Penalty u/s 271(1)(c) cannot be levied on the basis of estimated additions

Brief Facts: The assessee is an individual who filed his return for A.Y. 2011-12 declaring income of Rs. 6,72,940/- under the head long term capital gain. During the assessment, the AO verified the claim of commission of Rs. 2,50,000/- and improvement expenditure of Rs. 50,000. The AO asked the assessee to produce documentary evidences regarding the claim made by the assessee. That the matter being old, the assessee could not produce the evidences and as such the AO estimated the disallowance at 50% being Rs. 9,90,685/- and added the same to the total income of the assessee and also initiated penalty proceedings u/s 274 r.w.s. 271(1)(c) of the Act for concealing the particulars of income or furnishing inaccurate particulars of income. The Ld. CIT(A) upheld the levy of penalty. Aggrieved, the assessee preferred further appeal with Tribunal.

Submission before ITAT:

• The Ld. AR for the assessee submitted that these were the disallowances made by the AO on estimation basis and it is the settled legal position that there cannot be any imposition of penalty u/s 271(1)(c) of the Act in respect of disallowances made on estimation basis.
•  He further submitted that the assessee had made bona-fide disclosures through all the necessary particulars in the return of income. Mere disallowance of a claim made bona-fide would not amount to concealment of particulars of income or furnishing inaccurate particulars of such income to warrant imposition of penalty u/s 271(1)(c) of the Act.
• To support such contention, he has placed reliance on the following decisions:

1. CIT Vs. Reliance Petrol Products Pvt. Ltd. 322 ITR 158 (SC)
2. Ventura Textiles Limited Vs. CIT-Mumbai City-11, ITA No. 958 of 2017
3. Mohd. Farhan Shaikh Vs. Deputy Commissioner of Income Tax, ITA Nos. 51 & 57 of 2012 (2021) 110 CCH 0125 MumHC

Observation of Tribunal:

• It is a basic need of the provisions of law that definite finding is required to be recorded by the AO for reaching to a conclusion with regard to concealment of income or furnishing of inaccurate particulars of income and without any such findings, there can not be any question of imposition of any penalty u/s 271(1)(c) of the Act.
• More so, when the disallowances have been enforced by the Ld. CIT(A) on estimation basis, in such scenario, the settled legal position is that no penalty u/s 271(1)(c) of the Act cannot be imposed. We find strength from the following decisions of the Hon’ble High Courts: -

1. CIT Vs. Aero Traders Pvt. Ltd. 322 ITR 316 (Del): No penalty u/s 271(1)(c) of the Act can be imposed when the income is determined on estimate basis. Penalty being a quasi-criminal proceeding there is a duty cast on the AO to establish the guilt of the assessee in concealing the income or furnishing of inaccurate particulars of such income.
2. CIT Vs. Subhash Trading Co. 221 ITR 110 (Guj.): Where income is assessed on estimate basis after rejecting book results, penalty u/s 271(1)(c) cannot be imposed by mere application of explanation thereof in the absence of any evidence to conclude a positive finding that there was concealment of income.
3. Harigopal Singh Vs. CIT, 258 ITR 85 (P&H): Provisions of section 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.

Verdict of Tribunal: Keeping in view the totality of the facts and circumstances of the case, we are of the considered view that in this case, the additions were made on the basis of estimation and as discussed in the cases referred above, the penalty cannot be levied on the basis of estimated additions and thus, it is not a fit case of levying penalty.