2011 (6) TMI 462 - AT - Income Tax

Penalty under section 158BFA - Undisclosed income - search u/s 132 - AO initiated proceedings under section 158BD - Assessee furnished return in response section 158BD notice declaring nil undisclosed income - capital gains being assessed in a block assessment at 60 per cent after the search action, the assessee had filed a voluntary return offering the capital gains at 20 per cent - Held that - Assessee has not furnished any undisclosed income in the block return filed by it in pursuance of notice u/s 158BD is not a grievous mistake when the earlier belated return filed by the assessee and available in the files of the assessing authority is also looked into. The fact that the assessee has not filed any return of income through its block return is a legal error but not a ground to impose penalty. The block assessment itself has been completed by the Assessing Officer by adopting the amount of capital gains offered by the assessee in its belated return filed immediately after the search operation. Therefore,if that amount of capital gains is impregnated in the block return filed by the assessee, the equation becomes complete. The only correction was calculating tax at 60 per cent instead of 20 per cent. Thus the only mistake committed by the assessee is that it acted a little over-smart and over-cautious, even though the endeavour of the assessee was not productive. Penalty deleted. In favour of assessee.

Summary

Issues:
1. Penalty imposition under section 158BFA based on undisclosed income in block assessment.

Analysis:
The appeal before the Appellate Tribunal ITAT, Chennai involved a penalty imposed by the Assessing Officer under section 158BFA(2) of the Income-tax Act, 1961, against the assessee, a Hindu undivided family. The penalty was based on the undisclosed income determined during a search and seizure action under section 132, leading to block assessment proceedings under section 158BD. The Assessing Officer treated capital gains as undisclosed income, levying tax at 60 per cent, resulting in the penalty under contention.

The crux of the case revolved around the assessee's actions post the search operation. The assessee had initially filed a voluntary return offering the capital gains for taxation at 20 per cent, typically applicable to long-term capital gains. However, this return was belated, and the Assessing Officer disregarded it, completing the assessment based on the capital gains treated as undisclosed income. The assessee contended that the belated return was filed to disclose the capital gains and argued against the non-disclosure of income in the block return.

Upon careful consideration, the Tribunal highlighted the uniqueness of the case. It noted that the belated return filed by the assessee was technically invalid in the eyes of the law, rendering it non est. Consequently, the nil return filed by the assessee could not have been accepted for block assessment purposes, necessitating the inclusion of capital gains and tax levy at 60 per cent. The Tribunal emphasized the significance of accurately completing the quantum assessment and demanding tax accordingly.

However, the Tribunal differentiated between the quantum assessment and penalty imposition under section 158BFA. It noted that the failure to disclose income in the block return did not warrant a penalty, considering the earlier belated return where the capital gains were offered for taxation. Despite legal and technical flaws in the process, the Tribunal found that the assessee had effectively disclosed the taxable amount, albeit at a lower tax rate. The Tribunal concluded that the penalty imposition was not justified in the circumstances, ultimately ruling in favor of the assessee and allowing the appeal.

In summary, the Tribunal's decision centered on the distinction between the quantum assessment and penalty imposition, emphasizing the assessee's disclosure of capital gains despite procedural errors. The Tribunal's analysis underscored the need for accurate assessment while recognizing the assessee's attempt to disclose income, leading to the deletion of the penalty imposed under section 158BFA.