Disclosure of income in return filed after search is not sufficient to absolve assessee from penalty
Immunity from penalty under Explanation 5 to section 271(1)(c) of the Income-tax Act, 1961 cannot be extended if additional income is declared by filing the return.
ITAT, BANGALORE BENCH ‘C’
DCIT
v
K. Natarajan
ITA Nos. 595 to 600/Bang/08
December 1, 2008
RELEVANT EXTREACTS:
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3.23 The Hon’ble Apex Court in the case of K. P. Madhusudhan v. CIT 251 ITR 99 had an occasion to consider the imposition of penalty after introduction of Explanation to section 271(1)(c). The Hon’ble Apex Court held that specific reference to explanation dealing with deemed concealment is not necessary. The Hon’ble Apex Court observed as under to say that whatever laid by the Apex Court in the case of Sir Shadilal (supra) is not applicable:-
“ Learned counsel for the assessee then drew our attention to the judgment of this court in Sir shadilal Sugar and General Mills Ltd. v. CIT (1987) 168 ITR 705. He submitted that the assessee had agreed to the additions to his income referred to hereinabove to buy peace and it did not follow therefrom that the amount that was agreed to be added was concealed income. That it did not follow that the amount agreed to be added was concealed income is undoubtedly what was laid down by this court in the case of Sir Shadilal Sugar and General Mills Ltd. (1987) 168 ITR 705 and that, therefore, the Revenue was required to prove the mens rea of a quasi-criminal offence. But it was because of the view taken in this and
Thus, in view of the decision of the Apex Court in the case of IC P Madhusudan, one has to consider the imposition of penalty in view of the Explanations introduced.
3.24 As held by the Hon'ble Apex Court in the case of Onkarnath and Sons, one has to see the concealment in the original return. In the original return, the assessee has not disclosed the entire sales. This fact was material to the computation of the total income. No explanation has been offered as to why such sales were not reflected in the original return. The only explanation now submitted is that the assessee agreed for the addition to purchase peace. Such explanation cannot be considered as bonafide because the documents relating to such unaccounted sales were found. It was also found that the assessee was having unaccounted debtors to the extent of Rs.93.54 lakhs as on 31st March, 2004. Hence, in the instant case, Explanation 1 is squarely application for imposition of penalty.
4.2 Perusal of the assessment order show the following facts recorded by the Assessing Officer at the beginning of the order:-
“A search u/s 132 was conducted at the business and residential premises of the assessee on 9.11.2004, Various incriminating documents and books have been seized apart from fis.9 lakhs in cash and jewellery worth Rs.15 lakhs.
During the course of search it was revealed that the assessee used to sell the scrap mainly to the customers from Delhi and these Sales were totally unaccounted', if the party refuse the bill. The assessee use to declare only the accounted sales to sales tax department ami also income tax department. These unaccounted sales have been monitored by means of loose sheets and they have been seized and marked as A/NMS2, A/NMS3, A/NMS4, A/MMS5, A/NMS7, A/ NMSS, A/NMS9, A/NMS10, A/NMS11, A/NMS12andA/NMS14
Assessee's statement to this effect was recorded on 9.112004 to which the assessee has admitted that the sales were unaccounted. The assessee manufactures aluminium ingots in his factory at Nayandanahai, Mysore Road, Bangalore. The nature of business, location of the factory or income earned were not declared to the department On the other hand the assessee declared the factory as a godown and the sale of aluminium ingots as sale of scrap which is not accounted.
The assessee is also running another factory in the name of Ai/s N P Stone Polishing as a proprietary concern. Even the income earned out of this business is not declared in the regular returns filed by the assessee,
Notice u/s 15SA was issued for the years 1999-2000 to 2004-05 en 16.2.2005 proposing to reassess the income and requesting the assessee to file the returns within 30 days from the date of service of the said notice. In response, the assessee requested copies of statements recorded. The copies were made available to the –assessee on 8.3,2005. By his letter dated 18,3.2005 the assessee sought 10 days time to file the returns and the returns were filed on 12.4.2005 for all the years under consideration by admitting additional income”.
