2015 (3) TMI 409 - HC - Income Tax

Penalty under Section 158BFA(2) - income which was not undisclosed income but was determined on the basis of estimation on the application of Weight Formula on gross credits in various bank statements considered as turnover - Held that - In the present instance, there is no doubt at all that the AO did determine the undisclosed income; that it was based upon estimation or an inference is a matter of detail. The plain text of the enactment admits no room for doubt that all manners of determination of income, per se might call for action at the discretion of the AO. As to whether the AO has properly exercised discretion in a particular matter or otherwise can certainly be subject to further scrutiny. The assessee s argument that there was no fresh material since the entire amount was disclosed earlier and that amount has not been varied, in our opinion, is not accurate. The sum of ₹ 1,04,76,94,004/- was claimed in entirety (originally) to have been derived from share business. However, it did not exclusively stem from the share business and in fact the assessee admitted, in the course of search proceedings under Section 132(4) of the Act, that the said amount also included sums forming part of the turnover on account of providing accommodation entries. Now, that radically changed the complexion of the nature of declaration made and certainly formed the basis for materials discovered during the course of proceedings. Furthermore, having regard to this admission, the AO, most importantly, was entitled to determine having regard to the nature of commission originally declared, whether that was in line with the new activity disclosed. It is a matter of record - noted by the CIT(A) in the quantum proceedings that the commission ranged upto 1%. Having regard to the conspectus of circumstances, therefore, the AO determined the commission to be 1.5% on the said total turnover; the ITAT decreased it. Nonetheless, the important fact is that the determination in the course of block assessment order was based upon a material discovered, i.e. in the form of statement made by the assessee under Section 132(4) of the Act; that radically changed the character of the income originally declared. Consequently, the estimation directed by the ITAT was accepted by the assessee. In view of the above circumstances, this Court is of the opinion that the question of law urged has to be answered against the assessee - Decided in favour of the Revenue.

Summary

Issues Involved:

1. Legitimacy of penalty under Section 158BFA(2) of the Income Tax Act, 1961.
2. Determination of undisclosed income based on estimation.
3. Applicability of penalties based on the nature of income discovered during search operations.

Issue-wise Detailed Analysis:

1. Legitimacy of Penalty under Section 158BFA(2) of the Income Tax Act, 1961:

The assessee challenged the penalty imposed by the Income Tax Appellate Tribunal (ITAT) under Section 158BFA(2) of the Income Tax Act, 1961, arguing that the income determined was not undisclosed but was based on estimation. The court examined whether the penalty could be levied on income determined through estimation during block assessment proceedings. The court concluded that Section 158BFA(2) allows the Assessing Officer (AO) to levy penalties on undisclosed income determined during block assessments, even if based on estimation. The court emphasized that the provision does not exclude estimation-based income from penalty imposition.

2. Determination of Undisclosed Income Based on Estimation:

The court reviewed the facts where the AO had determined an undisclosed income of Rs. 1,57,15,409 by applying a flat rate of 1.5% on the aggregate of all credit entries in the bank account statements of the assessee. This determination was based on the assessee's admission during search proceedings that the income included sums from accommodation entries, not just share transactions. The ITAT later revised the commission rate to 0.6% on the total turnover of Rs. 1,04,76,94,004. The court found that the AO's determination was justified as it was based on material discovered during search operations, including the assessee's statement under Section 132(4).

3. Applicability of Penalties Based on the Nature of Income Discovered During Search Operations:

The assessee argued that penalties under Section 158BFA(2) should only apply to undisclosed income directly linked to material found during search operations, not estimated income. The court rejected this argument, stating that the plain text of Section 158BFA(2) allows for penalties on all manners of undisclosed income determined by the AO, including those based on estimation. The court noted that the assessee's admission during search proceedings significantly altered the nature of the declared income, justifying the AO's estimation and subsequent penalty imposition.

Conclusion:

The court concluded that the AO was correct in imposing penalties under Section 158BFA(2) based on the estimated undisclosed income. The court upheld the ITAT's decision to revise the commission rate but maintained that the penalty was justified as the income determination was based on material found during the search. The appeal was dismissed, and the question of law was answered in favor of the Revenue.