No Penalty u/s 271(1)(c) can be imposed on estimated additions

At times additions are made by Income Tax Department on estimated basis without having any clear evidence or iota of evidence on record to show that any particular entries in books of accounts were false or incorrect or any particular item of purchase or sale was omitted to be entered in books of account merely due to low Gross profit rates or by rejecting books of accounts or claiming of loss of goods on estimate basis. Resultantly, imposing penalty u/s 271(1)(c). Where there is penalty imposed on addition which is made on estimated basis, the assessee may take advantage following submission wherein he can pick & choose from the following grounds depending on the peculiarity of the case.

1. 1. 1. In the course of appellate proceedings, it is submitted that the addition was made purely on estimation basis after rejection of books 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. No further appeal is filed by the assessee or Revenue.
      2. The issue is squarely covered by the decision of CIT vs. Subhash Trading Co. [221 ITR 110] (HC)(Guj.), wherein the catch note is as follows,
         “Penalty – For concealment of income – Assessment year 1973-74 – After rejecting assessee’s accounts, Assessing Officer assessed income by applying estimated gross profit rate at 15 per cent on estimated sales, and also imposed penalty by invoking Explanation to section 271(1)(c) – Tribunal, while reducing gross profit rate to 12 per cent held that there was no evidence to conclude a positive finding about concealment and deleted penalty – Whether, in absence of any other material which might reflect on conduct of assessee about deliberate attempt to maintain false books of account, on a preponderance of probabilities, no other conclusion could be reached but that failure to return total assessed income was not on account of any fraud or gross or wilful neglect on part of assessee – Held, yes.”

1. 1. 3. In the instant case, the facts are more favourable because in the case of CIT vs. Subhash Trading Co. ( supra) , the ITO on rejection of books estimated the sales at Rs.8,75,000/- instead of Rs.7,75,000/- which was disclosed in Books of Accounts by the assessee and then the ITO estimated Gross Profit at 15% instead of 5% disclosed in Books of Accounts by the assessee which was reduced by Tribunal to 12%. In the present case, the turnover was undisputedly taken at Rs.4,27,11,794/- by ITO which was as per Books of Accounts and Audit Report only. The GP was enhanced from 10.25% to 12% leading to an estimated addition of Rs.7,43,555/-. Thus in Subhash Trading Co. there was allegation of suppression of sales which is not in the case of the assessee.
      4. Further, on perusal of assessment order it can be seen that the books are rejected mainly on the ground of low GP and this is well settled that books cannot be rejected u/s 145(3) on account of low GP. Though the assessee has failed to take the ground for rejection of books before CIT(A) and hence the CIT(A) has dismissed the appeal on merits, adverse view should not be drawn for the purpose of penalty.
      5. Thus, it is submitted that when there is a estimation of gross profit on the turnover shown by the assessee in the Books of Accounts, penalty u/s. 271(1)(C) is not leviable. This view is also fortified by the judgement of Gujarat High Court of CIT vs. S.P Bhatt 97 ITR 440 wherein it was held that “Whether where assessment was made on basis of an estimate and there was nothing on record to show that any particular entries in books of accounts were false or incorrect or any particular item of purchase or sale was omitted to be entered in books of account, assessee could be held to have discharged onus which rested upon him to show that failure to return total income assessed was not on account of any fraud or gross or wilful neglect on its part – Held, yes – Whether, therefore, legal fiction enacted in Explanation to section 271(1)(c) was not attracted, and assessee was not liable to penalty – Held, yes”
      6. In respect of such estimated additions no penalty can be imposed and in support of said contention, further the following case laws are relied upon :-

• • • • CIT vs. Sankarsons and Company [85 ITR 627] (HC) (Kerela)
        Held that Penalty –For concealment of income – Assessment year 1964-65 – Gross profit shown by assessee in return was according to ITO too low on admitted turnover – ITO rejected accounts on account of certain defects in it and estimated gross profit which resulted in addition – Penalty on that basis was levied under section 271(1)(c) – On appeal, assessee contended that addition was merely for deficiency of gross profit and that it was based on estimate – Tribunal found that finding regarding defective nature of account and suppression of stock was based on mere suspicision and conjectures and thus deleted penalty – Whether explanation given by assessee read in light of facts and circumstances of case was sufficient to warrant conclusion that assessee was not guilty of fraud or gross or wilful negligence in furnishing return – Held, yes – Whether, therefore, Tribunal was justified in deleting penalty – Held, yes

• • • • CIT V/s Vijay Kumar Jain [325 ITR 378] (HC) (Chattisgarh)
        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.

• • • • Harigopal Singh vs. CIT [258 ITR 85] (HC) (P&H)
        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.

• • • • CIT vs. Valimkbhai H. Patel [280 ITR 487] (HC) (Guj)
        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.

• • • • CIT vs. Sangrur Vanaspati Mills Ltd. [303 ITR 53] (HC) (P&H)
        Held that Penalty – For concalment of income – Assessment years 1992-93 and 1993-94 – Whether when addition had been made on basis of estimate and not on account of any concrete evidence of concealment, then penalty under section 271(1)(c) was not leviable – Held, yes

• • • • DCIT vs. Madad Ali Ansari & Co. [69 TTJ 0279](2000)(Trib.)(Jodhpur)
        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).

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