From the above observations, it is clear that the Assessing Officer was satisfied that the additional income being offered is the concealed income. The narration of the facts in the assessment order and mentioning of incriminating documents found during the course of search showing unaccounted sales clearly indicate that the Assessing Officer was satisfied during the course of proceedings that penalty proceedings u/s 271(i)(c) are required to be initiated. The satisfaction is evident and it cannot be held that the proceedings have been initiated without recording satisfaction. The ITAT, Visakapatnam in the case of ACIT v Gowtham Public School 88 ITD 31 had an occasion to consider and decide as to whether satisfaction as required u/s 271(l)(c) stands recorded in the case. The learned ITAT observed as under:
"No doubt the satisfaction of the Assessing Officer should precede the issue of notice and the satisfaction is to be recorded in course of asst. proceedings. But there is no statutory requirement that the satisfaction should ST" recorded in writing. The question whether the Assessing Officer had arrived at such satisfaction or not would have to be decided on facts and circumstances of each case. The proceedings is sufficient to form the basis for initiation of penalty proceedings. In the instant case, the narration of facts in the asst. particulars of income during survey operations, admission of earning such income by the assessee, it's disclosure by filing revised return and finally initiation of penalty proceedings under section 271(l)(c) clearly shows that the Assessing Officer had in fact formed his satisfaction that the assessee had committed an offence which attracts the penalty proceedings cannot be faulted and dismissed as illegal. The case law relied upon by the assessee Ram Commercial Enterprises Ltd.'s case (supra) is distinguishable on facts in as much as in that case the Assessing Officer in his asst. order had merely observed/directed penalty proceedings under section 27l (l)(c) to be initiated separately against the assesses Where as in the present case the Assessing Officer has in fact formed the satisfaction and initiated penalty proceedings in course of asst proceedings".
4.3 Hence, relying on the. above decision of the Tribunal and considering the facts as mentioned above, we hold that the AO was satisfied before initiating the proceedings u/s 271(l)(c).
5.1 It is true that the show-cause notice does not contain the specific allegation i.e. whether it is in respect of concealment of income .or furnishing of inaccurate particulars of income. The notice is to be read along with the assessment order during the course of which proceedings has been initiated. The proceedings have been initiated for concealment of income. The assessee in his reply has understood the spirit in which notice has been issued. In his reply, it has been mentioned that he has offered additional income to buy peace and to have an end to the proceedings. If the notice is in substance and effect is in conformity with or according to the intent and purpose of the Act, then such notice cannot be held as invalid as per section 292B of the I T Act. The purpose of issuing the show-cause notice is to give the assessee an adequate opportunity in respect of default, which is detected and alleged against him. From the nature of the assessment proceedings and the fact mentioned in the assessment order, it is clear that there was a specific charge of concealment of income and the assessee got adequate opportunity in rebutting such charge. Hence, it cannot be said that penalty proceedings are invalid because the Assessing Officer has not struck-off the column for which the assessee was not required to give reply. Hence, on this ground, penalty proceedings cannot be cancelled.
5.2 Explanation 5 to section 271(l)(c) was inserted by Taxation Law Amendment Act, 1984 w.e.f. 1st October, 2004. As per Explanation 5, an assessee found to be the owner of any money, bullion, jewellery or other valuable article or thing and the assessee claims that such assets have been acquired by utilizing his income for the earlier previous year or the previous year which is to end on or after the date of the search, then notwithstanding that such income is declared in the return filed after the date of the search the assessee shall be deemed to have concealed the particulars of exception was that deemed concealment is not to be considered in case such income is found recorded in the books of account maintained by the assessee or such income is disclosed to the Commissioner before the search. Thus, by this Explanation, it was made clear that even if the assessee discloses the income for the acquisition of such assets in the return of income filed after the search, the assessee will have to be deemed to have concealed the particulars of income.
5.3 Explanation 5 to section 271(l)(c) was further amended by Taxation Laws (Amendment and Miscellaneous Provisions Act, 1986). The amendment so made has been explained by the CBDT vide Circular No.469 dated 23rd September, 1986. The relevant para isasunder:-
"(c) (&) As per the existing Explanation 5 to section 271(1) of the Income-tax Act, if at the time of search, assets which are not recorded in the books of account are found, a taxpayer is liable to penalty for concealment even if he declares the full value of those assets as his income in the return filed after the search. This provision has been found to operate even in cases where the assessee has no intention to fabricate any evidence and he includes in his return the income out of which such assets have been acquired. Hence, by the Amending Act, it has been provided that if an assessee in such cases makes a statement during the course of the search admitting that the assets found at his premises or under his control have been acquired out of his income which has not been disclosed so far in his return of income to be furnished before the expiry of time prescribe^ in clause (a) or (b) of section 139(1) and specifies M the statement the manner in which such income has been derived and pays the taxes that are due thereon, no penalty shall be leviable”.
