SANTOSH SINGH HUKAM SINGH KARNAWAT,SURAT V. ITO, WARD 2(3)(8), SURAT

ITA 655/SRT/2025

AI Insights

The case involves Santosh Singh Hukam Singh Karnawat, an individual engaged in the diamond business, who appealed against the penalty imposed by the Income Tax Officer following the addition of alleged bogus purchases to his income. The additions were based on a search and seizure operation that revealed the involvement of certain entities in providing accommodation entries. The ITAT had previously reduced the disallowance to 5% of the alleged bogus purchases, recognizing only the profit element as taxable. The main legal issue was whether the penalty under section 271(1)(c) was applicable when the additions were made on an estimated basis without concrete evidence of concealment or inaccurate particulars.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 788835 (ITAT-SURAT)
• Duration Of Justice: 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-11-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: misc
• Appeal Filed On: 09-06-2025
• Other Referred Cases: Hari Gopal Vs. CIT, CIT Vs. Sangrur Vanaspati Mills Ltd, DCIT v M/s Marksans Pharma, M/s Boparai (P) Ltd, Asstt. Commissioner of Income Tax v. Remi Electrotechnik Ltd, Anita L. Ghadge v D.C.I.T.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJAY UKE
• Assessee Lawyers: RASESH SHAH
• Keywords: Condonation of delay; Bogus purchase; Onus to prove; TDS; Search and seizure; Accommodation entries; Bogus
• Section: 271(1)(c); 133(6)

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL SURAT BENCH, SURAT (HYBRID HEARING) BEFORE SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER & SHRI BIJAYANANDA PRUSETH, ACCOUNTANT MEMBER I.T.A. No. 655/SRT/2025 (Assessment Year: 2012-13) Santosh Singh Hukam Singh Karnawat (Individual), 402, Ramukh Darshan Apartment, Opp. Patidar Bhavan, Mahidharpura, Surat-395003 Vs. Income Tax Officer, Ward-2(3)(8), Surat [PAN No.ARAPK9181B] (Appellant) .. (Respondent) Appellant by : Shri Rasesh Shah, CA Respondent by: Shri Ajay Uke, Sr. DR Date of Hearing 03.11.2025 Date of Pronouncement 25.11.2025 O R D E R PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER: This appeal has been filed by the Assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals), (in short “Ld. CIT(A)”), National Faceless Appeal Centre (in short “NFAC”), Delhi vide order dated 21.02.2025 passed for A.Y. 2012-13. 2. The assessee has raised the following grounds of appeal: “1. On the facts and circumstances of the case, the order passed by the learned Commissioner of Income Tax (Appeals) under Section 250 of the Income Tax Act, 1961 is bad with regards to the facts and circumstances of the case. 2. The learned Commissioner of Income Tax (Appeals) has erred in levying penalty u/s. 271(1)(c) of the Income Tax Act, 1961 on addition made of 5% of total purchase value to the tune of Rs. 43,83,431/- from M/s. Euro Diam and Rs. 67,77,719/- from M/s. Little Diam as an accommodation entry for A.Y. 2012-13 for concealment of income without appreciating the facts and circumstances of the case in its right perspective for A.Y. 2012-13. Printed from counselvise.com ITA No.655/Srt/2025 Santosh Singh Hukam Singh Karnawat (Individual) vs. ITO Asst. Year – 2012-13 - 2– 3. The learned Commissioner of Income Tax (Appeals) has wrongly levied penalty u/s. 271(1)(c) of the Income Tax Act, 1961 overlooking the facts and circumstances of the case by levying penalty at 5 percent on alleged bogus purchases on estimated basis. 4. The Appellant craves leave to add, amend, alter, modify substitute, delete, change or vary all or any of the ground or grounds of appeal.” 3. The brief facts of the case are that the assessee is engaged in the business of manufacturing, importing, exporting and trading in diamonds. The assessee had filed his return of income declaring a total income of Rs. 3,12,660/-. During the course of assessment proceedings, the Assessing Officer noted that a search and seizure operation was carried out on 03.10.2013 in the case of the Bhanwarlal Jain Group, wherein it was found that the group was issuing accommodation entries relating to bogus purchases and sales through benami concerns. Based on the information received from the Investigation Wing, Mumbai, the AO observed that the assessee had allegedly received bogus purchase entries amounting to Rs. 1,11,61,150/- from two such concerns, namely Euro Diam and Little Diam. The Assessing Officer issued a show cause notice asking the assessee to explain why these purchases should not be treated as bogus. The assessee submitted that the purchases were genuine, supported by purchase bills, ledger entries, bank statements, confirmations and that payments were made through banking channels. However, by placing reliance on statements recorded during search and findings