Madras HC: No Penalty U/S. 271(1)(C) Of Income Tax Act on Mere Estimation of Unaccounted Income

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Published on: 29 July 2023 at 13:15 IST

The Madras High Court has quashed criminal proceedings against an Assessee, stating that no penalty under Section 271(1)(C) of the Income Tax Act can be levied based solely on the estimation of unaccounted income.

The court relied on the Supreme Court ruling in Radheshyam Kejriwal v. State of West Bengal [(2011) 3 SCC 581] and emphasized that when the findings of the ITAT favor the Assessee on merits, criminal prosecution on the same facts is not permissible.

Justice V. Sivagnanam, a Single Judge Bench, observed that the ITAT had ruled in favor of the Assessee, stating that there was no evidence of any unaccounted cash payment and the additions made by the Revenue were based solely on estimation.

As a result, the court concluded that penalty proceedings cannot be initiated in this case.

Senior Advocate N.R. Elango represented the Assessee, while Special Public Prosecutor M. Sheela represented the Revenue.

In brief, for the Assessment Year 2013-14, the Revenue filed a complaint before the Additional Chief Metropolitan Magistrate (Economic Offences), alleging offenses under Sections 276C(1) and 277 of the Income Tax Act, claiming that the Assessee could not explain the source of income for incurring cash expenses of Rs. 1.19 crore.

The Revenue added this amount as unexplained expenditure and initiated penalty proceedings, levying a penalty of Rs. 38.84 lakhs under Section 271(1)(c). The CIT(A) confirmed the penalty, but the ITAT held that while it might be a fit case for the addition, it was not suitable for penalty under Section 271(1)(c) as the additions were based on mere presumption from certain documents found during the survey.

The Revenue Department argued that even though the ITAT allowed the Assessee’s appeal against the penalty proceedings, separate criminal proceedings could still be maintained.

However, the High Court rejected the Revenue Department’s argument, relying on the Supreme Court’s ruling in J. Sekar v. Directorate of Enforcement [(2022) 7 SCC 370].

The court reiterated that if the allegations against the Assessee are not sustainable on merits, criminal prosecution on the same facts and circumstances cannot continue.

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