2013 (1) TMI 805 - AT - Income Tax

Penalties deleted for additional income offered in response to notice under section 153A

Sushil Kumar Trehan Versus DCIT

Sushil Kumar Trehan Versus DCIT - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under section 271(1)(c) can be levied on additional income disclosed in a return filed in response to a notice under section 153A where such additional income is based on entries in books of account or documents/loose papers seized in a search initiated before 1.6.2007. 2. Whether acceptance by the Assessing Officer of the return filed under section 153A (i.e., assessment completed on the basis of that return) precludes imposition of penalty under section 271(1)(c) for concealment in relation to the income so returned. 3. Whether penalty under section 271(1)(c) can be sustained where the assessment in respect of additional income was made on a protective basis. ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of Explanation 5 and Explanation 5A to searches initiated before 1.6.2007 - Whether entries in seized material can form basis of penalty under section 271(1)(c) Legal framework: Section 271(1)(c) penalises concealment of particulars of income or furnishing of inaccurate particulars. Explanation 5 (as in force prior to amendments effective 1.6.2007) and Explanation 5A (inserted by Finance Act, 2007 w.e.f. 1.6.2007 and subsequently substituted) govern when assets or income reflected in seized material are treated as deemed concealment for penalty purposes in search cases initiated under section 132. Precedent Treatment: The Tribunal in earlier coordinate-bench decisions examined the effect of the Finance Act, 2007 amendments and held that Explanation 5 (pre-amendment) did not extend to deem concealment in respect of income based solely on entries in seized books/documents; Explanation 5A (applicable to searches initiated on or after 1.6.2007) explicitly covers income based on entries in books/documents. Interpretation and reasoning: The Tribunal reasoned that the amended Explanation 5 (as enacted by the Finance Act, 2007) expressly limited its operation to searches initiated before 1.6.2007 and dealt primarily with assets (money, bullion, jewellery or other valuable articles) found in possession. Explanation 5A created a new statutory regime for searches initiated on or after 1.6.2007, expressly deeming income shown by entries in books or other documents to be concealed for penalty purposes. Because no provision equivalent to Explanation 5A existed for searches initiated before 1.6.2007, the statutory scheme up to that date did not permit imposition of penalty under section 271(1)(c) solely on the basis of entries in seized material. The Tribunal emphasized that invoking Explanation 5 to reach back and penalise earlier assessment years on the basis of seized entries would be based on presumption and conjecture, contrary to settled law that suspicion cannot replace evidence. Ratio vs. Obiter: Ratio - For searches initiated before 1.6.2007, penalty under section 271(1)(c) cannot be imposed solely on the basis of entries in books of account or other seized documents; Explanation 5 does not authorize such treatment. Obiter - Distinctions drawn with decisions relied upon by Revenue were treated as fact-specific and therefore not binding beyond their facts. Conclusions: The Tribunal held that where the search was conducted on 22.11.2006 (i.e., before 1.6.2007) and additional income offered in the section 153A return arose from entries in seized material, Explanation 5 could not be invoked to sustain penalty under section 271(1)(c). Consequently, penalty imposed on that basis must be deleted. Issue 2: Effect of acceptance of return filed under section 153A on levy of penalty under section 271(1)(c) Legal framework: Section 153A provides for assessment of income discovered as a result of search; returns may be filed in response to notices under that provision. Section 271(1)(c) concerns concealment or furnishing inaccurate particulars; applicability depends on whether particulars are deemed concealed. Precedent Treatment: The Tribunal relied on its prior decisions interpreting the interplay between acceptance of a section 153A return and imposition of penalty under section 271(1)(c), concluding that if the return filed under section 153A is accepted by the Assessing Officer, there is no concealment for the purposes of section 271(1)(c). Interpretation and reasoning: The Tribunal observed that where additional income is declared in the return filed pursuant to section 153A and that return is accepted in assessment, there is no failure to disclose the particulars of income; consequently the ingredient of concealment required for penalty under section 271(1)(c) is absent. This reasoning is applied particularly where the additional income declared is based on entries in seized material and the statutory amendment (Explanation 5A) that would deem such entries to constitute concealment is not operative. Ratio vs. Obiter: Ratio - Acceptance of the return filed under section 153A by the Assessing Officer removes the element of concealment for the purpose of imposing penalty under section 271(1)(c) with respect to the income so declared, where the statutory deeming provision (Explanation 5A) is not applicable. Obiter - None beyond explanatory remarks. Conclusions: The Tribunal concluded that where the section 153A return declaring additional income is accepted by the Assessing Officer, penalty under section 271(1)(c) cannot be imposed for that declared income (in the factual context of pre-1.6.2007 search and entries-based disclosure). Issue 3: Imposition of penalty where assessment of additional income was made on a protective basis Legal framework: Protective assessments are assessments made to preserve Revenue's rights where liability is contested or alternative claims exist; penalty under section 271(1)(c) still requires fulfilment of elements of concealment or furnishing inaccurate particulars. Precedent Treatment: The Tribunal treated protective assessments in light of the core principles on concealment and the applicability of Explanation 5/5A; previous coordinate-bench orders deleting penalties on similar protective assessments were followed. Interpretation and reasoning: The Tribunal did not find a separate justification to sustain penalty merely because the assessment was protective. The decisive factors remained (a) whether the return filed under section 153A was accepted and (b) whether the statutory deeming provision applicable to entries in seized material was operative. In the present facts, the protective nature of the assessment did not cure the absence of statutory authority to levy penalty based on entries in seized materials for searches initiated before 1.6.2007. Ratio vs. Obiter: Ratio - Penalty under section 271(1)(c) cannot be upheld solely because the assessment was protective if the statutory conditions for treating the declared income as deemed concealment are not met. Obiter - None additional. Conclusions: The Tribunal held that the protective character of the assessment did not justify upholding the penalty; penalty must be deleted in the factual matrix where the additional income was declared in and accepted via the section 153A return and the search pre-dated 1.6.2007. Cross-reference All conclusions above are inter-related: the non-applicability of Explanation 5A to searches before 1.6.2007 (Issue 1) supports the finding that acceptance of a section 153A return precludes concealment for penalty purposes (Issue 2), and that remains so even where the assessment is on a protective basis (Issue 3). The Tribunal followed coordinate-bench decisions treating identical facts and distinguished contrary decisions on fact-specific grounds.