ITAT Deletes Penalty Where Bogus Purchase Addition Based on Estimated Profit

Shri Ratnaram Kohlaram Chaudhary, proprietor of M/s Nutech Metal, filed returns for A.Ys. 2009-10 to 2011-12, which were processed under section 143(1). Based on Sales Tax Department information alleging bogus purchase bills, the assessments were reopened under section 147. The Assessing Officer held that purchases were accommodation entries and estimated the profit element at 25% (A.Y. 2009-10) and 12.5% (A.Ys. 2010-11 and 2011-12).

On appeal, the additions were reduced to 6.5% and 6% respectively. The Tribunal granted no further relief in quantum. Based on the sustained estimated additions, a penalty under section 271(1)(c) was levied and confirmed by NFAC, leading to the present appeals.

Main Issue: Whether a penalty under section 271(1)(c) can be sustained when additions for alleged bogus purchases are made purely on an estimated profit basis.

ITAT’s Decision: The Income Tax Appellate Tribunal held that the additions were admittedly based on estimation of profit element and not on disallowance of entire purchases. The wide variation between the percentages adopted at different stages demonstrated that the determination was based on estimation and guesswork.

Relying on Pr. CIT v. Colo Colour Pvt. Ltd., the Tribunal observed that a penalty requires clear satisfaction of concealment or furnishing of inaccurate particulars. Where income is assessed on an ad hoc or estimated basis, particularly by adding only a profit element in alleged bogus purchase cases, such estimation does not automatically justify penalty. The Tribunal deleted the penalty for all three years and allowed the appeals.

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