ITAT Jaipur: Penalty under Income Tax Act Section 271(1)(c) set aside for undisclosed salary income

The ITAT Jaipur allowed the appeal, setting aside the penalty imposed under section 271(1)(c) of the Income Tax Act for undisclosed salary income. The ITAT found the omission of salary income from the return to be a bona fide mistake, similar to cases where penalties were deleted for inadvertent errors. Emphasizing the strict construction of penal provisions and the absence of incriminating material during the search, the ITAT directed the deletion of the undisclosed salary income addition, citing a decision favoring the assessee when two interpretations are possible.

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Issues:
Confirmation of penalty imposed under section 271(1)(c) of the Income Tax Act, 1961 for undisclosed salary income.

Analysis:
1. The appeal was filed against the order confirming the penalty imposed under section 271(1)(c) of the Act for the assessment year 2010-11. The assessee's salary income from M/s Bhatia Corporation Pvt. Ltd. of Rs. 1,80,000 was inadvertently left out from the return. The Assessing Officer (AO) initiated penalty proceedings on the grounds of concealment of income particulars. The penalty was imposed based on explanation 5A to section 271(1)(c), considering the undisclosed salary income.

2. The assessee contended that no incriminating material was found during the search, making the addition unsustainable. The argument was based on the absence of any intention to conceal income and the inadvertent omission of the salary from the return. However, the CIT(A) upheld the penalty, citing a decision of the Kerala High Court and questioning the credibility of the explanation provided by the assessee regarding the undisclosed salary income.

3. The ITAT hearing focused on the comparison with a similar case where the penalty was deleted by the Coordinate Bench. The ITAT analyzed the legal provisions and observed that the conditions specified in explanation 5A to section 271(1)(c) were not met in the present case. It emphasized that penal provisions must be strictly construed, and in the absence of incriminating material during the search, the penalty was unjustified.

4. The ITAT further noted that the addition made by the AO in the assessment proceedings under section 153A was incorrect as it was not based on any seized material. The ITAT highlighted the importance of incriminating documents for invoking section 153A and concluded that the penalty imposed on the undisclosed salary income was unsustainable. Referring to a Supreme Court decision, the ITAT emphasized adopting a view favoring the assessee when two interpretations are possible.

5. Ultimately, the ITAT found that the omission of the salary income from the return was a bona fide mistake, similar to a case where a penalty was deleted due to inadvertent errors. The ITAT directed the AO to delete the addition of the undisclosed salary income, considering the totality of facts and circumstances, and the decision of the Coordinate Bench in a related case. As a result, the appeal of the assessee was allowed, and the penalty was set aside.

6. The judgment was pronounced on 28th January 2021 by the ITAT Jaipur, emphasizing the importance of adhering to legal provisions and ensuring that penalties are imposed only when justified by the circumstances.

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