2013 (6) TMI 725 - AT - Income Tax

Penalty u/s. 271(1)(c) - different between the income declared in the original return of income and the income declared in the return of income filed in response to notice issue u/s. 153A - Held that - We reject the argument of the Ld. Counsel that the issue arising in this appeal is clearly covered by the decision of Smt. Pramila Ashtekar and others (2012 (9) TMI 956 - ITAT PUNE ) to the extent of the income declared in the return filed in response to notice u/s 153A of the Act. Whether Explanation 5A(ii) contemplates income and not the expenditure ? - whether the income declared by the assessee which is pertaining to the unrecorded expenditure can said to be the income which is contemplated in Explanation 5A(ii)? - Held that - We hold that to the extent of the income offered by the assessee pertaining to the expenditure in the returns filed in response to notice u/s 153A Explanation-5A is applicable and as there is a legal presumption against the assessee in respect of the said income detected during the course of search and seizure operation the assessee case is squarely covered by Explanation- 5(ii) as the assessee himself has admitted the said undisclosed income. What is taxed u/s. 269C is the amount covered by the unrecorded expenditure and ultimately it is nothing but income applied. Admittedly unrecorded income was also found so in our opinion to the extent of the quantum of unrecorded income relating to these four assessment years the assessee has source to incur the unrecorded expenditure and hence without making any classification of unaccounted expenditure found during the course of search.We therefore direct the Assessing Officer to work out the penalty on the net of the unrecorded expenditure (Unrecorded Expenditure Unrecorded Income) as shown above for all the assessment years.

Summary

Issues Involved:
1. Deletion of penalty under Section 271(1)(c) of the Income-tax Act.
2. Set-off of undisclosed income against unexplained expenditure.
3. Applicability of Explanation 5A to Section 271(1)(c) for penalties.
4. Classification of unaccounted expenditure and its impact on penalty.

Detailed Analysis:

Deletion of Penalty under Section 271(1)(c):
The Revenue contended that the CIT(A) erred in deleting penalties levied by the Assessing Officer under Section 271(1)(c) for the assessment years 2003-04, 2004-05, and 2005-06. The CIT(A) had allowed set-off of undisclosed income against unexplained expenditure, thus holding that the expenditure no longer remained unexplained. The Tribunal upheld the CIT(A)'s decision to delete penalties for these years, noting that the unrecorded expenditure could be sourced from the unrecorded income, and therefore, the penalties were not justified.

Set-off of Undisclosed Income Against Unexplained Expenditure:
For the assessment years 2003-04, 2004-05, and 2005-06, the CIT(A) allowed the set-off of unrecorded income against unrecorded expenditure. The CIT(A) held that since the unrecorded expenditure could be sourced from the unrecorded income, it did not remain unexplained and thus could not be assessed as income under Section 69C. The Tribunal agreed with this reasoning but noted that the CIT(A) should not have made a distinction between admissible and inadmissible unrecorded expenditure. Instead, the set-off should apply to the total unrecorded expenditure.

Applicability of Explanation 5A to Section 271(1)(c):
The Tribunal examined whether Explanation 5A to Section 271(1)(c) was applicable to the penalties in question. Explanation 5A, applicable from June 1, 2007, creates a legal presumption of concealment for income detected during a search. The Tribunal noted that the income declared by the assessee pertained to unrecorded expenditure found during the search. The Tribunal held that Explanation 5A(ii) applies to such income, and therefore, the penalties were justified to the extent of the unrecorded expenditure exceeding the unrecorded income.

Classification of Unaccounted Expenditure:
The CIT(A) had classified the unaccounted expenditure into admissible and inadmissible categories and allowed set-off accordingly. The Tribunal found this classification unnecessary and directed that the set-off of unrecorded income should apply to the total unrecorded expenditure. The Tribunal provided a detailed calculation of the excess unrecorded expenditure over unrecorded income for each assessment year and directed the Assessing Officer to compute penalties based on these net amounts.

Conclusion:
The Tribunal partly allowed the Revenue's appeals for the assessment years 2003-04 to 2006-07, dismissing the assessee's appeal for 2006-07 and the cross-objections for the other years. The Tribunal upheld the principle of set-off of unrecorded income against unrecorded expenditure but clarified that the penalties should be based on the net unrecorded expenditure after such set-off. The Tribunal also confirmed the applicability of Explanation 5A(ii) to Section 271(1)(c) for the penalties in question.