Pre-return declaration under Section 139(1) prevents penalty under Section 271(1)(c) via Explanation 5 Exception No.2

HC held for the assessee: because a declaration about undisclosed income (value of diamonds) was made before the return due date under Section 139(1), the deeming provision of Explanation 5( Exception No.2) precluded penalty under Section 271(1)(c). Post-search disclosure in a later return did not negate the pre-search declaration requirement. Deficiencies in a Section 132(4) statement did not defeat immunity where the assessee declared the income and paid tax; the Tribunal's finding of substantial compliance and exemption from penalty was upheld, answering the reference in favour of the assessee.

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Issues Involved:
1. Whether the Tribunal was right in holding that the assessee fulfilled all conditions for availing immunity from penalty under Explanation 5 to Section 271(1)(c) of the Income-tax Act, 1961.
2. Whether the cancellation of penalty based on the inclusion of income of Rs.5,06,712/- representing the value of diamonds was based on a true and correct interpretation of the relevant provisions of law.

Issue-wise Detailed Analysis:

1. Immunity from Penalty under Explanation 5 to Section 271(1)(c):
- The Tribunal concluded that the assessee's case was covered by the Exception provided in Explanation 5 to Section 271(1)(c) and no penalty was leviable for concealment based on the statement recorded under Section 132(4) during the search.
- The Revenue argued that mere declaration in the statement under Section 132(4) did not grant immunity if the assessee failed to pay the tax and interest at the time of filing the return. The assessee had not disclosed the amount in the original return and paid tax only in the revised return.
- The Tribunal held that there was no specific time limit for tax payment stipulated by the provisions and sufficient compliance was shown if tax was paid before the assessment was completed.
- The court agreed with the Tribunal, noting that the outer limit for tax payment should be before the assessment proceedings, as the Assessing Officer must record satisfaction regarding concealment during these proceedings.

2. Interpretation of Relevant Provisions:
- Explanation 5 to Section 271(1)(c) deals with penalty for concealment of income discovered during search and seizure operations. The provision deems income concealed if not declared in returns filed before the search, unless certain conditions are met.
- The Second Exception to Explanation 5 provides immunity if the assessee makes a statement under Section 132(4) declaring the undisclosed income and pays tax and interest on it.
- The Revenue contended that the assessee did not specify the manner in which the income was derived in the statement and did not pay tax with the original return.
- The court held that the authorized officer must fully explain the provisions of Explanation 5 to the assessee during the statement recording. The Tribunal and Allahabad High Court's view that substantial compliance suffices if the income is declared and tax paid was upheld.
- The court found no infirmity in the Tribunal's conclusion that the assessee fulfilled all conditions for immunity from penalty. The statement under Section 132(4) and subsequent tax payment met the requirements for availing the benefit under Explanation 5.

Conclusion:
- The Tribunal was justified in holding that the assessee fulfilled all conditions for immunity from penalty under Explanation 5 to Section 271(1)(c).
- The cancellation of penalty based on the inclusion of income representing the value of diamonds was based on a correct interpretation of the relevant provisions.
- The question referred was answered in the affirmative, in favor of the assessee and against the Revenue. The reference was disposed of with no order as to costs.

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