Tribunal instructs AO on penalty: Cancel on declared income, uphold on investments.

C.P. Mohandas Versus DCIT, Central Circle-1 (1), Pune

C.P. Mohandas Versus DCIT, Central Circle-1 (1), Pune - TMI Issues Involved:
1. Levy of penalty under Section 271(1)(c) of the Income Tax Act.
2. Additional income declared post-search.
3. Explanation 5 and 5A to Section 271(1)(c).
4. Penalty on estimated additions and debatable issues.
5. Treatment of agricultural income as business income.

Issue-wise Detailed Analysis:

1. Levy of Penalty under Section 271(1)(c) of the Income Tax Act:
The primary issue in this case is the levy of penalty amounting to Rs. 16 lakhs under Section 271(1)(c) of the Income Tax Act, which was upheld by the CIT(A). The penalty was imposed due to the assessee's concealment of particulars of income and filing inaccurate particulars of income, as observed by the Assessing Officer (AO).

2. Additional Income Declared Post-Search:
The assessee initially filed a return declaring a total income of Rs. 18,09,360/-. After a search conducted under Section 132(1) of the Income Tax Act, the assessee filed a return under Section 153A declaring a total income of Rs. 55,77,038/-, thus disclosing additional income of Rs. 37,67,678/-. The AO assessed the total income at Rs. 79,66,750/-. The additional income was declared due to the search action, and it was not considered voluntary by the AO, leading to the levy of penalty.

3. Explanation 5 and 5A to Section 271(1)(c):
The assessee argued that Explanation 5A, inserted by the Finance Act, 2007, applies to searches initiated on or after 01-06-2007, which was not the case here as the search occurred on 24-06-2003. Therefore, Explanation 5A was not applicable. The Tribunal agreed, stating that the additional income was based on entries in loose papers found during the search and not on any money, bullion, or jewellery, thus falling under Explanation 5, which does not apply to this case.

4. Penalty on Estimated Additions and Debatable Issues:
The Tribunal found that penalty cannot be levied on estimated additions or debatable issues. Specifically:
- Sales Unrecorded (Rs. 55,000/-): The Tribunal considered this a debatable issue as the amount was not received by the assessee, and thus, no penalty was warranted.
- Estimated Disallowance (Rs. 36,500/- and Rs. 54,500/-): The Tribunal held that penalty cannot be levied on estimated disallowances, relying on decisions from the Punjab & Haryana High Court and Chattisgarh High Court.

5. Treatment of Agricultural Income as Business Income:
The assessee had declared agricultural income from rubber plantations, which was partially treated as business income by the AO. The Tribunal noted that similar additions were made in A.Y. 1998-99 without penalty. The Tribunal held that since the computation of agricultural income was on an estimate basis and varied from tree to tree, it could not be the basis for imposing a penalty under Section 271(1)(c).

Conclusion:
The Tribunal directed the AO to cancel the penalty on the additional income declared post-search (Rs. 37,67,679/-) and other specific additions, while upholding the penalty on certain unexplained investments and interest payments. The appeal was partly allowed, and the AO was instructed to recompute the penalty accordingly.