2017 (5) TMI 709 - AT - Income Tax

Tribunal sets aside penalty under Income-tax Act due to retrospective amendment

The Tribunal allowed the appeal, setting aside the penalty under section 158BFA(2) of the Income-tax Act, 1961, due to the retrospective nature of the ... Penalty under section 158BFA(2) for undisclosed income - definition of 'undisclosed income' and retrospective amendment - applicability of retrospective amendment to returns filed earlier - reliance on statement recorded under section 132(4) as basis for additionsPenalty under section 158BFA(2) for undisclosed income - definition of 'undisclosed income' and retrospective amendment - applicability of retrospective amendment to returns filed earlier - Whether penalty under section 158BFA(2) could be sustained where additions related to expenses/deductions that were included within the definition of 'undisclosed income' only by a later amendment - HELD THAT: - The Tribunal examined the amendment to the definition of 'undisclosed income' effected by the Finance Act, 2002 which inserted the phrase 'or any expense, deduction or allowance claimed under this Act which is found to be false', retrospectively from July 1, 1995. It held that at the time the assessee filed the block return on June 7, 2000 the definition did not include false expenses, deductions or allowances and therefore the assessee was not obliged to declare such items in the block return. The Tribunal applied precedents addressing retrospectivity and its limits (including the principle that retrospective amendments cannot impose new penal or quasi punitive liabilities in circumstances where the legal position at the time of filing did not create such liability). The Tribunal also noted factual aspects that the additions were founded primarily on a statement recorded under section 132(4) which was subsequently retracted and that no independent incriminating material was found during search to substantiate the disallowances. On these grounds and by following earlier decisions on identical questions, the Tribunal concluded that the retrospective amendment could not be invoked to sustain the penalty levied under section 158BFA(2) in the present case and therefore reversed the orders of the lower authorities confirming the penalty. [Paras 11, 12]Penalty under section 158BFA(2) set aside as the post facto amendment to the definition of 'undisclosed income' could not be applied to the block return filed on June 7, 2000; appeal allowed.Final Conclusion: The appeal is allowed and the penalty imposed under section 158BFA(2) is deleted. Issues Involved:1. Legality of the penalty under section 158BFA(2) of the Income-tax Act, 1961.2. Definition and scope of 'undisclosed income' prior to the amendment by the Finance Act, 2002.3. Validity of additions based on statements and retracted statements.4. Applicability of retrospective amendments on penalties.Issue-wise Detailed Analysis:1. Legality of the Penalty under Section 158BFA(2):The primary issue in this appeal is the legality of the penalty amounting to Rs. 17,33,821 levied under section 158BFA(2) of the Income-tax Act, 1961. The assessee contended that the penalty was not legally tenable as the expenses were not covered in the definition of 'undisclosed income' prior to the retrospective amendment by the Finance Act, 2002, effective from July 1, 1995.2. Definition and Scope of 'Undisclosed Income':The assessee argued that the definition of 'undisclosed income' did not include expenses, deductions, or allowances found to be false at the time of filing the block return on June 7, 2000. The relevant amendment by the Finance Act, 2002, which included these items in the definition of 'undisclosed income,' was made with retrospective effect from July 1, 1995. The Tribunal noted that at the time of filing the return, the disallowance of expenses was not within the ambit of 'undisclosed income.'3. Validity of Additions Based on Statements and Retracted Statements:The additions were primarily based on the statement of the CEO of the assessee-company, which was later retracted. The Tribunal observed that the Assessing Officer relied entirely on the CEO's statement without any corroborating incriminating material found during the search. The Tribunal emphasized that the retraction of the statement was not given due consideration, and the Assessing Officer did not provide the assessee an opportunity to rebut the evidence.4. Applicability of Retrospective Amendments on Penalties:The Tribunal referred to the decision of the Bombay High Court in CIT v. Essar Teleholdings Ltd., which held that retrospective amendments creating new liabilities should not entail punishment with retrospective effect. The Tribunal also cited the Calcutta High Court's decision in Emami Ltd. v. CIT, which held that interest and penalties could not be levied based on retrospective amendments. Applying these principles, the Tribunal concluded that the amended definition of 'undisclosed income' could not apply to the assessee's case as the return was filed before the amendment.Conclusion:The Tribunal reversed the orders of the lower authorities and held that the penalty under section 158BFA(2) was not applicable to the present case due to the retrospective nature of the amendment. The appeal of the assessee was allowed, and the penalty was set aside.Order Pronounced:The order was pronounced in the open court on February 17, 2017.