Penalty proceedings u/s 274 r/w section 271(1)(c) - estimation of income - bogus purchases

 

ITAT MUMBAI:-Amish Anantrai Modi Versus Deputy Commissioner of Incometax, Central Circle 2 (1), Mumbai,No.- I. T. A No. 6281/Mum/2025

Dated:- December 9, 2025

 

The instant appeal of the assessee was filed against the order of the Learned Commissioner of Income-tax (Appeal)-48, Mumbai [hereinafter, ‘Ld.CIT(A)] passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’) for the Assessment Year 2011-12, date of order 12/08/2025. The impugned order was emanated from the order of the Ld. Deputy Commissioner of Incometax, Central Circle-2(1) Mumbai (in short, ‘Ld.AO’) passed under section 271(1)(c) of the Act, date of order 27/09/2024.

 

2. The brief facts of the case are that the assessment was originally completed under section 143(3) read with section 153C of the Act on 30/12/2016 by determining the total income at Rs. 19,70,220/- as against the returned income of Rs. 7,03,475/-. Subsequently, the assessment was reopened under section 147 of the Act and notice under section 148 was issued. During the reassessment proceedings, it was alleged that the assessee was engaged in providing accommodation entries. Consequently, the entire purchases were treated as bogus and an addition of Rs. 1,82,70,830/- was made under section 68 of the Act. The assessee filed an appeal before the Ld. CIT(A) challenging the addition. The Ld. CIT(A) upheld the action of the Ld. AO. The assessee thereafter preferred a further appeal before the ITAT. The Hon’ble ITAT, after considering the submissions, restricted the addition to 3% of the total alleged accommodation entries, amounting to Rs. 5,48,125/-. Pursuant to the assessment, the Ld. AO initiated penalty proceedings under section 274 read with section 271(1)(c) of the Act and levied a penalty of Rs. 3,38,742/-, being 200% of the tax sought to be evaded. The assessee challenged the penalty before the Ld. CIT(A), who upheld the order of the Ld. AO. Aggrieved by the said confirmation, the assessee filed the present appeal before us.

 

3. The Ld. AR submitted and relied upon a paper book comprising pages 1 to 55, which has been taken on record. The Ld. AR contended that the penalty proceedings are vitiated due to the issuance of defective notices under section 274 read with section 271(1)(c) of the Act by the Ld. AO. Copies of the notices dated 27/11/2018 and 13/12/2016 have been placed on record. He further argued that, in the penalty order, the Ld. AO has recorded both charges namely, concealment of income as well as furnishing of inaccurate particulars of income. However, in the appellate order, the Ld. CIT(A) has proceeded on the footing that the charge is one of concealment. Thus, the charge underlying the penalty has undergone a change from the stage of assessment to the stage of appeal, which renders the penalty unsustainable in law.

 

4. The Ld. AR further submitted that the addition for the impugned assessment year was sustained by the Hon’ble ITAT only to the extent of 3% of the alleged bogus purchases. Therefore, penalty cannot be levied on such estimated or ad-hoc additions. In support of this proposition, he placed reliance on the judgment of the Hon’ble Bombay High Court in Indermal Manaji vs. CIT (2017) 88 taxmann.com 525 (Bom). The relevant portion of the said judgment is reproduced below:—

 

“17. The basis for initiation of Assessment Proceedings by the Assessment Officer is that the Assessment Officer disbelieved the claim of the assessee that he was engaged in the business of discounting draft; whereas the Tribunal held that the assessee carries on the business of Draft Discounting. The assessee ha stated that the amount in the account is the amount of the drafts received of which assessee charges Rs. 1/- per thousand as commission. Explanation (1) to Section 271(1)(c) of the Act states that if a person fails to offer a explanation or offers an explanation which is found by the Assessing Officer to be false or such person offer an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide an and that all the facts relating to the same and material to the computation of his total income have bee disclosed by him, then, the amount added or disallowed in computing the total income of such person, as result thereof shall for the purpose of Clause (c) of the said Sub- Section be deemed to represent the income in respect of which particulars have been concealed. In the present case, no addition of the amount has been made, nor is a case of dis-allowance. Even the Tribunal had accepted the case of the assessee that he is carrying on the business of Draft Discounting. It is also observed that in many cases, the Tribunal has taken view that in case of Draft Discounting, income is considered at Rs. 1/- per thousand and in some cases, at Rs. 2/- per thousand. In the present case, it considered to Rs. 2/- per thousand. The assessee, therefore, was not required to give any explanation as his case was accepted by the Tribunal in Appeal. As such, for all the above reasons, Explanation (1) to Section 271(l)(c) of the Act would not be attracted.

 

18. The learned counsel for the Revenue has placed reliance on the Judgment of the Apex Court in case of Chuharmal (referred to supra}. In the said case, the wrist watches were seized from the assessee's bedroon No explanation was given at the time of seizure. The assessee also did not avail opportunity to show that he was not the owner. The deemed income comprising of value of unexplained articles was added to the disclosed income. In that context, the Apex Court has held that Explanation to Section 271(1)(c) of the Act attracted and penalty would be leviable. In the present case, the Tribunal had accepted the case of the assessee that he has carried on the business of Draft Discounting and earns money thereby negating the Order of the Assessing Officer in the Assessment Proceedings. Further, no amount was added as income. In case of Kailandi Rail Nirman Engineering Ltd. (referred to supra] before the Delhi High Court also the facts were absolute different. In the said case, the income was concealed by the assessee and the discrepancies were found in the account by the Special Auditor. The Court held the imposition of penalty justified. As discussed supra, tl case of the assessee of carrying on business of discounting bank drafts and earning commission, has bet accepted.

 

19. Considering the aforesaid conspectus of the matter, it is abundantly clear that the very basis of the Penal Proceedings was set aside by the Tribunal in an appeal against the Assessment Order. There was no addition of income. On the contrary, the case of the assessee, which was negated by the assessing officer of carrying on the business of Draft Discounting, is accepted by the Tribunal. The Explanation (1) to Section 271(1)(c) of the Act, in the facts and circumstances of the present case, would not arise.”

 

5. The Ld. DR relied on the orders of the revenue authorities and argued that the assessee was an accommodation entry provider. Though the ITAT restricted the addition to 3%, the Ld. DR submitted that the penalty should still be sustained considering the assessee’s role in the alleged entry-providing arrangement.

 

6. We have carefully considered the rival submissions and perused the material available on record. It is undisputed that the addition sustained by the Hon’ble ITAT is only 3% of the total accommodation entries. The assessee has been assessed only on the element of commission income, as the entire transactions admittedly passed through the assessee’s bank account. The facts of the present case are squarely covered by the judgment of the Hon’ble Bombay High Court in Indermal Manaji (supra). In that case, the Hon’ble Court held that where the basis of the penalty does not survive or where the addition is made only on estimation, the penalty under section 271(1)(c) cannot be sustained. Following the binding precedent of the jurisdictional High Court and maintaining judicial consistency, we hold that the penalty imposed under section 271(1)(c) is unsustainable in law. The penalty is accordingly deleted.

 

7. Considering the above discussion, Ground Nos. 1 and 2 raised in the assessee’s appeal are allowed. Accordingly, the additional ground taken by the assessee is rendered academic and is kept open.

 

8. In the result, the appeal of the assessee ITA No. 6281/Mum/2025 is allowed.

 

Order pronounced in the open court on 09/12/2025.