of the Investigation Wing that the said parties were merely entry providers, the AO treated the purchases as bogus and added the entire amount to the total income of the assessee. Being aggrieved, the assessee filed an appeal before the CIT(Appeals) and contended that the purchases were duly supported and verified through notices under section 133(6) of the Act and that the parties had confirmed the transactions. The assessee also argued that Printed from counselvise.com ITA No.655/Srt/2025 Santosh Singh Hukam Singh Karnawat (Individual) vs. ITO Asst. Year – 2012-13 - 3– the statement of Shri Bhanwarlal Jain had been retracted. The CIT(A), however, held that the assessee failed to produce the suppliers or provide current addresses for verification, and that search findings clearly established that the concerns were engaged in providing accommodation entries. The CIT(A) therefore upheld the addition and held that the assessee had indulged in bogus purchases. 4. Thereafter, penalty proceedings under section 271(1)(c) were initiated and the AO held that the assessee had concealed income and furnished inaccurate particulars and levied penalty on the full amount of addition. The assessee then filed a further appeal before the ITAT in the quantum proceedings, and the Tribunal vide order dated 11.01.2019 held that although the purchases may not have been made from the parties shown in the books, the fact remained that sales were accepted and therefore the entire purchases could not be disallowed. The ITAT held that only profit element embedded in such purchases should be taxed and restricted the disallowance to 5% of the alleged bogus purchases based on industry profit rates and judicial precedents. Following this finding, the CIT(A) in the penalty proceedings held that it was clear that the assessee had inflated purchase claims and shown inaccurate particulars of income, though the disallowance had been restricted by the Tribunal to 5%. The CIT(A) therefore held that the assessee was liable for penalty under section 271(1)(c) to the extent of tax on 5% of such purchases and directed the AO to restrict the penalty accordingly. The appeal was thus partly allowed. Printed from counselvise.com ITA No.655/Srt/2025 Santosh Singh Hukam Singh Karnawat (Individual) vs. ITO Asst. Year – 2012-13 - 4– 5. The assessee is in appeal before us against the order passed by CIT(Appeals) dismissing the appeal of the assessee. Before us, the Counsel for the assessee placed reliance on judicial precedents which have held that when the additions made been on an ad-hoc basis, then no penalty is called for u/s 271(1)(c) of the Act. 6. In response, the Ld. DR placed reliance on the observations made by the Assessing Officer and Ld. CIT(Appeals) in their respective orders. 7. We have heard the rival submissions and perused the record. The issue for consideration before us is whether penalty proceedings can be sustained for disallowances made on ad-hoc basis by ITAT with reference to a particular percentage of alleged bogus purchases. 8. It would be useful to refer to law laid down by various High Courts and Tribunals on issue of levy of penalty in case of adhoc additions/ disallowances before we decide the issue before us. 9. Their Lordships of Punjab & Haryana High Court in Hari Gopal Vs. CIT [258 ITR 85 (P&H) held as under : \"In order to attract clause (c) of section 271(1)(c) of the Income-tax Act, 1961, it is necessary that there must be concealment by the assessee of the particulars of his income or furnishing of inaccurate particulars of such income. The provisions of section 271(1)(c) of the Act are not attracted to cases where the income of an assessee is assessed on estimate basis and additions are made therein\" 10. The Hon'ble High Court further in Hari Gopal Vs. C IT (supra) held as under:- Printed from counselvise.com ITA No.655/Srt/2025 Santosh Singh Hukam Singh Karnawat (Individual) vs. ITO Asst. Year – 2012-13 - 5– \"Additions in his income were made, as already observed, on estimate basis and that by itself does not lead to the conclusion that the assessee either concealed the particulars of his income or furnished inaccurate particulars of such income. There has to be a positive act of concealment on his part and the onus to prove this is on the Department. We are also of the considered view that the Tribunal grossly erred in law in relying on Explanation I(B) to section 271(1)(c) of the Act to raise a presumption against the assessee.\" 11. The Hon'ble Punjab & Haryana High Court in CIT Vs. Sangrur Vanaspati Mills Ltd 303 ITR 53 (P&H) held as under : \"In order to attract clause (c) of section 271(1) of the Income-tax Act, 1961, it is necessary that there must be concealment by the assessee of the particulars of his income or furnishing of inaccurate particulars of such income. The provisions of section 271(1)(c) of the Act are not attracted to cases where the income of an assessee is assessed on estimate basis and additions are made therein. When the additions have been made on the basis of estimate and not on account of any concrete evidence of concealment, then the penalty is not leviable.