2011 (7) TMI 650 - AT - Income Tax

Penalty - Search - undisclosed income - Assessee contended sale of scrap on account of demolition of factory premises and same could not be accounted due to reasons like labour problem etc further income based on loose papers and no money bullion is found thus Explanation 5 to 271(c) is not attracted - Held That - in view of South Indian Finance. Versus Income-Tax Officer (1991 - TMI - 61814 - ITAT COCHIN) Since no money, bullion or cash has been found Explanation 5 is not applicable. Further in the present case, the A.O. finally assessed the loss accepting as declared by the assessee hence fiction created by Expl.-4 is also not applicable.Penalty not leviable.

Issues Involved:
1. Justification of penalty levied under Section 271(1)(c) of the Income Tax Act.
2. Applicability of Explanation-5 to Section 271(1)(c).
3. Applicability of Explanation-3 to Section 271(1)(c).
4. Impact of non-filing or belated filing of returns under Section 139(4).
5. Relevance of discovered documents during the search operation.
6. Applicability of Explanation-4 to Section 271(1)(c) concerning tax evasion.

Detailed Analysis:

1. Justification of Penalty Levied under Section 271(1)(c) of the Income Tax Act:
The primary issue was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in confirming the penalty levied by the Assessing Officer (A.O.) under Section 271(1)(c) of the Income Tax Act for the assessment years (A.Ys.) 2002-03, 2003-04, 2004-05, and 2005-06. The A.O. initiated penalty proceedings because the income disclosed during the search operation on account of the sale of scrap was not accounted for in the books of accounts. The assessee contended that the income from the sale of scrap was due to the demolition of factory premises and could not be accounted for due to various reasons like labor problems and retrenchment of accounting staff.

2. Applicability of Explanation-5 to Section 271(1)(c):
Explanation-5 to Section 271(1)(c) applies when an assessee is found to be the owner of any money, bullion, jewelry, or other valuable articles or things during a search. The assessee argued that no such items were found during the search, and the income was disclosed based on jottings on loose papers. The Tribunal noted that only loose papers with jottings were found, and no money, jewelry, gold, or valuable articles were discovered. Citing the cases of South Indian Finance and T. Kodeeswaran L/H of Late A. Thangam, the Tribunal concluded that Explanation-5 could not be applied as it pertains to tangible assets, not mere documents.

3. Applicability of Explanation-3 to Section 271(1)(c):
Explanation-3 to Section 271(1)(c) deals with cases where no returns were filed under Section 139 or in response to notices under Section 142(1) or Section 148. The Tribunal observed that the assessee filed returns for the first time in response to notices under Section 153A, declaring losses that were accepted by the A.O. without any reduction. The Tribunal agreed with the assessee that Explanation-3 was not applicable because the returns were filed for the first time under Section 153A, and the A.O. accepted the declared losses.

4. Impact of Non-Filing or Belated Filing of Returns under Section 139(4):
For A.Y. 2002-03, the assessee had filed a return on 22.12.2004, beyond the time limit prescribed under Section 139(4), making it a non-est return. The Tribunal held that since the return was not filed within the permissible limit, it was as good as non-filing. Consequently, the assessment framed by the A.O. proved that the assessee had no taxable income, negating any statutory duty to file returns under Section 139 for the relevant years.

5. Relevance of Discovered Documents During the Search Operation:
The Tribunal emphasized that the income disclosed by the assessee was based on documents found during the search, which were loose papers with jottings, not tangible assets like money or jewelry. This distinction was crucial in determining the applicability of Explanation-5, which pertains to tangible assets discovered during a search.

6. Applicability of Explanation-4 to Section 271(1)(c) Concerning Tax Evasion:
Explanation-4 to Section 271(1)(c) concerns tax evasion, where a reduction in declared losses can be deemed as tax evasion. The Tribunal noted that the A.O. accepted the losses declared by the assessee without any reduction, meaning there was no tax liability. Consequently, Explanation-4 was not applicable, as there was no actual tax liability on the assessee.

Conclusion:
The Tribunal concluded that no penalty was leviable as there was no tax liability on the assessee for all four years. The penalties levied by the A.O. were canceled, and the appeals were allowed.

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