ITAT Removes Penalty U/S 271(1)(c) on Counted Quantum Addition Based Upon Details from Sales Tax

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has invalidated the penalty imposed under Section 271(1)(c) of the Income Tax Act, 1961, which was based on estimated quantum addition derived from information obtained from the Sales Tax Department.

The case involved Jaisingh H. Solanki, an individual and proprietor of M/s. Blue Star International, is a business engaged in trading ferrous and non-ferrous metals.

The assessee’s return of income prompted the reopening of the case, as the Sales Tax Department provided information suggesting that the assessee had received accommodation entries/bills from specific parties amounting to Rs. 2,35,64,090.

In response to the notices from the Assessing Officer (AO), the assessee explained that the transactions involved six parties. Although the AO acknowledged that the assessee had submitted necessary documents, the assessee could not provide delivery challans, truck receipts, and other supporting evidence.

As the assessee failed to produce the suppliers for verification and the six parties had admitted to the Sales Tax Department that they were involved in providing accommodation entries, the AO calculated the profit from the fraudulent purchases to be Rs. 2,35,64,090 at a rate of 12.5%, resulting in Rs. 29,45,511. The assessee then appealed this decision to the Commissioner of Income Tax (Appeals) [CIT(A)].

The CIT(A) upheld the AO’s decision but partially granted the assessee’s appeal by reducing the reported profit on these transactions, resulting in an anticipated increase of Rs. 12,04,124.

Subsequently, the AO issued a notice under Section 271(1)(c) of the Income Tax Act on March 3, 2016, and imposed a penalty of Rs. 5,27,640. Dissatisfied, the assessee filed an appeal with the CIT(A)/NFAC, who affirmed the penalty.

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The tribunal observed that the estimated addition in the quantum assessment was solely based on information from the Sales Tax Department regarding the assessee’s involvement in accommodation bills totalling Rs. 2,35,64,090.

As the quantum addition was entirely based on estimation, taking into account the facts and circumstances of the case, the two-member bench consisting of Amarjit Singh (Accountant Member) and Aby T. Varkey (Judicial Member) decided to delete the penalty imposed under Section 271(1)(c) of the Income Tax Act.

Consequently, the assessee’s appeal was allowed, and during the proceedings, the assessee did not appear while Ujjawal Kumar Chavan represented the revenue as counsel.