\" 12. It may be useful to refer to the decision of Mumbai Tribunal in the case of DCIT v M/s Marksans Pharma ITA NO.7278/Mum/2016. In this case, assessee which was engaged in the business of Film Making and in its profit & loss account, claimed a sum of Rs. 22,05,138/- as technical and professional expenses and Rs. 3,00,000/- as publicity expenses. The AO noted that on these payments, the assessee has not deducted TDS as required and accordingly he made disallowance u/s. 40(a)(ia). He further noticed that assessee has claimed various film production expenses and administrative expenses which were not open to full verification, and accordingly he made adhoc disallowance @ of 20%, aggregating to Rs.9,83,145/-. In the first appeal, it appears that all these disallowances were not pressed before the Ld. CIT(A) by the assessee. The AO after invoking the provisions of Explanation 1 to section 271(1)(c), levied the penalty on these disallowances. Even the Ld. CIT(A) too has confirmed the levy of penalty on the aforesaid Printed from counselvise.com ITA No.655/Srt/2025 Santosh Singh Hukam Singh Karnawat (Individual) vs. ITO Asst. Year – 2012-13 - 6– disallowance, firstly on the ground that assessee has failed to discharge its onus during the course of assessment proceedings as well as during the course of penalty proceedings; secondly the assessee has failed to comply with the statutory requirements of deducting TDS on the payments which has been claimed as expenses; and lastly the assessee's claim was not legally sustainable in law. 13. The Hon’ble ITAT while vacating the penalty proceedings observed as under: “We have heard the rival submissions of the parties and also carefully perused the materials placed on record. So far as levy of penalty on disallowance of Rs. 9,83,145/- is concerned, it is seen that the AO has made adhoc disallowance at the rate of 20% of the various expenses without pointing out any specific expenses being in the nature of non business purpose or for personal use. If the accounts have been audited, then the normal presumption is that the expenses are verifiable vis-a-vis the documents maintained by the assessee. Even though disallowances have been made in the quantum proceedings, due to non verifiability of expenses through corroborative eevidences and the same has not been challenged, however this does not lead to any inference that assessee is liable for levy of penalty for either furnishing of any inaccurate particulars or for concealment of particulars of income. The disallowance is purely based on adhoc basis, dehors any adverse material on record, therefore, no penalty is warranted u/s 271(1)(c) on adhoc disallowance of the expenses claimed by the assessee in the profit & loss account.” 14. Similar view has laid down in Chandigarh ITAT decision in the case of M/s Boparai (P) Ltd ITA No. 1013/Chd/201. The facts of this case are that the assessee had furnished return of income showing ‘nil’ income. During the year under consideration, there was a fall in G.P. rate in comparison to the GP rate shown in the preceding year. The Assessing Officer applying the GP rate 14.96% declared by the assessee in earlier assessment year as compared to 11.42% shown during the year under appeal, made an addition of Rs.1,75,000/- The Assessing Officer also from the perusal of the details noted that vouchers of machinery repaired, labour Printed from counselvise.com ITA No.655/Srt/2025 Santosh Singh Hukam Singh Karnawat (Individual) vs. ITO Asst. Year – 2012-13 - 7– welfare, sales promotion, telephone and car running and maintenance expenses were not properly vouched and made a disallowance of 25% of these expenses on ad-hoc basis. The AO also initiated penalty proceedings u/s 271(1)(c) of the Act. The Hon’ble ITAT while quashing the penalty proceedings observed as under: “In such cases where the income of the assessee has been assessed on estimate basis and addition has been made on the basis of estimate and not on account of any concrete evidence of concealment being found, there is no merit in the levy of penalty for concealment u/s 271(1)(c) of the Act.” 15. The Hon’ble Mumbai Tribunal in the case of Asstt. Commissioner of Income Tax v. Remi Electrotechnik Ltd. ITA no.6376/Mum/2019, while quashing penalty proceedings on the basis of disallowances on estimate basis, observed as under: “As it transpires from the record available before us that the Assessing Officer levied penalty under section 271(1)(c) of the Act on estimate basis without any evidence on record with regard to concealment of income. Penalty under section 271(1)(c) of the Act is leviable to be imposed only where the assessee has concealed its particulars of income or furnished inaccurate particulars. Action of making addition on ad–hoc basis does not result into imposition of penalty u/s 271(1)(c) of the Act and hence cannot be termed as either concealment or furnishing of inaccurate particulars of income…..” 