ITAT Surat Deletes Section 271(1)(c) Penalty Where Bogus Purchase Addition Was Sustained on Estimation Basis

Overview of the Ruling

The Surat Bench of the Income Tax Appellate Tribunal, in ITA No. 159/Srt/2026 (Sharad Jain Vs ITO), delivered a significant ruling on 13.07.2026, setting aside a penalty of Rs. 37,30,939/- that had been imposed under Section 271(1)(c) of the Income-tax Act, 1961 for Assessment Year 2007-08. The Tribunal concluded that once an addition relating to alleged bogus purchases has been sustained purely on an ad hoc or estimation basis across multiple appellate tiers, the imposition of penalty under Section 271(1)(c) cannot be legally justified.

Background: The Assessee and the Reassessment

The assessee, an individual engaged in the diamond trade, had originally filed a return under Section 139 of the Income-tax Act, 1961 for AY 2007-08, which was duly assessed. Thereafter, the case was reopened under Section 147 on the strength of information gathered during a search operation conducted on the "Bhanwar Lal Jain Group". Information obtained during this search indicated that the group had been issuing non-genuine bills to provide accommodation entries to various beneficiaries. The assessee was identified as one such beneficiary.

During the reassessment proceedings, the Assessing Officer, Ward-3(3)(4), Surat, found that the assessee had made bogus purchases aggregating to Rs. 8,93,53,079/-. However, rather than disallowing the entire amount, the Assessing Officer made an addition of Rs. 2,23,38,270/-, which represented 25% of the total alleged bogus purchases.

Progressive Reduction of the Addition at Each Appellate Stage

What makes this case particularly instructive is the way in which the quantum of the addition was progressively reduced at every level of adjudication:

  1. Assessing Officer: Addition computed at 25% of alleged bogus purchases, i.e., Rs. 2,23,38,270/-
  2. **CIT(A) (First Appeal)😗* Rate of addition reduced from 25% to 12.50%, resulting in a sustained addition of Rs. 1,11,69,135/-
  3. **ITAT, Surat (ITA No. 1390/Ahd/2017, order dated 18.07.2022)😗* Addition further reduced from 12.5% to 6% of the alleged bogus purchases

This successive reduction at each forum made it evident that the addition was never anchored to any precise, verified figure of concealment — it was, at every stage, an estimate or approximation.

Initiation and Imposition of Penalty

Simultaneously with the completion of the reassessment, the Assessing Officer initiated penalty proceedings under Section 271(1)(c) of the Income-tax Act, 1961. By order dated 29.03.2019, the Assessing Officer imposed a penalty of Rs. 37,30,939/-. Notably, this penalty was calculated with reference to the addition of Rs. 1,11,69,135/- as sustained by the CIT(A), rather than the ultimately reduced figure that the ITAT later arrived at.

The first appellate authority, the Commissioner of Income-tax-NFAC, Delhi, by order dated 30.01.2026, confirmed the penalty. Aggrieved by this confirmation, the assessee filed the present appeal before the ITAT, Surat.

Contentions Raised Before the Tribunal

Assessee's Arguments

The Authorised Representative for the assessee made the following submissions: