2011 (3) TMI 973 - AT - Income Tax

Penalty u/s 271(1)(c) - Survey - Revised return - In response to penalty notice, the assessee contended before the Assessing Officer that originally the advances paid which were in the nature of capital outgo were wrongly booked as revenue expenditure in the books of account - The appellant has contended that Explanation 2 is applicable only when there are any tangible or intangible additions made in course of the assessment proceedings - From a careful perusal of the statement and note of the assessee, it is abundantly clear that during the course of survey proceedings, assessee has categorically admitted that discrepancies relate to the labour charges and machinery maintenance etc - Additions may be made merely for lack of proof or on estimate as for lack of stock account coupled with lower gross profit compared to other dealers in the same line of business - The scope of explanation was explained in paragraph 61.9 in Circular No. 204, dated 24-7-1996 according to which Explanation 2 seeks to punish concealment discovered as though in retrospect It is well settled that the blameworthiness of the assessee with respect to the original return cannot be avoided by filing a fresh return after concealment was detected by the ITO - As the assessee claimed the source for investment made in a year as the income assessed for the earlier assessment year for which no penalty for concealment had been levied, it has fallen within Explanation 2 to section 271(1) - Having carefully perused the assessment orders and the notices issued by the Assessing Officer, we are of the view that it was a typographical error in the penalty notice and the provisions of section 292B of the I.T. Act comes in rescue for the department - Held that this defect in the notice to be a typographical error in mentioning the assessment year for which the entire penalty proceedings cannot be held to be invalid whether the additional income declared by the assessee during the course of survey conducted before the start of the assessment proceedings can be called to be an addition for invoking the Explanation 2, on claim of the assessee raised in succeeding year to be the source of deposits - Held that the provisions of Explanation to section 271 can only be invoked where the source of any receipt, deposit, outgoing or investment in any assessment year is claimed by any person to be an amount which had been added in computing the income or deducted in computing the loss in the assessment year of such person for any earlier assessment year or years but in respect of which no penalty under clause (3) of section 271(1) had been levied - Decided in favor of the assessee

Issues Involved:
1. Legitimacy of penalty proceedings under section 271(1)(c) for Assessment Year 2004-05.
2. Applicability of Explanation 2 to section 271(1)(c) of the Income Tax Act.
3. Validity of penalty notice issued with a typographical error.
4. Nature and treatment of additional income disclosed during survey proceedings.

Issue-wise Detailed Analysis:

1. Legitimacy of Penalty Proceedings under Section 271(1)(c) for Assessment Year 2004-05:
The assessee, a private limited company engaged in civil contract works, filed its original return for AY 2004-05 on 31-10-2004, admitting an income of Rs. 1,05,96,720. A survey under section 133A on 10-3-2005 revealed discrepancies in the books of account, leading to the disclosure of an additional income of Rs. 65 lakhs. The revised return filed on 17-3-2005 disclosed an income of Rs. 1,70,96,720. The Assessing Officer initiated penalty proceedings under section 271(1)(c) for AY 2004-05, invoking Explanation 2 to section 271(1)(c).

2. Applicability of Explanation 2 to Section 271(1)(c) of the Income Tax Act:
The assessee contended that the discrepancies were due to wrongly booked advances as revenue expenditure, which were later rectified. The CIT(A) confirmed the penalty, observing that the additional income was disclosed to cover deficiencies in maintaining labour and expenditure vouchers, not due to capital expenditure misclassification. The Tribunal examined whether Explanation 2, which applies to intangible additions, was applicable. The Tribunal noted that no additions were made in the assessment for AY 2004-05 as the revised return was accepted without adjustments. Thus, the Tribunal concluded that Explanation 2 could not be invoked since the additional income was not an intangible addition made during assessment proceedings.

3. Validity of Penalty Notice Issued with a Typographical Error:
The assessee argued that the penalty notice dated 26-12-2007 was for AY 2005-06, not AY 2004-05. The CIT(A) dismissed this ground, citing section 292B, which allows correction of technical errors. The Tribunal upheld this view, noting that the Assessing Officer's intention to invoke Explanation 2 for AY 2004-05 was clear, and the subsequent notice dated 23-6-2008 correctly mentioned AY 2004-05. Thus, the typographical error did not invalidate the penalty proceedings.

4. Nature and Treatment of Additional Income Disclosed During Survey Proceedings:
The assessee disclosed an additional income of Rs. 65 lakhs during the survey to cover discrepancies in labour and expenditure vouchers. The Tribunal noted that the revised return filed on 17-3-2005 was accepted without further adjustments, indicating no additions were made during assessment. The Tribunal emphasized that Explanation 2 to section 271(1)(c) applies only when additions are made during assessment, not when additional income is voluntarily disclosed before assessment. Therefore, the Tribunal concluded that the penalty under section 271(1)(c) could not be levied for AY 2004-05 based on the additional income disclosed during the survey.

Conclusion:
The Tribunal allowed the appeal, setting aside the CIT(A)'s order and deleting the penalty. The Tribunal held that Explanation 2 to section 271(1)(c) was not applicable as no additions were made during the assessment for AY 2004-05, and the typographical error in the penalty notice did not invalidate the proceedings.

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