The Income Tax Appellate Tribunal, Surat Bench, has reaffirmed that penalty under Section 271(1)(c) of the Income Tax Act, 1961 cannot be imposed on additions made on an ad-hoc or estimated basis. This ruling clarifies that even in cases involving alleged bogus purchases, where additions are sustained through estimation rather than concrete evidence, the imposition of penalty remains unsustainable in law.
Background & Facts
The Dispute
The appellant, an individual engaged in the diamond business, filed his return of income for Assessment Year 2007-08. The case was subsequently reopened under Section 147 of the Act based on information gathered during a search conducted on the "Bhanwar Lal Jain Group," which revealed that the group was involved in issuing non-genuine bills. The appellant was identified as one of the beneficiaries of such accommodation entries.
Key Facts
The appellant’s case was reopened under Section 147 based on information from a search conducted on the "Bhanwar Lal Jain Group."
The Assessing Officer (AO) alleged bogus purchases of Rs. 8,93,53,079 and made an addition of Rs. 2,23,38,270 (25% of the bogus purchases).
The Commissioner of Income Tax (Appeals) [CIT(A)] reduced the addition to Rs. 1,11,69,135 (12.5% of the bogus purchases).
The appellant appealed to the ITAT, Ahmedabad Bench, which further reduced the addition to 6% of the alleged bogus purchases (vide order dated 18.07.2022 in ITA No. 1390/Ahd/2017).
Procedural History
29.03.2019: The AO imposed a penalty of Rs. 37,30,939 under Section 271(1)(c) of the Act.
30.01.2026: The CIT(A) upheld the penalty order.
02.07.2026: The appellant filed the present appeal before the ITAT, Surat Bench.
Relief Sought
The appellant sought the deletion of the penalty of Rs. 37,30,939 imposed under Section 271(1)(c), contending that the addition was made on an ad-hoc basis and that penalty was not leviable in such cases.
The Legal Issue
The central question before the Tribunal was whether penalty under Section 271(1)(c) of the Income Tax Act can be imposed on additions made on an ad-hoc or estimated basis, particularly in cases involving alleged bogus purchases.
Arguments Presented
For the Appellant
The appellant contended that the addition was made on an ad-hoc/estimated basis, and thus, penalty under Section 271(1)(c) was not leviable.
Reliance was placed on two decisions of the ITAT, Surat Bench:
Ramprakash Vijayvergia v. ITO (ITA No. 125/Srt/2024, dated 16.04.2024)
Santosh Singh Hukam Singh v. ITO (ITA No. 655/Srt/2025, dated 25.11.2025)
Both decisions held that penalty under Section 271(1)(c) cannot be imposed on ad-hoc additions.
For the Revenue
The Revenue argued that the case involved bogus purchases, and the addition, though estimated, was based on concrete evidence of non-genuine bills.
It was contended that the penalty was justified as the appellant had furnished inaccurate particulars of income.
The Revenue urged the Tribunal to deviate from the Co-ordinate Bench decisions and uphold the penalty.
The Court's Analysis
The Tribunal examined the legal position regarding the imposition of penalty under Section 271(1)(c) in cases involving ad-hoc additions. It observed:
"It is settled proposition of law that penalty u/s 271(1)(c) of the Act is not exigible where the addition is made/sustained on adhoc/estimated basis."
The Tribunal relied on the following judicial precedents:
CIT v. Subhash Trading Co. (1996 86 Taxman 30 (Guj))
Navjivan Oil Mills v. CIT (2002 124 Taxman 392 (Guj))
CIT v. Valimkbhal H Patel (2006 280 ITR 487 (Guj))
ITO v. Bombaywala Readymade Stores (2015 55 taxmann.com 258 (Guj))
These cases established that penalty under Section 271(1)(c) cannot be imposed on additions made on an ad-hoc or estimated basis, even if the additions relate to alleged bogus transactions.
The Tribunal also noted that the present case was directly covered by the decisions of the ITAT, Surat Bench in Ramprakash Vijayvergia and Santosh Singh Hukam Singh, where identical facts and legal principles were applied. The Revenue failed to point out any distinguishing feature or contrary judicial pronouncement that would warrant a deviation from these decisions.
The Verdict
The Tribunal allowed the appeal and directed the Assessing Officer to delete the penalty of Rs. 37,30,939 imposed under Section 271(1)(c) of the Act. The penalty order dated 29.03.2019 and the appellate order dated 30.01.2026 were set aside.
What This Means For Similar Cases
Penalty Not Leviable on Ad-hoc Additions
Practitioners must note that penalty under Section 271(1)(c) cannot be imposed where additions are made on an ad-hoc or estimated basis, even in cases involving alleged bogus transactions.
The Tribunal has reaffirmed that the legal position is well-settled, and reliance on binding precedents of the Gujarat High Court and ITAT, Surat Bench is crucial.
Judicial Discipline and Consistency
Courts and tribunals are bound by the principle of judicial discipline and consistency. Where a legal issue has been settled by a Co-ordinate Bench, subsequent benches must follow the same unless there are distinguishing facts or contrary higher judicial pronouncements.
The Revenue’s argument for deviation from settled law was rightly rejected by the Tribunal.
Practical Implications for Taxpayers
Taxpayers facing penalty proceedings based on ad-hoc additions can rely on this decision to argue for deletion of penalties.
The decision underscores the importance of documentary evidence and concrete proof in penalty proceedings, as opposed to estimations or assumptions.
Key Takeaways for Practitioners:
Always check if the addition is ad-hoc or estimated - penalty under Section 271(1)(c) is unlikely to sustain in such cases.
Cite binding precedents of the jurisdictional High Court and ITAT to strengthen arguments.
Ensure that penalty notices specify whether the charge is concealment of income or furnishing inaccurate particulars - vague notices may be challenged.
In cases of bogus purchases, focus on quantum additions rather than penalty, as the latter is harder to sustain on estimated additions.
