ITAT Surat: Penalty under Section 271(1)(c) deleted where bogus purchase addition was purely estimated

1. Background of the dispute

The Income Tax Appellate Tribunal, Surat Bench, in the case of Sharad Jain Vs ITO (ITAT Surat), ITA No. 159/Srt/2026, pronounced on 13/07/2026, examined whether a penalty under Section 271(1)(c) of the Income Tax Act 1961 can survive when the underlying addition towards bogus purchases is determined only on an estimated / ad hoc basis.

The appeal was filed by the assessee challenging the order dated 30.01.2026 passed by the CIT(A)-NFAC, Delhi, which had affirmed a penalty of ₹37,30,939 levied by the Assessing Officer under Section 271(1)(c) in relation to Assessment Year 2007-08.

The essential controversy was not about the quantum addition itself—already settled in a separate quantum appeal—but about whether the character of that addition (being purely estimated) could legally sustain a concealment penalty.

2. Facts leading to the penalty

2.1 Business profile and original assessment

  • The assessee is an individual engaged in the diamond trade.
  • For AY 2007-08, the assessee filed his return of income under Section 139, which was originally processed and assessed.

2.2 Reopening under Section 147

Subsequently, the case was reopened under Section 147 based on information received from a search conducted on the “Bhanwar Lal Jain Group”. During this search, the group was alleged to have been involved in providing accommodation entries through non-genuine purchase bills.

On the strength of this material, the assessee was treated as one of the alleged beneficiaries of such accommodation entries. During the reassessment:

  • The Assessing Officer identified purchases of ₹8,93,53,079 as alleged bogus purchases.
  • On a 25% estimate of such purchases, an addition of ₹2,23,38,270 was made in the reassessment order.

This was not based on rejection of books followed by a definite determination of actual profit; rather it was an estimation of profit element embedded in the alleged accommodation bills.

2.3 Relief by CIT(A) and further reduction by ITAT in quantum proceedings

The assessee challenged the reassessment before the CIT(A):

  • The CIT(A) did not accept the full 25% addition and restricted the disallowance to 12.50% of the impugned purchases.
  • Consequently, the addition stood curtailed from ₹2,23,38,270 to ₹1,11,69,135, granting partial relief.

The assessee then carried the quantum dispute to the ITAT Surat in ITA No. 1390/Ahd/2017.

  • By order dated 18.07.2022, the Tribunal further reduced the addition to 6% of the alleged bogus purchases.
  • Thus, the addition was consistently treated as a percentage-based profit element estimation, undergoing revision at each appellate stage.

2.4 Initiation and levy of penalty

Side by side with the reassessment order, the Assessing Officer initiated penalty proceedings under Section 271(1)(c) for alleged concealment of income / furnishing of inaccurate particulars.

  • Relying on the disallowance as sustained by the CIT(A) at ₹1,11,69,135, the Assessing Officer passed a penalty order dated 29.03.2019, imposing a penalty of ₹37,30,939.
  • The CIT(A) later confirmed this penalty by order dated 30.01.2026, rejecting the assessee’s explanation.

Aggrieved, the assessee approached the ITAT Surat against the penalty order so upheld.

3. Grounds raised by the assessee before ITAT

In essence, the assessee’s challenge before the Tribunal was that:

  • The penalty order under Section 271(1)(c) was illegal and contrary to settled law, as the underlying addition was wholly on estimated / ad hoc basis.
  • The issue was already covered by the jurisdictional coordinate benches of ITAT Surat in cases involving similar estimated additions on alleged bogus purchases.
  • Specific reliance was placed on:
    • Shri Ramprakash Vijayvergia Vs. ITO, ITA No. 125/SRT/2024, dated 16.04.2024
    • **Santosh Singh Hukam Singh Karnawat Vs ITO, ITA No.