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Penalty on estimated additions

  1. In the course of Appellate proceedings it is submitted that for invoking explanation-1 to section 271(1)(c) all the three ingredients are to be cumulatively and simultaneously satisfied as held by the Tribunal in ITAT, Lucknow bench in star international (P) Ltd. Vs. ACIT (2008) 23 SOT 88 (Lucknow). The three ingredients are as under
  • The assessee offers an explanation which he is not able to substantiate; and
  • He fails to prove that such explanation is bona fide; and
  • All the facts relating to the same and material facts to the computation of total income then disclosed by him.
  1. In the instant case, assessee has given a bonafide explanation in penalty proceedings and the Assessing officer has levied the penalty as per his findings at Para 1 only on the ground that the AR of the assessee signed the order sheet against the proposal of CIT(A) to make estimated addition of Rs. 2,60,000/- and because he observed that the assessee has not filed second appeal before the Honourable ITAT. In the course of penalty proceedings, it is submitted that the addition was made purely on estimation basis and there were no clinching evidence in possession of the learned AO of either concealment of income or furnishing of inaccurate particulars of income. Even if the addition is confirmed in the first appeal and if the assessee has not filed a second appeal in order to buy peace of mind and avoid litigation, that does not lead to impose penalty automatically unless it is established with evidence that the assessee has committed a clear default u/s. 271(1)(c) of the Act.
  1. The copy of the order of Ld. CIT(A) is attached herewith. No further appeal is filed by the assessee or Revenue. The Ld CIT(A) while giving its findings at Para 9.3 has clearly stated that , “Consequently, the net profit disclosed by the appellant comes to Rs. 2,98,951/-. This net profit is only 6.7 % of the turnover of Rs. 44,66,421/-. Therefore, if the appellant’s income is estimated on source based method, there will an addition of Rs. 2,60,000/- if net profit is estimated at 12.5 %”. Thus, your honour will appreciate that penalty is imposed only on the estimation of profit. In respect of such estimated additions no penalty can be imposed in view of following case laws:-
  •  CIT vs. Smt. K. Meenakshi Kutty 258 ITR 494(Mad).
  •  Harigopal Singh vs. CIT 258 ITR 85(P&H).
  • CIT(A) vs. Valimkbhai H. Patel 280 ITR 487(Guj).
  • CIT(A) vs. Raj Bans Singh 276 ITR 351(All).
  • CIT vs. Lallubhai Jogibhai Patel 261 ITR 216(Guj) (This decision is of jurisdictional high court & is therefore binding decision).
  •  CIT vs. Shivnarayan Jamnalal & Co. 232 ITR 311 (MP).
  •  Navjivan Oil Mills Vs. CIT [252 ITR 417 (Guj)]
  •  CIT Vs. Ravail Singh & Co. [254 ITR 191 (P&H)]
  •  CIT Vs. Sangrur Vanaspati Mills Ltd. [216 CTR 92 (P&H)]
  •  CIT Vs. Dhillon Rice Mills [256 ITR 447 (P&H)]
  1. Reliance is further placed on the following decisions of various high courts/tribunals wherein it was categorically held that penalty cannot be imposed in respect of additions made on the basis of estimation of profit rate. These decisions are directly applicable to the facts of assessee’s case and hence, no penalty could be imposed. * CIT V. K. L. Mangal Sain – 107 ITR 598 (ALL) * DCIT V. Madad Ali Ansari & Co. – 69 TTJ 279 (JD) * ITO V. C. Chhotalal Textiles Pvt. Ltd. – 95 TTJ 436 (MUM)
  2. Further, in fact in the instant case, the CIT(A) has not even cited any comparable for taking the profit rate of 12.5% and hence no penalty is leviable. Reliance is placed on the decision of Honourable Chattisgarh High Court in the case of CIT V/s Vijay Kumar Jain, (2010) 325 ITR 378 wherein it was held that “Particulars of receipts furnished by the assessee not having been found inaccurate and there being no allegation by the revenue that the assessee has concealed any income in his return, penalty under section 271(1)(c) could not be imposed simply on account of addition made by the AO on application of higher rate of net profit.”
