2015 (1) TMI 201 - HC - Income Tax

Penalty under Section 271(1)(c) not applicable if tax paid on undisclosed income during search proceedings

KIRIT DAHYABHAI PATEL Versus ASSISTANT COMMISSIONER OF INCOME TAX

The HC set aside the Tribunal's order restoring the penalty under Section 271(1)(c), ruling in favor of the assessee. It held that the benefit under ... Validity of restoration of penalty made by Tribunal – Availability of benefit of Explanation 5 - Whether the Tribunal was right in restoring the penalty imposed u/s 271(1)(c) holding that benefit under explanation 5 to Section 271(1)(c) of the Act would be available only for period where due date for filing the return u/s 139(1) of the Act had not expired – Held that:- In Commissioner of Income-Tax Versus SDV. Chandru [2003 (12) TMI 40 - MADRAS HIGH COURT], it has been held that in a case where the asseessee had not disclosed his income in the returns filed for the previous year which have ended prior to the date of the search and, in the statement given u/x 132(4) the assessee admitted the receipt of undisclosed income for those years and also specified the manner in which such income had been derived and thereafter pays the tax on that undisclosed income with interest, then such undisclosed income would get immunised from the levy of penalty. Also in Commissioner Income Tax, Bilaspur CG. Versus Shri Abdul Rashid [2013 (5) TMI 328 - CHATTISGARH HIGH COURT] it has been held that in order to get the benefit of immunity under clause(2) of explanation5 to Section 271(1)(c) of the Income Tax Act, it is not necessary to file the return before the due date provided that the assessee had made a statement, during the search and explained the manner in which the surrendered amount was derived, and paid tax as well as interest on the surrendered amount - the view taken by the Tribunal is erroneous - the assessees had satisfied all the conditions which are required for claiming immunity from payment of penalty u/s 271(1) - the provision does not specify any time limit during which the aforesaid amount i.e. the amount of penalty with interest has to be paid - when the assessees have paid the entire amount with interest, the AO ought to have granted them immunity available u/s 271(1)(c) – Relying upon Assistant Commissioner of Income Tax, Udaipur Versus M/s. Gebilal Kanhaialal HUF, Through Karta, Udaipur [2012 (9) TMI 297 - SUPREME COURT] - the penalty u/s 271(1)(c) cannot be levied on the income shown in the return filed under Section 153A – the order of the Tribunal is set aside - Decided in favour of assessee. Issues Involved:1. Legality of the penalty imposed under Section 271(1)(c) of the Income Tax Act.2. Applicability of Explanation 5 to Section 271(1)(c) of the Income Tax Act.3. Interpretation of the due date for filing the return under Section 139(1) of the Income Tax Act.4. Consideration of the return filed under Section 153A of the Income Tax Act as equivalent to a return filed under Section 139 of the Income Tax Act for penalty purposes.Detailed Analysis:1. Legality of the Penalty Imposed under Section 271(1)(c) of the Income Tax Act:The appellant-assessees challenged the common order dated 17.07.2009, passed by the Income Tax Appellate Tribunal, which restored the penalty imposed by the Assessing Officer under Section 271(1)(c) of the Income Tax Act. The Tribunal had set aside the order of the CIT(A), which had deleted the penalty. The core issue was whether the Tribunal was right in law in restoring the penalty, holding that the benefit under Explanation 5 to Section 271(1)(c) would be available only for the period where the due date for filing the return under Section 139(1) had not expired.2. Applicability of Explanation 5 to Section 271(1)(c) of the Income Tax Act:Explanation 5 to Section 271(1)(c) provides conditions under which an assessee can claim immunity from penalty in the case of undisclosed income found during a search. The High Court of Madras in S.D.V. Chandru held that if the assessee admits the undisclosed income during the search, specifies the manner in which it was derived, and pays the tax with interest, the income would be immunized from penalty. The Supreme Court in Gebilal Kanbhaialal (HUF) clarified that there is no prescribed time limit within which the tax and interest must be paid for claiming immunity under Explanation 5(2).3. Interpretation of the Due Date for Filing the Return under Section 139(1) of the Income Tax Act:The Tribunal's decision was based on the interpretation that the benefit under Explanation 5 to Section 271(1)(c) is only available if the due date for filing the return under Section 139(1) had not expired. However, the High Court of Chattisgarh in Abdul Rashid held that it is not necessary to file the return before the due date to claim immunity, provided the assessee made a statement during the search, explained the manner of deriving the income, and paid the tax and interest.4. Consideration of the Return Filed under Section 153A of the Income Tax Act:The return filed in response to a notice under Section 153A is to be considered as a return filed under Section 139 for the purpose of penalty under Section 271(1)(c). The CIT(A) rightly held that the return filed under Section 153A should be considered for penalty purposes, and penalty should be levied on the income assessed over and above the income returned under Section 153A, if any.Conclusion:The High Court found that the Tribunal's view was erroneous and that the CIT(A) had correctly interpreted the law. The assessees had satisfied all the conditions for claiming immunity from penalty under Section 271(1)(c) as they had paid the entire amount with interest. The provision does not specify any time limit for payment. Consequently, the penalty under Section 271(1)(c) cannot be levied on the income shown in the return filed under Section 153A. The appeals were allowed, the Tribunal's order was quashed, and the CIT(A)'s order was restored. The question of law was answered in favor of the assessee and against the revenue.