In a recent court case, the Bombay High Court ruled in favor of Colo Colour Pvt. Ltd., dismissing the appeal filed by the Principal Commissioner of Income Tax-6. The case was about supposed fake purchases and the penalty that was placed on Colo Colour.
Colo Colour Pvt. Ltd., a company that runs a photo studio and sells photographic materials, was accused of making fake purchases. The Income Tax Department had reopened the company's tax assessment for the year 2011-12, adding over ₹7 lakh to the company's income because of these supposed purchases.
The tax officer said, "the purchase itself cannot be doubted, but... there is an element of suspicion."
The tax officer imposed a penalty of ₹2.75 lakh under Section 271(1)(c) of the Income Tax Act, claiming that Colo Colour gave wrong information and hid income. However, Colo Colour argued that the penalty was based on a rough guess and lacked solid proof.
The Commissioner of Income Tax (Appeals) [CIT(A)] agreed with Colo Colour, saying that the penalty was not justified. The Tribunal supported this decision, stressing that the penalty was based on a guess rather than solid proof.
The Tribunal noted, "the estimated rate of profit... did not amount to concealment or furnishing of inaccurate particulars."
The High Court, with judges G. S. Kulkarni and Aarti Sathe, ruled that the penalty could not be imposed just on a guess. They pointed out that the tax officer's approach lacked the necessary proof to show hiding of income or giving wrong information.
"Penalty proceedings are penal in nature... to create an effective deterrent," the court remarked.
The High Court's decision means that Colo Colour does not have to pay the penalty because there wasn't enough solid evidence to prove that they did something wrong.
