By TIOL News Service

AHMEDABAD, MAR 01, 2012: THE issues before the Bench are - Whether the penalty u/s 158BFA (2) is mandatory in nature; Whether for purpose of imposing penalty u/s 158BFA(2), necessary condition prescribed under Sec 271(1)(c) to prove concealment of income or furnishing of inaccurate particulars of income is not required to fulfilled and whether when in the search proceedings, the addition is made even on estimated basis and is accepted, the penalty cannot be deleted stating that the addition was made on estimated basis as it would amount to re-opening the question of quantum addition. And the verdict goes in favour of the Revenue.

Facts of the case

Search and seizure operation u/s 132 was carried out. AO, while carrying out the assessment proceedings made various additions over and above the income disclosed by the assessee. CIT(A) restricted the additions. Tribunal granted further relief. Assessee did not carry the matter any further and Tribunal's order thus became final. AO issued notice for imposing penalty u/s 158BFA(2). No reply was received from the assessee and AO imposed penalty u/s 158BFA(2). CIT (A) confirmed the order of the AO. Tribunal retained a small portion of the penalty imposed.

Revenue raised the question of law that whether the penalty u/s 158BFA(2) was mandatory or discretionary in character and if it was held to be discretionary, did the Tribunal exercise its discretion on legally sound principles so as to delete the penalty.

In respect of various additions tribunal dealt with in penalty order addition-wise. In respect of addition towards unexplained investment in residential house, compound wall and farm house. Tribunal deleted the penalty holding that the income was required to be treated as unaccounted, was a mere presumption. Nothing incriminating had been found which would reveal that the assessee had incurred the said expenses. Though additions were confirmed to the above extent, the same being on estimation basis and the assessee is not found of guilty of concealment. Another addition was towards the inflation of agricultural income by assessee. Tribunal observed that there was nothing on the record to prove that the assessee had disguised his tax bearing income as agriculture income, for which penalty could be levied. In respect of the addition on account of investment in financial activities, Tribunal deleted such penalty observing that, no doubt there was a difference in undisclosed investment in finance activities, but for that the assessee had already demonstrated that there were estimates of additions by decoding the jottings and estimated rotation of funds by adopting six month's cycle. In view of the presence of large number of unavoidable factors which are co-related by logical imagination, no penalty could be levied.

Revenue contended that the penalty u/s 158BFA(2) of the Act is mandatory in nature. Once it is held that during the block assessment income is determined, which is higher than the declared income of the assessee, automatically penalty would follow. The only discretion would be at the rate at which such penalty should be imposed. Section 158BFA finds place in Chapter XIVB which makes special provisions for undisclosed income and the word, ‘may’ used in sub-section (2) of the said section should be constructed as, ‘shall’. Even if penalty u/s 158BFA (2) was held to be discretionary, the Tribunal committed serious error in deleting the penalty on the grounds which were not germane.

Assessee contended that the penalty u/s 158BFA is not mandatory. Even if additions are sustained during the block assessment, it is still the discretion of the Assessing Officer whether or not to impose the penalty.

After hearing both the parties, the High Court held that,

++ upon perusal of sub-section (2) of Section 158BFA, it would emerge that the Assessing Officer or Commissioner (Appeals) has the power to impose penalty in course of any proceedings under the said Chapter, which penalty would range between 100% to 300% of the tax leviable on the undisclosed income determined by the Assessing Officer under clause (c) of Section 158BC of the Act. Proviso to sub-section (2) of Section 158BFA of the Act, however, provides for four conditions, upon satisfaction of which, the assessee would get immunity from such penalty. Such conditions are to be satisfied cumulatively. In essence, it provides that the penalty shall not be imposed if the assessee furnishes a return under clause (a) of Section 158BC; also pays tax on the basis of such return, or offers for adjustment any money seized, or produces evidence of having paid such tax, and also does not file appeal against assessment on that part of the income which is shown in the return. In other words, in cases of proceedings for block assessment, the assessee would have an additional chance to avoid penalty by furnishing a return, paying tax on such undisclosed return and accepting finality with respect to the same;

++ proviso to sub-section (2) of Section 158BFA is merely in nature of clarification and provides that the first proviso would not apply where undisclosed income determined by the Assessing Officer is in excess of the income shown in the return and in such cases, penalty shall be imposed on that portion of the undisclosed income determined, which is in excess of the amount of undisclosed income shown in the return. Closely seen, sub-section (2) of Section 158BFA makes it clear that it is well within the discretion of the Assessing Officer, while framing the assessment for the block period, whether or not to impose any penalty or not. The words, ‘may direct’ has to be given its normal meaning, leaving discretion to the officer. In absence of any special reason the word, ‘may’ cannot be read as ‘shall’. Thus the penalty u/s 158FBA(2) is not mandatory in nature;

++ Section 273B of the Act which provides that penalty shall not be imposed in certain cases on the assessee proving that there was reasonable cause for failure to pay tax refers to several provisions such as Section 271, 271A, etc., makes no mention of Section 158BFA(2). This still does not mean that penalty under Section 158BFA (2) is mandatory;

++ the Tribunal deleted the penalties on three grounds: firstly, that the addition was made only on estimation; secondly, there was no concealment proved by the Revenue, and thirdly, that according to the Tribunal, certain additions would not give rise to penalty proceedings. None of the grounds were sufficient to permit the Tribunal to delete the penalties. The concept of proving concealment of income can nowhere be traced in Section 158BFA (2). Penalty imposable u/s 271 [1](c) of the Act is different from the one that can be imposed u/s 158BFA. Section 158BF provides, inter alia, that no penalty under Section 271[1](c) of the Act shall be leviable with respect to undisclosed income determined in the block assessment. Thus, statutorily also, penalty provided under sub-section (2) of Section 158BFA is set apart from one imposable under Section 271 [1](c) of the Act. The concept of the onus on the Revenue to prove concealment of the income, therefore, cannot be imported while considering the question of penalty under sub-section (2) of Section 158BFA of the Act;

++ Tribunal deleted penalty observing that the findings of the AO is mere presumption. Such an observation would amount to re-opening the question of quantum addition which had attained finality by virtue of the decision of the Tribunal. Similarly the deletion of penalty on inflated agricultural income would amount to re-opening the closed issues of addition sustained upto the level of the Tribunal. Regarding estimated addition, additions made on the basis of estimation may be one of the grounds on which discretion not to impose penalty may be exercised. However, in absence of any requirement to prove concealment or furnishing of inaccurate particulars found in Section 271 [1](c) of the Act cannot form the sole basis to delete penalty. Thus, Tribunal’s order is restored to the tribunal for fresh consideration and disposal in accordance with law.

(See 2012-TIOL-158-HC-AHM-IT in 'Income Tax')