2012 (8) TMI 812 - HC - Income Tax

Court Upholds Penalty under Section 271(1)(c) over Explanation 5, Emphasizes Case-specific Analysis

The court held that the Income Tax Appellate Tribunal (ITAT) can uphold the penalty under the main provision of Section 271(1)(c) even if the initiation ... Penalty imposed u/s 271(1)(c) - additional income disclosed in response to the notice u/s 153 C - assessee contested that levy of penalty to be under Explanation 5 of Section 271(1)(c) - Held that:- It was totally unnecessary on the facts of these cases to invoke Explanation 5 to Section 271(1)(c) as income not disclosed in the return u/s 139 but detected subsequently and established to be assessee's income and assessed accordingly is concealed and fully covered by Section 271(1)(c). There was absolutely no need to try and bring the cases under Explanation 5 of section 271(1)(c). The proposition that assessee has an obligation to show correct income under Section139 and if it is not done, Revenue is entitled to invoke provision to Section 271(1)(c) notwithstanding that correct income is shown in response to notice under Section 148 of the IT Act or in some other proceedings is well established and is beyond doubt. For the purpose of present proceeding, there is no material difference whether the returns were filed in response to notice under Section 148 or under Section 153C of the IT Act. As in the present case the assessee did not disclose the income or the assets any time in the returns filed by them. Furthermore, the search conducted was not in their premises, as it was in the premises of someone else. Having regard to the restricted nature of the phrase “books of account” the particulars found in the premises of someone else could not be said to have been “in the course of search”, because the present assessee's premises were not searched. Nor did they make any disclosure or statement, or surrender their income, during the course of search. They filed a return, which for the first time, disclosed the hitherto concealed income. Their explanations were not of the kind which therefore, fell within the exception to Explanation 5 of Section 271 (1) (c) - against assessee. Issues Involved:1. Whether the Income Tax Appellate Tribunal (ITAT) can uphold the penalty under the main provision of Section 271(1)(c) when the initiation and levy of penalty were under Explanation 5 of Section 271(1)(c).2. Whether the ITAT was justified in not going into the merits of the case.Detailed Analysis:Issue 1: Penalty under Section 271(1)(c) vs. Explanation 5 of Section 271(1)(c)The primary question was whether the ITAT can uphold the penalty under the main provision of Section 271(1)(c) when the initiation and levy of penalty were under Explanation 5 of Section 271(1)(c). The court noted that the assessees had not furnished the particulars or sources of income in their original returns filed under Section 139. It was only after receiving notices under Section 153C, following a search operation at a third party's premises, that they disclosed substantially higher income. This non-disclosure of income was deemed to fall within the mischief of Section 271(1)(c), which empowers the Assessing Officer to impose penalties for not furnishing accurate particulars or concealing sources of income.The Tribunal's reasoning in the Kiran Devi batch of cases was highlighted, where it was observed that the assessee had concealed income in the returns originally filed under Section 139, notwithstanding that such income was disclosed after the search and detection of the concealed income in returns filed in response to notices under Section 153C. The Tribunal emphasized that the main provision of Section 271(1)(c) could be applied to uphold the levy of penalty, even if Explanation 5 was initially invoked. The court agreed with this interpretation, stating that the Explanation 5 creates a legal fiction, and the onus is on the assessee to show that they fall within the exceptions carved out of the Explanation. The court found that the assessees did not meet the criteria for these exceptions, as they did not disclose the income in their original returns and only did so after being prompted by the search and subsequent notices.The court concluded that the assessees could not claim the benefit of the exceptions to Explanation 5, as their conduct in filing returns without full particulars clearly amounted to non-disclosure of relevant particulars. Therefore, the question of law was answered in favor of the revenue, and the appeals were dismissed.Issue 2: ITAT's Justification in Not Going into the MeritsThe second issue was whether the ITAT was justified in not going into the merits of the case. The court noted that the ITAT, in Meera Devi's case, had allowed the appeals based on the reasoning in its previous order dated 14.03.2008, which held that Explanation 5 to Section 271(1)(c) was not applicable. However, the ITAT did not discuss the individual facts and why the fifth Explanation was not attracted. The court emphasized that the ITAT should have considered the individual facts of each case and the specific circumstances under which the income was disclosed.The court highlighted that the search was conducted in a third party's premises, and the documents pertaining to the assessees were found and seized. The assessees did not respond to the initial notices and only filed returns after receiving notices under Section 153C, disclosing substantially higher income. This conduct indicated that the assessees had no intention of disclosing the income and had indulged in concealing their income. The court found that the ITAT's failure to consider these individual facts and circumstances was an error.Therefore, the court answered the question of law in favor of the revenue, stating that the ITAT was not justified in not going into the merits of the case. The appeals were consequently allowed.Conclusion:In conclusion, the court held that the ITAT can uphold the penalty under the main provision of Section 271(1)(c) even if the initiation and levy of penalty were under Explanation 5, provided the conditions for penalty under Section 271(1)(c) are met. The court also held that the ITAT was not justified in not going into the merits of the case, emphasizing the importance of considering individual facts and circumstances. The appeals were dismissed or allowed accordingly, with the questions of law answered in favor of the revenue.