The Income Tax Appellate Tribunal, Nagpur, has clarified that a penalty imposed under Section 271AAC(1) cannot stand if the underlying quantum assessment order is set aside by a High Court. This ruling provides critical relief to assessees facing penalties based on additions that are later invalidated.
Background & Facts
The Dispute
These two appeals by Dayal Energy and Proteins Private Limited challenge penalty orders under Section 271AAC(1) for Assessment Years (AY) 2017-18 and 2022-23. The penalty for AY 2017-18 was levied on the basis of an addition of Rs. 2.90 crore under Section 68, which was later quashed by the Bombay High Court. For AY 2022-23, the dispute centers on disallowances of Rs. 10.92 crore in purchases and Rs. 94.55 lakh in commission expenses, both upheld by the Commissioner of Income Tax (Appeals).
Key Facts
- AY 2017-18: The assessee filed return declaring income of Rs. 95,71,500. The Assessing Officer (AO) reopened the case based on information from the Insight Portal regarding accommodation entries. The AO made an addition of Rs. 2.90 crore under Section 68 on 22.05.2023 and levied penalty of Rs. 17,45,263 under Section 271AAC(1) via order dated 22.03.2024.
- Writ Petition: The assessee filed Writ Petition No. 4186 of 2023 before the Nagpur Bench of the Bombay High Court challenging the assessment order.
- High Court Order: On 12.08.2024, the Bombay High Court quashed the assessment order dated 22.05.2023.
- AY 2022-23: The assessee, engaged in vegetable oil and cake manufacturing, filed return on 31.10.2022. The AO identified purchases of Rs. 10.92 crore from three parties: Kedia Overseas (Rs. 3.94 crore), Meenakshi Fibre (Rs. 6.21 crore), and Gaurav Sales Corporation (Rs. 75.90 lakh). The AO enhanced gross profit by 25% and disallowed 30% of commission expenses (Rs. 94,54,737).
- Documentation: The assessee submitted invoices, E-way bills, GST returns, TDS certificates, stock registers, and bank records for all transactions. All three seller parties filed responses to notices under Section 133(6) on 22.03.2024 and 24.03.2024, with proof uploaded on the ITBA portal.
- CIT(A) Order: The CIT(A) upheld the AO’s additions, relying on general observations about bogus purchases and the PCIT v. Premlata Tekriwal judgment, without addressing specific documentary evidence.
Procedural History
-
AY 2017-18:
- 22.05.2023: Assessment order passed under Section 147 r.w.s. 144
- 22.03.2024: Penalty order under Section 271AAC(1) issued
- 18.07.2024: CIT(A) order upholding penalty
- 12.08.2024: Bombay High Court quashes assessment order in W.P. No. 4186 of 2023
- 25.02.2026: Hearing before ITAT Nagpur
- 23.04.2026: ITAT pronounces order
-
AY 2022-23:
- 31.10.2022: Return filed
- 2023: Scrutiny assessment initiated
- 2023: AO issues notices under Section 133(6)
- 22.03.2024 & 24.03.2024: Seller parties respond to notices
- 02.08.2024: CIT(A) order enhancing additions to Rs. 10.92 crore and disallowing 30% commission
- 25.02.2026: Hearing before ITAT Nagpur
- 23.04.2026: ITAT pronounces order
The Parties' Positions
For the Assessee: The penalty under Section 271AAC(1) cannot survive if the underlying assessment is quashed. For AY 2022-23, all purchases were substantiated with invoices, GST returns, E-way bills, TDS records, and seller responses. The 30% disallowance of commission was arbitrary, given the turnover of Rs. 295 crore and full documentation.
For the Revenue: The AO and CIT(A) acted reasonably. No responses were received from seller parties, and the volume of commission entries (over 7,000) justified an ad hoc disallowance. The Premlata Tekriwal precedent supports full disallowance of unexplained purchases.
Relief Sought
- For AY 2017-18: Quash penalty of Rs. 17,45,263 under Section 271AAC(1).
- For AY 2022-23: Delete addition of Rs. 10.92 crore under Section 69C and disallowance of Rs. 94,54,737 in commission expenses.
- Set aside CIT(A) orders dated 18.07.2024 and 02.08.2024.
The Legal Issue
The central question was whether a penalty under Section 271AAC(1) can be sustained when the underlying quantum assessment order has been quashed by a High Court, and whether the entire purchase amount can be disallowed under Section 69C merely because the Assessing Officer failed to verify seller responses, despite the assessee producing comprehensive documentary evidence.
