2018 (11) TMI 1254 - HC - Income Tax

Tribunal's Decision on Income Tax Assessment & Penalty Clarified

The Court upheld the Tribunal's decision to levy income tax on only 15% of total receipts in assessment proceedings, in line with Section 158B of the ... Block assessment - Levy of income tax only on 15% of the total receipts disclosed in proceedings under Section 158BC - Held that:- Sub-section (2) of Section 158B which defines “undisclosed income” as including inter alia any income based on an entry in the books of accounts or other documents or transactions representing whole or part of the income, which has not been or would not have been disclosed for the purposes of this Act. The provision does not permit tax to be levied on the entire receipt of money by an assessee and also does not deem undisclosed income to be the entire undisclosed receipts, revealed on search or otherwise. Here, the sale consideration, which was detected on search and seizure, was not reflected in the books of accounts nor the profit returned as income for the subject years. The sale consideration was also for the purchase of apartments in different complexes, the development of which was promoted by the respondent/assessee. The income of the assessee, which stood undisclosed, has to be determined for the purpose of levying income tax. The Tribunal, after looking into the net profit of the assessee in the different projects, directed 15% of the total undisclosed receipts to be taken as the undisclosed income. We are of the opinion that the said direction was perfectly in tune with the provision under Section 150BB and Section 158BH, which specifies that unless otherwise provided all the provisions of the Act, applicable to assessments under Chapter XIVB. - Decided in favour of the assessee Levy of penalty under Section 158BFA - Held that:- What is to be looked at is whether the returns filed under Section 158BC, for each of the assessment years, in the block period conceded income less than that determined finally in the block assessment. As of now the Tribunal had set aside the determination in assessment, levying tax on the entire undisclosed receipts in the respective years and directed determination of income at 15% of the undisclosed receipts. We have upheld the order of the Tribunal and rejected the appeal of the Revenue. Hence a re-computation of the undisclosed income is warranted. Penalty can be imposed only on the excess amounts determined @ 15% of the undisclosed receipts, from that conceded in the returns filed under Section 158BC. We hence answer the question of law in favour of the Revenue and against the assessee 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court were bifurcated into two appeals-one concerning assessment proceedings and the other relating to penalty proceedings under the Income Tax Act, 1961 (the Act). The issues in the assessment appeal were:(i) Whether the Tribunal was justified in directing levy of income tax on only 15% of the total receipts disclosed in proceedings under Section 158BC of the Act;(ii) Whether, upon detection of undisclosed income during search, the entire income must be treated as subject to income tax levy.In the penalty appeal, the questions were reframed as:(i) Whether the Tribunal erred in setting aside the penalty on the ground that the provision under Section 158BFA of the Act is a quasi-criminal proceeding, relying on precedent;(ii) Whether the Tribunal ought to have held that the liability arising from non-disclosure of income is a civil liability due to failure to return proper income.2. ISSUE-WISE DETAILED ANALYSISAssessment Issues:The factual matrix involved a search operation during which undisclosed sale consideration receipts were recovered from the assessee, an architect and builder engaged in constructing and selling apartment complexes. These receipts were neither reflected in the books of accounts nor disclosed in income tax returns. The Assessing Officer treated the entire sale consideration revealed on search as undisclosed income and levied tax accordingly. This was confirmed in first appeal.The Tribunal, however, directed that only 15% of the total sales receipts be considered as undisclosed income for tax purposes. This direction was based on the assessee's statement of net profit from the projects, which averaged 14.47%, and thus the Tribunal rounded it to 15% to represent profits and, consequently, the undisclosed income.The Court examined the relevant statutory framework, particularly Section 158B(2) of the Act, which defines 'undisclosed income' as income based on entries or transactions not disclosed for the purposes of the Act. The Court emphasized that the provision does not mandate levying tax on the entire receipt amount but on the income portion that remains undisclosed.The Court further referred to Section 150BB and Section 158BH, which stipulate that all provisions applicable to regular assessments apply to assessments under Chapter XIVB, including determination of income. Applying these provisions, the Court found the Tribunal's approach consistent with the law, recognizing that undisclosed receipts must be converted into undisclosed income by applying a reasonable profit percentage.The Court rejected the Revenue's contention that the entire undisclosed receipts must be taxed as income, holding that the Tribunal's adoption of 15% as the profit margin for undisclosed income was legally sound and factually supported by the assessee's own profit statements.Penalty Issues:Section 158BFA(2) of the Act prescribes penalty provisions for undisclosed income determined under Section 158BC. The penalty amount ranges from not less than the tax leviable to up to three times the tax leviable on the undisclosed income. The section also contains provisos that exempt penalty if the assessee files a return under Section 158BC, pays the tax, offers seized money for adjustment, furnishes evidence of tax paid, and does not file an appeal against the disclosed income. Where undisclosed income determined exceeds that returned, penalty applies only to the excess portion.The Tribunal had set aside the penalty on the ground that Section 158BFA proceedings are quasi-criminal, requiring mens rea, relying on the precedent that penalty proceedings are akin to criminal proceedings. The Court analyzed this reliance and distinguished the precedent cited (Hindustan Steels Ltd.) on the basis of subsequent authoritative decisions which clarified that penalty under the Income Tax Act is a civil liability and does not require mens rea.The Court observed that the statutory obligation to disclose income and pay tax is a civil duty, and failure to comply attracts civil penalty. The discovery of undisclosed income during search implies deliberate non-compliance, supporting imposition of penalty. The Court clarified that penalty can only be imposed on income determined in excess of that disclosed in the return filed under Section 158BC.Since the Tribunal had directed reassessment of undisclosed income at 15% of receipts (less than the entire receipts), penalty must be recalculated accordingly, imposed only on the excess undisclosed income over the amount returned. Thus, the Court remanded the penalty matter for recomputation consistent with the Tribunal's directions on income determination and statutory provisions governing penalty.3. SIGNIFICANT HOLDINGSThe Court held that the Tribunal was correct in directing levy of income tax on 15% of the total undisclosed receipts rather than the entire amount, stating:'The provision does not permit tax to be levied on the entire receipt of money by an assessee and also does not deem undisclosed income to be the entire undisclosed receipts, revealed on search or otherwise.'It affirmed that undisclosed income must be determined by applying a reasonable profit margin to the undisclosed receipts, consistent with Sections 150BB and 158BH of the Act.On penalty, the Court held:'The penalty provision under Section 158BFA of the Act is not a quasi criminal proceeding... when the statutory obligation is clearly a civil liability cast on the assessee, without requirement for mens rea, then there is no question of application of Hindustan Steel Ltd.'It clarified that penalty is a civil liability arising from failure to disclose income and pay tax, and penalty can only be imposed on income determined in excess of that disclosed in the return filed under Section 158BC.Consequently, the Court rejected the Revenue's appeal on assessment, upheld the Tribunal's direction to tax only 15% of undisclosed receipts, and allowed the penalty appeal only to the extent of remanding for recomputation of penalty consistent with the reassessed income.