  3. The case of the assessee is squarely covered in the case of Punjab and Haryana High Court in case of Harigopal Singh vs. CIT 258 ITR 85(P&H). In the said case (as referred supra), the assessee had not maintained any accounts and he filed his return of income on estimate basis. The AO did not agree with the estimate of the assessee and brought his income to tax by increasing it to Rs. 2,07,500. This, too, was on estimate basis. The Tribunal agreed that the income of the assessee had to be assessed on an estimate of the turn-over but was of the view that the estimate as made by the AO was highly excessive and it fixed the total income of the assessee at Rs. 1,50,000 for the year under appeal. It was held that “Since the AO and the Tribunal adopted different estimates in assessing the income of the assessee, it cannot be said that the assessee had concealed the particulars of his income so as to attract cl. (c) of s. 271(1). There is not even an iota of evidence on the record to show that the income of the assessee during the year under appeal was more than the income returned by him. Additions in his income were made, on estimate basis and that by itself does not lead to the conclusion that the assessee either concealed the particulars of his income or furnished inaccurate particulars of such income. There has to be a positive act of concealment on his part and the onus to prove this is on the Department. The Tribunal grossly erred in law in relying on Expln. 1(B) to s. 271(1)(c) to raise a presumption against the assessee. The assessee had justified his estimate of income on the basis of household expenditure and other investments made during the relevant period. It is not the case of the Revenue that he had, in fact, incurred expenditure in excess of what he had stated. In this view of the matter, it cannot be said that the explanation furnished by the assessee had not been substantiated or that he had failed to prove that such explanation was not bona fide. The provisions of s. 271(1)(c) are not attracted to cases where income of an assessee is assessed on estimate basis and additions are made therein on that basis.” In the present case of the assessee, the facts are similar and hence it is submitted that no penalty should be levied.
  4.  Even the Jurisdictional High Court in the case of CIT vs. VALIMKBHAI H. PATEL 280 ITR 487 held that “Penalty under s. 271(1)(c)—Concealment—Claim of loss of goods on estimate basis—Assessee carrying on business of manufacturing salt which is stored in the open in heaps, loss returned by assessee on account of cyclone and rain on estimate basis would not constitute concealment under s. 271(1)(c) on the same being reduced by AO—This is a case of substitution of one estimate by another estimate—Penalty not leviable.”
  5.  Further reliance is also placed on the decision of ITAT, Jodhpur Bench in the case of Deputy Commissioner of Income Tax vs. Madad Ali Ansari & Co. wherein it was held that “Simply because assessee’s assessed income was worked out at a figure higher than the declared income on the basis of application of higher profit rate it could not be said that there has been concealment of income and penalty for concealment could not be levied under s. 271(1)(c).”
  6.  It is to be noted that in the case of penalty, the assessee need not substantiate the explanation to the satisfaction of assessing officer. So if the assessee furnishes plausible explanation, no penalty can be levied for concealing the particulars of income or furnishing inaccurate particulars of income. The concealment can only be of facts and not of conclusions. The reliance is placed on decision of High Court in the case of CIT v. Pawan Kumar Dalmia (1987) 168 ITR 1 (Ker). Even if assessee is not able to substantiate the explanation but if his explanation is bonafide, no penalty for concealment can be levied. The reliance can be placed on decision of Delhi High Court in case of CIT v. Gurbachhan Lal (250 ITR 157) and CIT v. Rahuljee & Co. (250 ITR 225). Explanation 1 to section 271(1)(c) does not make the assessment order conclusive evidence that the amount assessed was in fact income of the assessee. On the state of accounts and evidence in the quantum proceedings, the assessment of income can be justified but merely on that basis the penalty could not be justified even by recourse of Explanation 1.