Arguments Presented
For the Appellant/Petitioner
The assessee relied on the principle that penalty proceedings are ancillary to the quantum assessment. Once the assessment is quashed, the basis for penalty vanishes. For AY 2022-23, the assessee cited ACIT v. Chander Arjundas Manwani (ITA No. 2733/Nag/2025) to argue that ad hoc disallowances are impermissible when detailed evidence is furnished. The assessee demonstrated that all three seller parties responded to Section 133(6) notices, with proof uploaded on the ITBA portal. The invoices, E-way bills, GST returns, and TDS records established the genuineness of transactions. The CIT(A) erred by relying on generalised assumptions about bogus purchases without addressing specific evidence.
For the Respondent/State
The Revenue contended that the AO’s failure to receive responses from seller parties justified treating purchases as non-genuine. The CIT(A) was entitled to enhance the addition under Section 251(2) based on the PCIT v. Premlata Tekriwal judgment, which permits full disallowance of unexplained expenditures. The volume of commission payments (over 7,000 entries) and lack of detailed nexus justification warranted the 30% disallowance as a reasonable estimate.
The Court's Analysis
The Tribunal emphasized that Section 271AAC(1) is a penalty provision triggered by the existence of an addition under Section 68. The penalty is not an independent proceeding but a consequence of the assessment. The Bombay High Court’s order dated 12.08.2024 quashing the assessment order rendered the entire basis for the penalty non-existent.
"Once the assessment order is quashed the penalty under section 271AAC(1) levied vide order dated 22.03.2024 will not survive."
Regarding AY 2022-23, the Tribunal rejected the Revenue’s reliance on generalised suspicions about the trade. It noted that the CIT(A) failed to engage with the specific documentary evidence submitted by the assessee. The ITBA portal records, invoices, E-way bills, GST returns, and seller responses were all contemporaneous, verifiable, and consistent with the assessee’s business operations.
"The assessee has discharged its onus to substantiate the purchases and even on investigation of fact, the seller party confirmed the transactions."
The Tribunal further held that the 30% disallowance of commission expenses was arbitrary. The turnover of Rs. 295 crore and commission of Rs. 3.15 crore (approximately 1.07%) was within reasonable limits. The AO and CIT(A) made no specific findings on individual transactions, and the disallowance was purely ad hoc.
The Tribunal distinguished PCIT v. Premlata Tekriwal on facts, noting that case involved no documentary evidence or seller responses, unlike the present case where evidence was abundant and verified.
The Verdict
The appeals of the assessee are allowed. The penalty of Rs. 17,45,263 under Section 271AAC(1) for AY 2017-18 is set aside. The addition of Rs. 10.92 crore under Section 69C and the disallowance of Rs. 94,54,737 in commission expenses for AY 2022-23 are deleted. The orders of the CIT(A) dated 18.07.2024 and 02.08.2024 are set aside. The assessment for AY 2022-23 is to be reopened to reflect the deletion of additions, and any interest or penalty based on the deleted additions shall be adjusted accordingly.
What This Means For Similar Cases
Penalty Cannot Survive Quashed Assessment
- Practitioners must immediately challenge penalties under Section 271AAC(1) if the underlying assessment is under challenge in High Court.
- A penalty order based on an addition that is later quashed is legally unsustainable, regardless of procedural compliance by the AO.
- File applications for stay of penalty proceedings pending outcome of writ petitions.
Documentary Evidence Prevails Over Generalised Suspicion
- The Tribunal reaffirmed that detailed, contemporaneous documentation (invoices, GST returns, E-way bills, TDS records, seller responses) overrides mere non-cooperation by third parties.
- AO cannot assume non-genuineness merely because a notice under Section 133(6) was not replied to - if the assessee proves the transaction independently, the burden shifts.
- CIT(A) must address specific evidence, not rely on blanket precedents without factual comparison.
Ad Hoc Disallowances Are Unlawful
- Disallowances based on arbitrary percentages without specific findings are invalid.
- Where turnover is high and commission is a small percentage, the AO must identify specific unverified transactions, not apply blanket disallowances.
- The Chander Arjundas Manwani precedent now reinforces that detailed vouchers and banking trails are sufficient to rebut ad hoc estimates.
