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

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 Explanation 5 to Section 271(1)(c) is not limited to the period before the due date for filing returns under Section 139(1). The court relied on precedents establishing that if undisclosed income is admitted during search proceedings, explained, and tax with interest is paid, immunity from penalty applies regardless of return filing timing. The penalty cannot be levied on income declared in returns filed under Section 153A. Consequently, the assessee satisfied all conditions for immunity, and the penalty was rightly disallowed.

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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.

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