ITAT Deletes Penalty Where Additions Are Based on Estimation Alone:

ITAT Deletes Penalty Where Additions Are Based on Estimation Alone The ITAT confirmed that the penalty should be removed, holding that no penalty can be imposed when additions are made merely on estimated bogus purchases without solid supporting evidence. The present appeal has been filed by ITO against Vinipul Inorganbogusics Private Limited, challenging the impugned order dated September 03, 2025, passed by the CIT(A) under section 250 of the Income Tax Act, 1961.

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Background of the case

The assessee filed its income tax return in September 2011, declaring an income of Rs 11,73,980. Later, based on information from the Investigation Wing alleging bogus purchase transactions, the tax department reopened the assessment. The Assessing Officer (AO) initially made an addition of Rs 15,65,241. During the appeals in the quantum proceeding, the CIT(A) reduced the addition to 12.5% of the alleged bogus purchases. The matter also went through several rounds of litigation, and eventually, the ITAT also upheld the addition of the CIT(A), treating it as an estimated disallowance. The AO imposed a penalty in the meantime of Rs.8,46,419 under Section 271(1)(c), alleging concealment of income. However, the CIT(A) later deleted this penalty, stating that since the addition itself was based on estimation and not on concrete proof, the penalty could not be justified. The Revenue further approached the Tribunal, but the Tribunal upheld the CIT(A)’s decision. The Tribunal also relied on several High Court judgements, which have consistently held that penalties cannot be imposed where income additions are made on estimation rather than on clear evidence.

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The tribunal also stated that "Penalty under section 271(1)(c) of the Act cannot be levied merely on the basis of an estimated addition." Concluding that there was no error in the CIT(A)’s order, the ITAT ruled in favour of the assessee and dismissed the Revenue’s appeal.