16. The Hon’ble Mumbai Tribunal in the case of Anita L. Ghadge v D.C.I.T. ITA NO.5959 & 5960/MUM/2014, while vacating penalty proceedings initiated on account of disallowance of 70% of commission and 30% of other expenses on an estimate basis for not maintaining proper accounts, observed as under: “We have heard the rival submissions, perused the orders of the Authorities below. On a perusal of the Assessment Order and the Ld.CIT(A) order, we find that the Assessing Officer disallowed the commission as well as the expenses on an estimate basis which was further reduced by the Ld.CIT(A). None of the authorities below have conclusively proved that there is neither concealment of income nor furnishing of inaccurate particulars by the assessee. It is only a mere disallowance of expenses on estimates on Printed from counselvise.com ITA No.655/Srt/2025 Santosh Singh Hukam Singh Karnawat (Individual) vs. ITO Asst. Year – 2012-13 - 8– an adhoc basis. Penalty U/s.271(1)(c) of the Act is not attracted when there is an adhoc estimation of disallowance of expenses. Hence, we direct the Assessing Officer to delete the penalty levied U/s. 271(1)(c) of the Act. This ground is allowed.” 17. On consideration of the facts of the assessee’s case and the judicial precedents reproduced above, we are of the considered view that the levy of penalty under section 271(1)(c) of the Act cannot be sustained. In the present case, the addition made by the Assessing Officer in the quantum proceedings was ultimately restricted by the Hon’ble ITAT to 5% of the alleged bogus purchases on an estimated basis, applying industry profit ratio and following judicial principles. The ITAT clearly held that the purchases were in fact made, though not necessarily from the parties reflected in the books, and only the embedded profit element was taxable. Thus, the disallowance sustained was not based on any finding of actual concealment or furnishing of inaccurate particulars, but only on an estimation of profit. The legal position laid down by the Hon’ble Punjab & Haryana High Court in Hari Gopal vs. CIT and CIT vs. Sangrur Vanaspati Mills Ltd., and by various coordinate benches of the Tribunal including DCIT vs. Marksans Pharma, M/s Boparai (P) Ltd., Remi Electrotechnik Ltd., and Anita L. Ghadge vs. DCIT, is that where income is assessed or additions are made on an estimate or ad-hoc basis without concrete evidence of concealment, penalty under section 271(1)(c) is not leviable. The consistent judicial view is that an estimated or percentage- based disallowance does not automatically mean that the assessee has either concealed income or furnished inaccurate particulars, and such circumstances do not justify the imposition of penalty. Applying these principles to the facts of the present case, the restricted disallowance made by the ITAT represents only an estimated profit element and not a definitive finding of concealment. Therefore, the essential condition for invoking section 271(1)(c) namely, a Printed from counselvise.com ITA No.655/Srt/2025 Santosh Singh Hukam Singh Karnawat (Individual) vs. ITO Asst. Year – 2012-13 - 9– positive act of concealment or furnishing of inaccurate particulars remains unfulfilled. Accordingly, the penalty imposed by the Assessing Officer and sustained in part by the CIT(Appeals) is not justified in law. 18. In view of the above discussion, we hold that the penalty levied under section 271(1)(c) is liable to be deleted, and the appeal of the assessee is allowed. 19. Further, the delay of 40 days in filing the present appeal is condoned, considering the smallness of the delay and as no perceptible prejudice has been caused to the Revenue. Accordingly, the application for condonation of delay is allowed. 20. In the result, the appeal filed by the assessee is allowed. Order pronounced under proviso to Rule 34 of ITAT Rules, 1963 on 25/11/2025 Sd/- Sd/- (BIJAYANANDA PRUSETH) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 25/11/2025 TANMAY, Sr. PS TRUE COPY आदेश की Ůितिलिप अŤेिषत/Copy of the Order forwarded to : 1. अपीलाथŎ / The Appellant 2. ŮȑथŎ / The Respondent. 3. संबंिधत आयकर आयुƅ / Concerned CIT 4. आयकर आयुƅ(अपील) / The CIT(A)- 5. िवभागीय Ůितिनिध, आयकर अपीलीय अिधकरण, सूरत / DR, ITAT, Surat 6. गाडŊ फाईल / Guard file. आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपीलीय अिधकरण, सूरत/ ITAT, Surat Printed from counselvise.com "