 7,40,776 as profit element on alleged bogus purchases and Rs. 59,262 as commission on such purchases.

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The Assessing Officer initiated penalty proceedings under Section 271(1)(c), arguing that the assessee had concealed income and furnished inaccurate particulars. A penalty of Rs. 2,75,000 was levied.

On appeal, the Commissioner of Income Tax (Appeals) deleted the penalty, observing that the additions were based only on ad hoc estimation without any concrete evidence of concealment. The Income Tax Appellate Tribunal upheld this view, explaining that penalty provisions do not apply where additions are made only on estimation.

Before the High Court, the Revenue’s counsel argued that the assessee had failed to prove the genuineness of purchases and that the Assessing Officer was right in disbelieving the purchase bills based on inquiries with the Sales Tax Department. They submitted that the case fell within the ambit of deemed concealment.

The assessee’s counsel argued that all documents, including invoices, bank statements, and stock records, had been furnished and that the Assessing Officer himself had accepted the sales. They argued that merely making an estimated addition of 12.5% on alleged bogus purchases could not justify penalty under Section 271(1)(c) of the Income Tax Act.

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The Division Bench comprising Justice G. S. Kulkarni and Justice Aarti Sathe observed that penalty can be imposed only when there is conscious concealment of income or deliberate furnishing of inaccurate particulars.

The court pointed out that in this case, the additions were based solely on estimation and not on positive evidence of concealment. It explained that assessment proceedings and penalty proceedings are independent, and additions made on an estimated basis cannot be the foundation for penalty.

The court held that the concurrent findings of the CIT(A) and the Tribunal were correct, as the essential requirements for penalty under Section 271(1)(c) were not met. The Revenue’s appeal was dismissed and the deletion of penalty was upheld.

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