By TIOL News Service

NEW DELHI, FEB 23, 2017: THE ISSUE IS - Whether penalty is to be levied automatically whenever the assessee declares a higher income in his return filed u/s 153A in comparison to the original return filed u/s 139(1). NO is the verdict.

Facts of the case: The assessee belonged to the M/s. J.M. Estate Developers Pvt. Ltd. group. For the relevant A.Y 2005-06, assessee filed its return u/s 139(1) declaring an income of Rs.1,72,799/-. Subsequently, a search and seizure operation was carried out in the premises of assessee's group companies and directors of the company, wherein a disclosure of Rs.16 crores was made by the group on behalf of different directors and relatives of the directors. During the search, cash amounting to Rs.5,26,530/- and jewellery worth Rs.17,85,785/- were found from the premises and lockers of the assessee. Out of these assets, cash amounting to Rs.4,06,930/- was seized. Thereafter, notice u/s 153A was issued in response to which the assessee filed his return showing additional income of Rs.21,65,932/-. The AO completed the assessment u/s 153A r/w/s 143(3) after accepting the declared income. In addition, he also initiated penalty proceedings u/s 271(1)(c) in view of the concealed unaccounted income and imposed penalty amounting to Rs.1,34,640/-.

Consequent to the same, the CIT passed revisional order by holding that the order passed by the AO was erroneous as he had whilst making the penalty order, erroneously taken the figure of concealed income at Rs.4,00,000/- as against the additional income of Rs.21,65,932/- declared by the asseessee. Pursuant to this development, the AO made an order u/s 271(1)(c) imposing penalty of Rs.7,29,100/-. On appeal, the CIT(A) deleted the penalty. On further appeal, the ITAT concluded that while the assessee had surrendered undisclosed income, the cash was seized during search in A.Y. 2007-2008, and not in the relevant assessment years under consideration. Therefore, the ITAT concluded that Explanation 5 to Section 271(1) could not be invoked in assessment years 2005-06 & 2006-07, which were the relevant assessment years, on the presumption that the assessee might have been in possession of the seized cash throughout the period covered by search assessments.

On appeal, the HC held that,

++ it must be noted that pursuant to the search and seizure operation conducted u/s 132(4), the assessee was given notice u/s 153A to file fresh return of his income. Thereafter, the assessee filed revised returns and the same was accepted as such by the AO. However, the AO was of the opinion that inasmuch that the income disclosed by assessee u/s 153A was higher than the income in the original return filed u/s 139(1) and since in his view, such disclosure of income was a consequence of the search conducted on the assessee, there was concealment of income which attracted Section 271(1)(c). Therefore, the question that needs to be answered is whether penalty is to be levied automatically whenever the assessee declares a higher income in his return filed u/s 153A in comparison to the original return filed u/s 139(1). The Supreme Court held, in case of Union of India v. Rajasthan Spinning and Weaving Mills 2009-TIOL-63-SC-CX, that for there to be a levy of penalty u/s 271(1)(c), the conditions laid out therein have to be specifically fulfilled. Section 271(1)(c) being in the nature of a penal provision, requires strict construction. Despite the fact that there is no requirement of proving mens rea specifically, it is clear that the word "conceal" inherently carries with it the requirement of establishing that there was a conscious act or omission on the part of the assessee to hide his true income. Thus, as the law stands, the word "conceal" in Section 271(1)(c), would require the A.O. to prove that specifically there was some conduct on part of the assessee which would show that the assessee consciously intended to hide his income. In the present case, the AO noted that the disclosure of higher income in the return filed by the assessee was a consequence of the search conducted and hence, such disclosure cannot be said to be "voluntary". Hence, in the A.O.'s opinion, the assessee had "concealed" his income. However, the mere fact that the assessee has filed revised returns disclosing higher income than in the original return, in the absence of any other incriminating evidence, does not show that the assessee has "concealed" his income for the relevant assessment years. On this point, several High Courts have also opined that the mere increase in the amount of income shown in the revised return is not sufficient to justify a levy of penalty;

++ the whole matter can be examined from a different perspective as well. Section 153A provides the procedure for completion of assessment where a search is initiated u/s 132 or books of account, or other documents or any assets are requisitioned u/s 132A. In such cases, the Assessing Officer shall issue notice to such person requiring him to furnish, within such period as may be specified in the notice, return of income in respect of six A.Ys immediately preceding the assessment year relevant to the previous year in which the search was conducted u/s 132 or requisition was made u/s 132A. Section 153A opens with a non-obstante clause relating to normal assessment procedure covered by Sections 139, 147, 148, 149, 151 and 153 in respect of searches made after May 31, 2003. The sections, so excluded, relate to returns, assessment and reassessment provisions. However, the provisions that are saved are those u/s 153B and 153C, so that these three Sections 153A, 153B and 153C are intended to be a complete code for post-search assessments. Considering that the non-obstante clause u/s 153A excludes the application of, inter alia, Section 139, it is clear that the revised return filed u/s 153A takes the place of the original return u/s 139, for the purposes of all other provisions of the Act. Therefore, the position that emerges from the above-mentioned provision is that once the assessee files a revised return u/s 153A, for all other provisions of the Act, the revised return will be treated as the original return filed u/s 139. Thus, it is clear that when the A.O. has accepted the revised return filed by the assessee u/s 153A, no occasion arises to refer to the previous return filed u/s 139. For all purposes, including for the purpose of levying penalty u/s 271(1)(c), the return that has to be looked at is the one filed u/s 153A. Now, it is trite to say that the "concealment" has to be seen with reference to the return that it is filed by the assessee. Thus, for the purpose of levying penalty u/s 271(1)(c), what has to be seen is whether there is any concealment in the return filed by the assessee u/s 153A, and not vis-a vis the original return u/s 139.

(See 2017-TIOL-354-HC-DEL-IT)