It has long been a settled principle of tax law that a penalty for concealment could not be levied where additions or disallowances were made purely on an ad hoc or estimated basis. For instance, the application of an estimated rate of profit to an assessee’s turnover did not amount to either concealment of income or furnishing of inaccurate particulars under the erstwhile section 271(1)(c) of the Income-tax Act, 1961.
The Bombay High Court recently reaffirmed this settled position in Principal Commissioner of Income-tax v. Elcon Pipe and Fittings (P.) Ltd. [2026] 187 taxmann.com 886 (Bombay). The Court held that no penalty under section 271(1)(c) could be imposed where the addition was sustained purely on an estimated basis or was founded on mere guesswork. In this case, the assessment was reopened on account of alleged bogus purchases. Ultimately, only 12.5% of the disputed purchases was added to the assessee’s income on an estimated basis, which was accepted by both the Revenue and the assessee. Although penalty proceedings under section 271(1)(c) were initiated for concealment of income, the High Court, following its earlier decision in Pr. CIT v. Colo Colour (P.) Ltd. [IT Appeal No. 48 of 2022, dated 16-9-2025] and several other judicial precedents, held that no penalty was leviable and accordingly dismissed the Revenue’s appeal.
However, this well-settled legal position has been substantially modified by section 270A(6) of the Income-tax Act, 1961, and its corresponding provision, section 439(8) of the Income-tax Act, 2025, which govern penalties for under-reporting of income.
Under section 439(8), under-reported income does not include:
(a) income in respect of which the assessee offers a bona fide explanation, supported by full disclosure of all material facts, and the Competent Authority is satisfied with such explanation;
(b) under-reported income determined on an estimated basis, where the accounts are correct and complete to the satisfaction of the Competent Authority, but the method of accounting employed is such that the correct income cannot properly be deduced therefrom;
(c) under-reported income determined on an estimated basis, where the assessee has voluntarily estimated a lower amount of addition or disallowance on the same issue, included such amount in the computation of income, and disclosed all material facts relating thereto; and
(d) additions made in conformity with the arm’s length price determined by the Transfer Pricing Officer, subject to fulfilment of the prescribed documentation and disclosure requirements.
Thus, under the new penalty regime, estimated additions are exempt from penalty only in the following two situations:
- The under-reported income is determined on an estimated basis because, although the accounts are correct and complete to the satisfaction of the Competent Authority, the method of accounting employed does not permit the correct income to be properly deduced.
- The under-reported income is determined on an estimated basis, and the assessee has voluntarily offered a lower amount of addition or disallowance on the same issue, included such amount in the computation of income, and disclosed all material facts relating to the addition or disallowance.
An earlier contrary view was expressed by the Tribunal in Commissioner of Income-tax v. Md. Warasat Hussain [1987] 35 TAXMAN 227 (Pat.), where it held that no penalty could be levied merely because the assessment was based on an estimate. Reversing that view, Uday Sinha, J. observed:
“I seriously contest the bald proposition that no penalty can be levied where the assessment has been made on the basis of estimate. Assessment by estimate is one of the known processes in the taxation world. Where the assessee conceals relevant material or evidence, the Revenue has no option but to make a best judgment assessment by estimate. An assessment by estimate is as much legal as any other assessment. Once an assessment has been made, whether by best judgment or otherwise, the figure so assessed must be held to be the income of the assessee. I do not see why such an assessment cannot invite penalty in its trail.”
The statutory exceptions contained in section 270A(6), now substantially reproduced in section 439(8) of the Income-tax Act, 2025, indicate that Parliament has consciously recognised only two categories of estimated additions as being immune from penalty. Consequently, the earlier judicial principle that no penalty can be levied on estimated additions may no longer be of universal application.
Accordingly, the numerous judicial precedents rendered under section 271(1)(c), including those relating to estimated additions on account of alleged bogus purchases, will have only limited application under the new penalty regime introduced by section 270A of the Income-tax Act, 1961, and continued in section 439 of the Income-tax Act, 2025. While sections 270A and 439, being penal provisions, must undoubtedly receive strict construction, such construction must necessarily give effect to the statutory scheme, which grants immunity to estimated additions only in the situations expressly enumerated therein. Outside those exceptions, under-reported income determined on an estimated basis may no longer be immune from penalty.