5.4 The assessee vide his statement dated 9th November, 2004 in answer to question no.34 in which he was asked to say as to whether he has got anything else to say. The assessee replied as under
"Yes, as explained earlier, I would voluntarily declared a sum of Ts.24,34,709/- being the unaccounted sundry debtors receivable as on date. Since, lam voluntarily declared this income, I may please be given immunity from penalty and prosecution”.
When the above referred answer is read along with question no.13, it is clear that the assessee has to receive Rs.24,34,709/- out of receivable of Rs.93,54,663/- as on 31st March, 2004. Hence, there is a declaration u/s 132(4) for a sum of Rs.24,34,709/- which relates to asst year 2004-05 as the sum represented the receivable as on 31st March, 2004. In the return filed for the asst. year 2004-05, the assessee computed the additional tax payable at Rs.16,02,723/-.. The same was paid as self assessment tax as per the copy of the return filed in the paper book by the assessee. The Hon’ble Rajasthan High Court in the case of CIT v Kanaiahlal 299 ITR 90 held that penalty cannot be imposed and held that the assessee was entitled to immunity under Explanation 5 to Section 271(l)(c) as the assessee has made disclosure of undisclosed income of Rs.3,50,000/-and stated that it would file a return in respect of this amount. Even if this amount was spread over, instead of the asst. year for which it was disclosed, the Hon'ble Rajasthan High Court held that immunity will be available. The Hon'ble Rajasthan High Court in the case of CIT v Mishrimal Soni held that Explanation to section 271(l)(c) applies to tangible and intangible assets. The Hon'ble Allahabad High Court in the case of CIT v Radhakrishna Goyal held that nondisclosure of manner in which undisclosed income was derived is not relevant. However, in the instant case, the manner in which the undisclosed income has been derived is clear from the facts recorded in the statement u/s 132(4) of the IT Act.
5.5 The Hon'ble Gujarat High Court in the case of CIT v Mahendra C Shah 299 ITR 305 mentioned that the statement is recorded in the question and answer form and there would be no occasion for an assesses to state and make averments in the exact format stipulated by the provisions considering the setting in which statement is being recorded. It is incumbent upon authorized officer to explain the provisions of Explanation 5 in entirety to the assessee concerned and the authorized of fleer cannot stop short at a particular stage so as to permit the revenue to take advantage of such a lapse in the statement. Hence, if the statement does not specify the manner in which the income has been earned then it is not detrimental until and unless specific question is asked and the assessee does not give the reply. In the instant case, tax has been paid. The requirement of Explanation 5 to section 271(l)(c) for providing immunity from penalty is that tax along with interest is paid. There is no prescription as to the point of time when the tax has to be paid qua the amount of income declared in the statement u/s 132(4). In the instant case, the assessee has paid the tax. The return filed in response to section 153A were not processed. The payment of interest was created at the time of assessment and it is not the case of the revenue that such payment has not been paid. Hence we are of the opinion that no penalty is leviable in respect of sum-of Rs.24,34,709/- as declared in the statement u/s 132(4) for which the tax stands paid. It is true that the assessee has admitted sundry debtors of more than fts.93 lakhs as on 31st March, 2004; but has not declared the same u/s 132(4) of the I T Act. In the absence of any clear cut declaration in the statement recorded u/s 132(4), immunity from penalty cannot be allowed on the sum of Rs.93,54,663/-. Immunity from penality under Explanation 5 cannot be extended if additional income is declared by filing the return. There is specific requirement that additional income be declared in the statement recorded u/s 132(4). Yience, we can not extend the scope of explanation that penalty will not be leviable if additional income is declared in the return and tax alongwith interest is paid—
5.6 The Hon’ble Kerala High Court in the case of Smt. B Indrcrani v CIT 263ITR 525 had an occasion to consider the imposition of penalty u/s 271(l)(c) when income is disclosed after the search proceedings. The Hon'ble High Court held that principal logical impart of explanation is to shift the burden of proving from the revenue to the assessee. The rebuttal must be on materials relevant and cogent. The explanation of the assessee for the purpose of avoidance of penalty must be an acceptable explanation. In that case, since the disclosure were made after the search was conducted, the Hon'ble High Court held that penalty is leviable. In the instant case also, disclosure has been made after the search and it has been found that undisclosed income stands receivable in the form of sundry debtors,
5.7 The Hon'ble Madras High Court \n the case of CU v Dr. A Mohd. Abdul Qadir 183 CTR 543 had an occasion to consider the imposition of penalty when the revised return was filed after the search. During the course of search, the Accountant of the doctor gave his false statement that the doctor was not accounting 50 to 60% of the receipts. The assessee filed a petition before the Commissioner vide which he submitted that the accretion in wealth is to the extent of Rs.2,92,000 while the income already assessed was Rs.1,00,679/-. He requested the Commissioner to spread over the sum of Rs.1,91,321/- i.e. excess of accretion in wealth and declared income for the asst. years 72-73 to 76-77: The assessee filed revised return. The Hon'ble High court observed that mere filing of the revised return in these circumstances could not have the effect of exonerating the assessee from the liability for penalties as the revised return was filed only on the basis that he has concealed his income during the earlier years. The imposition of penalty was confirmed.
