By TIOL News Service

NEW DELHI, DEC 18, 2013: THE issue before the Bench is - Whether when the AO has himself given tax credit to individual members of the AOP for the tax paid on surrendred undisclosed income, any penalty u/s 271AA is warranted. And the answer goes against the Revenue.

Facts of the case

The assessee, Sugandh Sansar, is an Association of Persons (AOP). The three members of the AOP are Virendara Kumar Gupta, Sarad Jain and Sudhir Jain. The Revenue conducted a Search & Seizure operation on its premises and the premises of its members. Rs.20 cores was surrendered as undisclosed income at the time of search and it was agreed that the tax liability should be paid as set out in the statement recorded under Section 132(4) of the Income Tax Act, 1961 of Virendara Kumar Gupta. Subsequently, affidavit of Sarad Jain was filed wherein the undisclosed income of Rs.20 crores was duly maintained and accepted. The disclosure was bifurcated into Rs.7.50 crores, as on account of discrepancies in inventory prepared at the business premises of M/s Gupta and Company Private Limited. Rs.12.50 crores was disclosed as income earned through joint enterprise of Virendara Kumar Gupta, Sarad Jain and Sudhir Jain, described as 'Sugandh Sansar' in terms of agreement dated 9th January, 1998. The assessee filed return of income for the Assessment Year 2009-10 declaring income of Rs.11 crores under the head “income from business and profession” after claiming operational expenses of Rs.1.5 crores from the surrendered amount of Rs.12.5 crores.

The Assessing Officer, however, came to the conclusion that this amount should not be taxed in the hands of three member AOP, but individually in the hands of Virendara Kumar Gupta, Sarad Jain and Sudhir Jain. Hence Rs.12.5 crores was equally bifurcated in the hands of Virendara Kumar Gupta, Sarad Jain and Sudhir Jain. Taxes on Rs.12.5 crores were duly paid. Thereafter, 'Sugandh Sansar' AOP filed a revision petition under Section 264 of the Act and the Commissioner of Income Tax, Delhi-VII passed an order dated 18th June, 2012 - "... the appeals in the individual cases of the members of the AOP namely Shri V.K. Gupta, Shri Sudhir Jain and Shri Sharad Jain are still pending before CIT(A), the assessee was asked to clarify its position with regard to these appeals. The assessee has filed an undertaking from all the three members of the AOP pointing out that the appeal have been filed against the additions made of the same amount which had been offered to tax by the assessee AOP M/s Sugandh Sansar. Further it has been stated that in case the relief i allowed to the AOP M/s Sugandh Sansar, all the three members of the AOP undertake to withdraw their appeals from the CIT(A). In view of his undertaking, it is further held that the relief granted in the preceding para will be effective only after the appeals have been withdrawn in the case of members of the AOP and the same have become final.”

In appeal before the High Court, the question before the Bench is - whether the assessee is liable to pay penalty @ 10% under Section 271AA.

While arguing before the Bench the counsel for the Revenue submitted that initially the amount of Rs.12.5 crores was declared and disclosed by the AOP but subsequently the AOP had filed a revised return declaring 'nil' income. Therefore, the conditions for exoneration from penalty under Section 271AAA were not satisfied. It was stated that the individual-assessees in their return of income had not declared proportionate amount of Rs.12.5 cores nor had they substantiated their statements as to the manner in which the income was derived.

Held that,

++ we have considered the said contention, but do not find any merit in the same. The AOP consisted of Virendara Kumar Gupta, Sarad Jain and Sudhir Jain. Initially, the AOP had declared the entire undisclosed income. AOPs are taxed at maximum marginal rate, whereas individuals are taxed on cascading scale. The Assessing Officer had himself given tax credit to individual members of the tax paid by AOP. AOP consisted of three persons, including the present respondent-assessee. The tribunal has taken a realistic and pragmatic view and accordingly deleted the penalty under Section 271AAA of the Act noticing the factual matrix;

++ 'Sugandh Sansar' had filed 'nil' return of income only after the Assessing Officer had decided that Rs.12.5 crores should be equally divided and taxed in the hands of Virendara Kumar Gupta, Sarad Jain and Sudhir Jain. The three assessees had filed appeals before the Commissioner (Appeals) questioning the said order/position. Meanwhile, the AOP filed an application under Section 264, which was accepted by the Commissioner of Income Tax, Delhi-VII and in terms of the said order, the individual assessees withdrew the appeals. Taxes and applicable interest were paid on the undisclosed income. Details of nature of undisclosed income and manner of earning was recorded in the statement of Virendara Kumar Gupta. It was stated that the income was derived from trading transactions not recorded in the books.

(See 2013-TIOL-1040-HC-DEL-IT)