Penalty under section 271(1)(c) cannot be imposed when revised return under section 153A accepted by Assessing Officer

The ITAT Jaipur allowed the assessee's appeal against penalty u/s 271(1)(c). The assessee had filed a revised return under section 153A offering additional income before the search notice was issued. The tribunal found no evidence linking the additional income to seized materials and noted that the assessment order accepted the revised return as filed. Following the Delhi HC precedent in Neeraj Jindal case, the tribunal held that when a revised return under section 153A is accepted by the Assessing Officer, penalty under section 271(1)(c) cannot be automatically imposed merely because it shows higher income than the original return.

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The core legal questions considered in this judgment revolve around the applicability of penalty under section 271(1)(c) of the Income Tax Act, 1961, in the context of additional income disclosed by the assessee in a return filed under section 153A following a search and seizure operation. Specifically, the issues are:

1. Whether the penalty under section 271(1)(c) is leviable on additional income disclosed suo moto by the assessee in the return filed under section 153A, when such income was not disclosed in the original return filed under section 139(1).

2. Whether explanation 5A to section 271(1)(c), which deals with penalty in cases of search and seizure, applies to the additional income offered in the return filed under section 153A.

3. The validity of disallowance of set off of brought forward long term capital loss against the long term capital gain declared in the return filed under section 153A but not disclosed in the original return.

Issue-wise Detailed Analysis

Issue 1: Applicability of penalty under section 271(1)(c) on additional income disclosed in return filed under section 153A

Legal Framework and Precedents: Section 271(1)(c) imposes penalty for concealment of income or furnishing inaccurate particulars of income. Explanation 5A to this section specifically addresses cases arising from search and seizure operations under section 132. The return filed under section 153A is deemed to be a return under section 139(1) for the purposes of assessment and penalty.

Several judicial precedents were relied upon by the assessee to contend that if additional income is disclosed suo moto in the return filed under section 153A and is not related to any material found during search, penalty should not be imposed. Notable among these are:

• Judgment of ITAT Chandigarh Bench in Sh. Tarminder Singh's case, which held that penalty is not leviable if additional income declared under section 153A is voluntary and not due to incriminating material found in search.
• Decision of Mumbai Tribunal in Virendra M. Shanklesha's case, which emphasized that additional income disclosed due to error or omission and not linked to search materials does not attract penalty under section 271(1)(c).
• Rajkot Tribunal's ruling in Shabbir Allauddin Latiwala's case, where absence of linkage between additional income and seized materials led to setting aside of penalty.
• Nagpur Tribunal's decision in DCIT v. PurtiSakhar Karkhana, which held that search assessments under section 153A are not continuations of normal assessments, and penalty under section 271(1)(c) cannot be imposed if returned income under section 153A is accepted without variation.

Court's Interpretation and Reasoning: The Assessing Officer (AO) imposed penalty on the ground that the additional income from long term capital gain (LTCG) of Rs. 6,19,338/- was not disclosed in the original return and was detected due to search and seizure action, thus amounting to concealment. The AO also disallowed set off of brought forward LTCG loss of Rs. 3,18,558/- on the same ground.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the penalty, reasoning that the additional LTCG income declared in the return under section 153A was related to the bogus LTCG detected during search. The CIT(A) held that the onus was on the assessee to prove that the non-disclosure was a bona fide omission and not concealment. Since the assessee failed to discharge this burden, penalty was justified.

However, the Appellate Tribunal noted that the assessee had filed a revised return before issuance of notice under section 153A, voluntarily disclosing the additional income and paying tax along with interest. There was no evidence linking the additional income declared in the revised return to any seized material or incriminating evidence found during search. The Tribunal relied on the decision of the Delhi High Court in PCIT-19 vs. Neeraj Jinal, which held that a revised return filed under section 153A takes the place of the original return for all purposes, and mere enhancement of income in such return does not automatically attract penalty under section 271(1)(c).

Application of Law to Facts: The Tribunal observed that since the additional LTCG income was voluntarily disclosed by the assessee before the notice under section 153A was issued, and the return was accepted by the AO without variation, the imposition of penalty was not justified. The Tribunal distinguished cases where additional income is detected during search and seizure and was not disclosed by the assessee.

