NEW DELHI, FEB 01, 2013: THE issues before the Bench are - Whether first part of clause (A) of Explanation 1 to section 271(1)(C) is attracted, although the assessee has voluntarily offered income for taxation, however, failed to explain the source of such income - Whether no penalty can be imposed, merely when there is a voluntary surrender of income with the motive of avoiding litigation for arriving at an amicable settlement with the departmen t- Whether when the nature and source of any income is not explained, Revenue is entitled to draw an inference that the amount represents the assessee's taxable income - Whether such failure to offer explanation is statutorily considered as concealment of income - Whether the principle of burden of proof as embedded in Section 106 of the Evidence Act, can be extended to Section 271(1)(C) of Income Tax Act. And the verdict goes against the assessee.

Facts of the case

A survey u/s 133A was conducted at the business premises of the assessee in the course of which some documents pertaining to the assessee were found and were impounded. These documents consisted of blank transfer deeds for shares duly signed, affidavits, share application forms, copies of bank accounts, income tax returns and assessment orders of certain other companies. The documents appeared to have belonged to certain entities who had applied for shares in the assessee company, and the AO wanted the assessee to prove the nature and source of the monies received as share capital, the creditworthiness of the applicants and the genuineness of the transactions. In reply to this, the assessee stated that share application money from different entities aggregating to a sum of Rs.239 lacs was received, however, it could provide explanation only for a sum of Rs 182.51 lakhs, and the balance amount of Rs 56.49 lakhs was not explained. The assessee further stated that with a view to avoid litigation and buy peace and to channelize the energy and resources towards productive work and to make amicable settlement with the Income Tax Department a sum of Rs.56.49 lakhs is being surrendered as income from other sources. Thereafter, the offer of Rs 56.49 lakhs was scaled down to Rs 40.74 lakhs as a revised offer by the assessee. The said amount was added to the total income for taxation.

Subsequently, penalty proceedings were initiated against the assessee. The assessee contended that the amount was offered as income only to buy peace and avoid protracted litigation and with the condition that no penalty or prosecution proceedings would be launched. On appeal, the penalty was confirmed by the CIT(A), and a second appeal was made before the Tribunal, where it was held that there was no material against the assessee to show any concealment and the offer was made in a spirit of settlement of the dispute with the revenue.

Aggrieved, the Revenue filed an appeal before the High Court.

Having heard the parties, the High Court held that,

++ in the case before us the Revenue is right in contending that there was absolutely no explanation from the assessee in respect of the amount of Rs.40,74,000/-; when the AO called upon the assessee to produce the evidence as to the nature and source of the amount received as share capital, the creditworthiness of the applicants and the genuineness of the transactions the assessee simply folded up and surrendered a sum of Rs.56.49 lacs in its hands initially, which was later scaled down to Rs.40,74,000/-. The assessee merely stated that with a view to avoid litigation and to buy peace and to channelize the energy and resources towards productive work and to make amicable settlement with the income tax department, it surrendered the income under the head "income from other sources";

++ in the absence of any explanation in respect of the surrendered income, the first part of clause (A) of Explanation 1 is attracted. It cannot be denied that the nature and source of the amount surrendered are facts material to the computation of the total income of the assessee. The Revenue is entitled to know the same and if the nature and source of the amount are not explained, it is entitled to draw the inference that the amount represents the assessee's taxable income. Though this principle was originally confined to the assessment proceedings, the Explanation has extended it to penalty proceedings also, presumably on the assumption that the furnishing of an explanation regarding the nature and source would have compromised the assessee's position. It is the assessee who has received the monies and is in the knowledge of all the facts relevant and material in relation to the receipt. Therefore, it should be in a position to offer an explanation and disclose the material facts regarding the same. The absence of any explanation is statutorily considered as amounting to concealment of income. In the absence of any explanation regarding the receipt of the money, which is in the exclusive knowledge of the assessee, an adverse inference is sought to be drawn against the assessee under the first part of clause (A) of the said Explanation. This appears to be somewhat in the lines of Section 106 of the Evidence Act, the principle behind which has been extended to the provisions of Section 271(1)(c) of the Act;

++ we are satisfied that the Tribunal fell into error in setting aside the penalty imposed by the AO and upheld by the CIT(Appeals). We accordingly answer the substantial question of law in the affirmative, against the assessee and in favour of the revenue.

(See 2013-TIOL-74-HC-DEL-IT)