Assessee Gets Penalty Immunity Under Section 271(1)(c) Explanation 5(2) After Full Disclosure and Tax Payment

The SC held that the assessee is entitled to immunity from penalty under clause (2) of Explanation 5 to Section 271(1)(c) as all three statutory conditions were met. The assessee disclosed unaccounted assets during the search, admitted these were income not declared before the due date under Section 139(1), and specified the manner of income derivation under Section 132(4). The assessee also paid the tax with interest on the disclosed income, fulfilling the third condition. Since no time limit for payment was prescribed in the clause and no default was established, the penalty was waived. The decision favored the assessee.

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Issues involved:
- Assessment year 1987-88
- Immunity under clause (2) of Explanation 5 to Section 271(1)(c) of the Income Tax Act, 1961

Analysis:
The civil appeal filed by the Department pertains to the assessment year 1987-88, involving an HUF represented by its Karta. Search and seizure operations conducted in July-August 1987 resulted in the seizure of assets and incriminating documents. The Karta made a statement under Section 132(4) of the Income Tax Act on August 1, 1987, surrendering a significant amount. Notices were subsequently issued to furnish information, with the Karta making a statement in February 1990 reiterating concealment of income. The main contention by the Department was the failure of the assessee to file the return of income by the due date of July 31, 1987, despite the Karta's statement on August 1, 1987. The Department relied on this failure to deny immunity under clause (2) of Explanation 5 to Section 271(1)(c).

The primary issue for determination was whether the assessee was entitled to immunity under clause (2) of Explanation 5 to Section 271(1)(c). Explanation 5 is a deeming provision that presumes concealment of income if specific conditions are not met. The interpretation of clause (2) of Explanation 5 was crucial in this case. Three conditions needed to be satisfied for immunity from penalty under this clause. The first two conditions, regarding the statement made during the search and specifying the manner of income derivation, were acknowledged to be fulfilled. The contentious third condition required the assessee to pay tax with interest on the undisclosed income. While the Department argued that the failure to file the return on time negated immunity, the Court emphasized that the only requirement was to pay tax with interest up to the date of payment, with no specified time limit.

The Court concluded that the assessee met all conditions for immunity under clause (2) of Explanation 5 to Section 271(1)(c). As a result, the civil appeal filed by the Department was dismissed, with no order as to costs.

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