Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2025 Supreme(Online)(Bom) 222097

HIGH COURT OF BOMBAY
G. S. Kulkarni, Aarti Sathe, JJ
Principal Commissioner of Income Tax 1 Thane – Appellant
Versus
Sunny Ashok Lad – Respondent
INCOME TAX APPEAL NO.5 OF 2022

Advocates:
For the Appellants/Petitioners: Akhileshwar Sharma
For the Respondents: None

A penalty for concealment or furnishing inaccurate income particulars cannot be sustained solely on an addition agreed to by an assessee to 'buy peace'. Revenue must independently prove the fraudulent nature of transactions, and adverse material must be disclosed to the assessee to satisfy natural justice requirements.

Headnote:(A) Income Tax Act, 1961 - Sections 143(3), 147, 148, 260A, 271(1)(c), and 274 - Penalty for concealment of income - Whether penalty is sustainable when addition to income was accepted by an assessee merely to 'buy peace' and avoid litigation - Held, assessment and penalty proceedings are legally distinct - Revenue is required to independently establish concealment or furnishing of inaccurate particulars - Failure to provide adverse third-party evidence to an assessee prevents a valid determination of penalty and violates principles of natural justice. (Paragraphs 11-16)

(B) Principles of Natural Justice - Reliance upon third-party evidence - Assessing authorities must furnish all adverse material to the assessee and afford an opportunity to respond or cross-examine before concluding on penal liability - Assessments cannot be sustained when based solely on external reports without independent verification or disclosure. (Paragraph 16)

Facts of the case:
The revenue authority appealed against the decision of an appellate tribunal which deleted a penalty imposed on an assessee under section 271(1)(c) of the Act. The assessee had surrendered specific income additions related to disputed purchases for the purpose of avoiding protracted litigation and to 'buy peace'. The assessing authority initiated penalty proceedings alleging concealment of income and furnishing of inaccurate particulars, relying exclusively on data obtained from a separate government department without providing the assessee with access to this evidence or an opportunity to cross-examine.

Findings of Court:
The court held that the assessing authority failed to independently establish the non-genuineness of the purchases. The voluntary acceptance of an income addition for peace of mind does not constitute an admission of tax evasion or concealment. The court observed that the assessing authority's reliance on unverified external information without allowing the assessee to contest it was procedurally flawed and contrary to law.

Issues: Whether a penalty under the Act can be imposed when an assessee agrees to an addition to income solely to resolve a dispute, and whether an assessing authority can rely upon third-party information without subjecting it to due process or disclosure to the assessee.

Ratio Decidendi: Penalty proceedings are independent of assessment proceedings and require positive evidence of concealment or falsity. Since the revenue authority failed to substantiate the nature of the alleged bogus transactions and infringed upon the principles of fair play by withholding evidence, the imposition of a penalty was legally unsustainable.

Result: Appeal dismissed.

Table of Content
1. procedural history and factual background leading to penalty initiation. (Para 1 , 2 , 3 , 4 , 6 , 7)
2. parties' contentions regarding validity of penalty and nature of disclosure. (Para 5 , 8 , 9)
3. judicial assessment of penalty evidence and applicability of precedent. (Para 10 , 11 , 12 , 13)
4. requirement for independent investigation and adherence to natural justice. (Para 14 , 15)
5. final ruling dismissing the revenue's appeal regarding penalty levy. (Para 16)

ORAL JUDGMENT (Per - G.S.Kulkarni, J.) :-

1. This is an appeal filed by the Revenue under Section 260A of the Income Tax Act, 1961 (`the Act’ for short) assailing the orders passed by the Income Tax Appellate Tribunal, Bench at Mumbai (`Tribunal’) dated 31st October 2019 whereby the Respondent-Assessee’s appeal for the A.Y.2010-11 against the orders passed by the Commissioner of Income Tax (A) dated 3rd October 2017 has been allowed.

2. Briefly the facts are : The assessee is an individual having a proprietary business of civil construction in the name of M/s. Sai Siddhanath Construction. For the assessment year in question the return of income was filed on 12th October 2010 declaring the total income of Rs.87,53,450/- The Assessing Officer (`A.O.’ for short) issued notice under Section 148 of the Act dated 19th July 2013 and commenced re-assessment proceedings on the ground that data is provided by the Sales Tax Department about non genuine purchases from one entity during F.Y. 2009-2010 relevant to assessment year 2010-2011. The assessee responded to the said notice as reproduced below by contending that purchases were genuine and supported by evidence.

“……...Purchases in the financial year 2009-2010, relevant to assessment year 2010-2011 from suspicious dealers quantified by VAT department total amounting to Rs. 3,03,561/- details mentioned below

Sr. No.	Name of Supplier	Amount
1	Arbuda Steel	109,715/-
2	Marco Enterprises	193,846/-
	Total	303,561

Sales tax department was quantified as suspicious dealers. But I purchased material from above mentioned parties which are genuine purchases & payment also made by account payee cheque. We are attached herewith invoice copy, delivery Challan & bank statement showing payment details for your kind consideration.

I am government contractor since last 4 years a per the work order I have to finish the work within a stipulated time & procure the material as per the site requirement & some time problem of working capital to procure the goods on credit from unknown parties for various sites due to the availability of time it is very difficult to judge the genuineness of the party.

My firm is proprietary concern where is no department like corporate in which every activity handled by various departments like purchase, finance, project, HR & admin in proprietorship concern all decisions taken by my self with whatever expertise, so limitation of man power considering the cost factors this type of suspicious dealers misguide to us.

Considering the constitution of my business & availability of manpower & competition in business I agree to make addition in my return for peace of mind & avoid further proceedings. So I made addition in our return & recomputed the tax. So please consider my humble request to your honor not to initiate penalty proceedings for the same.”

3. In response to the Section 148 notice, the assessee added the purchases made from the alleged havala parties by filing a revised return of income. It was assessee’s case that filing of return declaring such income was on such understanding that no penal action under Section 271(1)(c) of the Act for concealment of income would be taken and that the assessee accepted to file the revised return in response to the notice under Section 148 of the Act to buy peace. Accordingly the assessment under the provisions of Section 148 read with Section 143 of the Act was accepted.

4. Assessee did not challenge the assessment order dated 23rd January 201

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2025 Supreme(Online)(Bom) 222097

HIGH COURT OF BOMBAYG. S. Kulkarni, Aarti Sathe, JJPrincipal Commissioner of Income Tax 1 Thane – AppellantVersusSunny Ashok Lad – RespondentINCOME TAX APPEAL NO.5 OF 2022

HIGH COURT OF BOMBAY
G. S. Kulkarni, Aarti Sathe, JJ
Principal Commissioner of Income Tax 1 Thane – Appellant
Versus
Sunny Ashok Lad – Respondent
INCOME TAX APPEAL NO.5 OF 2022