No penalty under section 271(1)(c) on estimation of profits- Rajasthan High Court 

Brief Facts:

• The assessee is a registered firm and is engaged in retreading of old tyres of all vehicles. A survey operation came to be carried out at the business premises of the respondent which were not satisfactorily explained and an addition was made of Rs. 1,44,000 on estimated basis. The assessee appealed against the said addition of Rs. 1,44,000 which was sustained by CIT(A) but modified subsequently by Tribunal by restricting the addition to Rs. 1,00,000 on estimate basis.
• The issue pertains to the penalty imposed by the AO on the said amount of Rs. 1,00,000 which was sustained as addition. The penalty was however, deleted by the ITAT.

Submission by AR:

• Merely because the addition has been sustained, that too in estimate basis, it cannot be said that the assessee concealed the income or furnished inaccurate particulars of such income. He further submitted that no positive income has been found or admitted. It is merely rejection of a claim, which could not be substantiated by the assessee and the AO has not been able to justify the imposition of penalty and the Tribunal had rightly deleted the penalty.
• Merely because proper explanation was not offered, it does not make out that the assessee became liable for imposition of penalty. He also submitted that it basically a finding of fact and no question of law arises for consideration.

Judgements Referred:

• Hon’ble Apex Court in Dilip N. Shroff Vs. Jt. CIT [2007] 291 ITR 519/161 Taxman 218: If there is no evidence on material to show that the assessee had deliberately furnished inaccurate particulars and there was any mala-fide intention on his part so as to make him liable for penalty. A mere omission or negligence would not constitute deliberate act of concealing particulars of income or suppressed or furnished inaccurate particulars of income.

• Patna High Court in CIT V. Kailash Crockery House [1999] 235 ITR 544/107 Taxman 386: So far as penalty u/s 271(1)(c) is concerned, the trading addition had been made on the basis of estimate and on account of estimated trading addition penalty could not be levied u/s 271(1)(c) of the Income Tax Act.

• Punjab & Haryana High Court in CIT v. Metal Products of India [1984] 150 ITR 714/18 Taxmann 412: Merely because the addition has been made on estimate basis that did not automatically lead to the conclusion that there was failure to return the correct income.

• Gujarat High Court in CIT v. Whitelene Chemicals [2014] 360 ITR 385 / [2013] 32 Taxmann.com 192/214 Taxman 93 (Mag.)(Guj): Mere rejection of books of accounts and estimation of profit cannot be a ground for imposition of penalty.

• Gujarat High Court in CIT v. Subhash Trading Co. [1996] 221 ITR 110/86 Taxman 30

• Punjab & Haryana High Court in Harigopal Singh v. CIT [2002] 258 ITR 85/125 Taxman 242

• MP High Court in CIT v. Shivnarayan Jamnalal & Co. [1998] 232 ITR 311/[1996] 89 Taxman 420: We have gone through the orders of Tribunal and the CIT(A). We are satisfied that both the authorities have correctly approached the matter and found that there was no fraudulent attempt on the part of the assessee. The assessee had placed before the authorities whatever books of accounts it has maintained- whether they were properly maintained or not but it has not withheld or concealed any material or made any deliberate attempt to defraud the authorities. The AO has employed the flat rate for assessing the income of the assessee and on that basis, he has been taxed. Therefore, we are of the opinion that the view taken by the Tribunal in setting aside the penalty appears to be justified and we answer both these questions against the Revenue and in favour of the assessee.

• Allahabad High Court in CIT v. Raj Bans Singh [2005] 276 ITR 351: On appeal, the Tribunal came to the conclusion that it was a case of an estimate against an estimate and there was no concealment and accordingly it was held that no penalty was imposable.

• Rajasthan High Court in CIT v. Chaturbhuj Bhanwarlal [1987] 166 ITR 659/31 Taxmann 363 (Raj.): The finding of the Tribunal cannot be said to be based on no evidence and the finding that there has been no concealment of income is a finding of fact and it does not raise any question of law and the Tribunal was right in cancelling the penalty imposed on the assessee.

• Delhi High Court in CIT v. Aero Traders (P.) Ltd. [2010] 322 ITR 316: Penalty is not leviable when income was based on estimated profit and substantially reduced by the Tribunal.

• Punjab & Haryana High Court in CIT v. Modi Industrial Corporation [2010] 195 Taxman 68: Where the assessment of the assessee was completed on estimated basis, penalty u/s 271(1)(c) of the Act was not imposable w.r.t. the additions made on such estimate by the AO.

• Chhattisgarh High Court in CIT v. Vijay Kumar Jain [2010] 325 ITR 378/ [2011] 10 taxmann.com 9/198 Taxman 156 (Mag.): The assessee declared the net profit by estimating it at the rate of 6.36% of his gross receipts while it was estimated @ 10% by the AO. On these facts held that penalty for concealment cannot be levied as the assessee cannot be said to have concealed any particulars of income or furnished any inaccurate particulars of income.

Submission by DR: The Tribunal was unjustified in deleting the penalty as the addition was sustained by the final finding authority i.e. Tribunal itself, who came to the conclusion that the addition was called for and sustained major addition. She Submitted that the AO had to make the estimated addition as during the course of survey, the assessee could not offer proper explanation which was based on the discrepancies and addition was made. She further submitted that though the addition has been sustained on estimate basis, but then it cannot be said that there is no concealment. Accordingly, she submitted that the Tribunal erred in deleting the penalty and question of law do arise and required consideration of this court.

Observations of Court:

• The Tribunal upheld the addition made by AO on estimate basis but modified the addition as it was looking on a higher side. Such modification was again based on estimates.
• On perusal of the facts, it transpired that the addition has been sustained purely on estimate basis and, in our view, no positive fact or finding has been found so as to even make the said addition. It is, according to us, a pure guess work and, in our view, on such guess work or estimation, no penalty u/s 271(1)(c) can be said to be leviable. Merely because the books of accounts of the assessee were rejected or estimate addition was made, in our view, no penalty is leviable.

Court’s Verdict: In view of the above facts, the finding reached by the Tribunal is essentially a finding of fact and no substantial question of law is involved in the appeal. So, the departmental appeal is dismissed.