5.8 The Hon'ble Rajasthan High Court in the case of CIT v. Mohd. Mohtram Farooqui 259 ITR l32 had an occasion to consider, the imposition of penalty in a case were the cash was seized by the police authorities and it was explained that part of cash belong to third parties. However, there was no evidence to explanation and the assessee surrendered the amount for assessment by filing the return. The Hon'ble Rajasthan High Court upheld the penalty and observed that after the insertion of Explanation to Section 271(i)(c), the requirement as the department should establish that there has been a conscientious concealment of particulars of income or a deliberate failure to furnish accurate particulars is no longer necessary. In case additions are made and the explanations submitted by the assessee is not satisfactory, the income added should be treated as deemed concealment. In this case, the assessee has filed the return and declared the cash Seized as income in the return. Hence, the disclosure of income in the return filed after search is not sufficient to absolve the assessee from penalty.
5.9 The Assessing Officer has estimated the income from the scrap sale at 7% against shown by the assessee in the return. While applying the rate of 7% the AO has referred to 6 cases in which the gross profit varied from 6.55% to 7.65%. However, the learned AO has not mentioned as to how those cases are comparable with the case of the assessee. In the order, the AO has mentioned the gross profit varying from 6,55% to 7.65% in the case while he himself has applied net profit of 7%. The AO has not referred to the net profit being disclosed by the assessee on the sales disclosed by it and has not made the same as basis for estimating the income. The assessee while estimating net profit of 5% has filed the statement along with the return and has shown the undisclosed income as invested. However, the AO has not brought on record any evidence to suggest that the difference between income estimated at 7% by him and 5% returned by the assessee stands invested in any form. Hence, there is no material to suggest that penalty is leviable In respect of the addition made by the AO. Therefore we delete the penalty in respect of addition made on account of applying net profit of 7% as against 5% by the assessee. Thus, the penalty is leviable to the extent of net profit estimated at 5% by the assessee. Similarly, other income disclosed in the return filed in response to notice u/s 153A consisted of income declared on account of stone polishing and melting operation of aluminum. Since such income was not declared in the original return, therefore, these amounts will have to be considered for the purpose of imposition of penalty u/s 271(l)(c).
5.10 As per the second proviso to section 153A, the assessment or reassessment if any relating to any assessment year falling within the period of six asst, years referred to in section 153A pending on the date of initiation of search shall abate. The purpose of introducing the second proviso has been explained to clarify that there will be no parallel proceedings, one for the regular assessment and the other for the assessment in consequence of the search.
Whatever is mentioned in the second proviso is that the assessment or reassessment proceedings shall abate. It does not-say that the return for the earlier will abate and will not to be considered for the purpose of the Act. As per section 234B(3), if recomputation is made u/s 153A then the amount on which interest was payable u/s 234B(1) will have to be increased. This show that the earlier assessment will not abate because the interest to be increased for the period starting with the date of order u/s 143(1) was regular assessment and ending with the date on which recomputation u/s 153A is made. Hence we ore not inclined to accept the contentions of the learned AR that in view of second proviso to section 153A, the original return abates and therefore, there is no concealment. Concealment is to be seen on the basis of the original return. In respect of six assessment years mentioned in section 153A, assessments are to be made u/s 153A and any assessment or reassessment proceedings pending on the date of search shall abate. Hence, it cannot be held that penalty is not leviable on account of 2nd proviso to section 153A vide which assessment or reassessment proceedings abate. Returns filed earlier does not stand abate. Mention of section 153A in 234A and 234B for increasing the interest changed earlier also supports the view that earlier returns do not become infractuous.
5.11 In view of the discussion made in the above-referred paras, it is held that penalty on an income of Rs.24,34,709/- for Asst. Year 2004-05 and an addition of income due to application of net profit rate for all the asst. years is not leviable and penalty will be leviable on difference on income declared in return u/s 153A and original return will be leviable after considering the exclusion for which penalty is held as not leviable.
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