Penalty u/s 271(1)(c) can’t be Imposed when Income is determined on Estimate Basis: ITAT [Read Order]

In ACIT vs. Eagle Theatres, the Delhi bench of the Income Tax Appellate Tribunal (ITAT) held that penalty under Section 271(1)(c) of the Income Tax Act, 1961 cannot be imposed when income is determined on estimate basis.

The assessee, owner of two properties, sold one. He claimed revenue deduction of Rs.66.88 Lacs as one-time payment to employees as retrenchment compensation. The Assessing Officer (A.O.) disallowed such deduction. After two rounds of litigation, the Tribunal accepted the alternate plea of the assessee for allowing such expenditure as cost of improvement under Section 48 of the Income Tax Act, 1961. The assessee in the computation of capital gain, attributed Rs.1 lac towards constructed portion of building as the premises was sold on consolidated basis comprising of land and building.

The Assessing Officer estimated sale consideration relatable to super structure at Rs.32.70 lac. He accordingly made the addition. The Tribunal reduced the estimate of sale consideration towards constructed portion to Rs. 16.35 lac. The AO imposed penalty of Rs. 18,05,176/- u/s 271(1)(c) of the Act with respect to the above two items. The Commissioner of Income Tax (Appeals) (CIT(A)) deleted the penalty in respect of retrenchment compensation paid to employees in terms of agreement to sell while confirming the penalty in relation to the other item, being, computation of capital gain on the sale consideration attributable to building for which the assessee estimated sale consideration at Rs.1 lac. Aggrieved, both parties appealed to ITAT.

The bench comprising of Judicial Member Suchitra Kamble and Vice President R. S. Syal observed “Admittedly, no separate sale consideration of super structure was assigned in the sale deed. Whereas the assessee estimated Rs.1 lac as sale consideration of building sold, the Assessing Officer estimated the same at Rs.32.70 lac, which got finally settled by means of appellate order at Rs.16.35 lac. These facts indicate that penalty is based on mere estimate. The Hon’ble Delhi High Court in CIT vs. Aero Traders Pvt. Ltd., (2010) 322 ITR 316 (Del), has held that no penalty u/s 271(1)(c) can be imposed when income is determined on estimate basis. Similar view has been taken by the Hon’ble P&H High Court in Harigopal Singh vs. CIT (2002) 258 ITR 85 (P&H) and the Hon’ble Gujarat High Court in CIT vs. Subhash Trading Company, 221 ITR 110 (Guj). Under these circumstances, we are of the considered opinion that the ld. CIT(A) was not justified in sustaining the penalty on the basis of estimate. We, therefore, order to delete the penalty.”