Treatment of Competing Arguments: The Revenue relied on the fact that the income was not disclosed in the original return and was only declared after search, thus attracting penalty. The Tribunal rejected this argument on the ground that the revised return was filed prior to the notice under section 153A and was not linked to any incriminating material found in search. The Tribunal also noted that the assessee had paid tax and interest on the additional income, indicating bona fide disclosure.

Conclusion: The penalty under section 271(1)(c) is not leviable on additional income voluntarily disclosed in the return filed under section 153A when such disclosure is not linked to any incriminating material found during search and seizure, and the return is accepted by the AO.

Issue 2: Applicability of explanation 5A to section 271(1)(c) to additional income offered in return filed under section 153A

Legal Framework: Explanation 5A to section 271(1)(c) provides that penalty shall be levied if the income is found as a result of search or seizure. However, if the income is offered voluntarily by the assessee in the return filed under section 153A, which is deemed to be a return under section 139(1), penalty provisions under explanation 5A may not apply.

Court's Reasoning: The CIT(A) initially held that explanation 5A applies if the additional income is related to or unearthed during search. If the income is voluntarily offered by the assessee and not linked to search findings, penalty is not leviable. The AO, however, contended that since the income related to capital gains was part of the search assessment and was not disclosed originally, explanation 5A applied.

The Tribunal, after considering the facts, found that the additional income was declared voluntarily by the assessee prior to the section 153A notice, and there was no direct or indirect linkage to seized materials. Therefore, explanation 5A was not applicable in this case.

Conclusion: Explanation 5A to section 271(1)(c) does not apply to additional income voluntarily offered in the return filed under section 153A, if such income is not linked to any material found during search and seizure.

Issue 3: Disallowance of set off of brought forward long term capital loss against LTCG declared in return filed under section 153A

Legal Framework: The Income Tax Act allows set off of brought forward losses against income under the same head, subject to conditions. However, if the income against which loss is set off was not disclosed in the original return, the claim for set off may be disallowed.

Court's Reasoning: The AO disallowed the set off of brought forward LTCG loss of Rs. 3,18,558/- on the ground that the corresponding LTCG income of Rs. 6,19,338/- was not disclosed in the original return but only in the return filed under section 153A.

The CIT(A) confirmed this disallowance, observing that the assessee did not challenge this addition before him, thereby accepting the disallowance. The Tribunal did not interfere with this aspect, as it was not contested before them.

Conclusion: The disallowance of set off of brought forward LTCG loss against undisclosed LTCG income in the original return, but declared in the return under section 153A, stands confirmed.

Significant Holdings

"The revised return filed under section 153A takes the place of the original return under section 139(1) for the purposes of all other provisions of the Act. Thus, when the Assessing Officer has accepted the revised return filed by the assessee under section 153A, no occasion arises to refer to the previous return filed under section 139 of the Act."

"When an assessee has filed revised return after search has been conducted, and such revised return has been accepted by Assessing Officer, then merely by virtue of fact that such return showed a higher income, penalty under section 271(1)(c) cannot be automatically imposed."

"Penalty under section 271(1)(c) is leviable on the income offered in the income tax return under section 153A if such income is related to or unearthed during the course of search and seizure action. If the additional income offered in income tax return under section 153A is not related to or not unearthed during the course of search and seizure action and is offered by the assessee on his own, penalty under section 271(1)(c) is not leviable."

"The onus is on the appellant to prove that the non-disclosure of capital gain in the original income tax return was due to bona fide genuine omission reason."

"In the absence of any material or finding by the Assessing Officer that the additional income admitted in the return of income filed under section 153A is because of some incriminating material or information found during the course of search and seizure action, it cannot be said that the case of the assessee would attract the provisions of section 271(1)(c)."

In conclusion, the Tribunal allowed the appeal of the assessee and deleted the penalty of Rs. 1,91,375/- imposed under section 271(1)(c), holding that the additional income was voluntarily disclosed in the revised return filed before issuance of notice under section 153A, was accepted by the AO, and was not linked to any incriminating material found during search and seizure. The disallowance of set off of brought forward loss was not challenged and thus confirmed. The principles established clarify that voluntary disclosure of additional income in returns filed under section 153A, accepted by the AO, does not attract penalty under section 271(1)(c), and explanation 5A is not applicable in such circumstances.

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