2016 (7) TMI 957 - HC - Income Tax

Penalty leviable under Section 158BFA(2) - whether the penalty proceedings initially started by the assessing officer for an undisclosed income of a sum of ₹ 491.50 lakhs should be allowed to continue for the sum of ₹ 37 lakhs which has ultimately been found to be the undisclosed income of the assessee? - Held that - There was some sort of understanding between the department and the director of the assessee company as to the person who should disclose the income on the basis of the documents seized. The picture which emerges is that after the search and seizure, the revenue itself was unable to make up its mind as to whether the undisclosed income belonged to the company/assessee or to the director Sri S.N. Shroff. There was in those circumstances an understanding arrived at between the parties on the basis whereof the director made a disclosure of ₹ 2.16 crores whereas the company filed a nil return. Ultimately the undisclosed income of the director was assessed at ₹ 2.02 crores approximately and undisclosed income of the company was assessed at ₹ 37 lakhs. Both the CIT(A) and the Tribunal were of the opinion that in the facts of the case no penalty should be levied upon the company. The understanding arrived at between the revenue, the company and the director has not been disproved nor is that finding assailed. Imposition of penalty, when returns of undisclosed income were filed in consultation with the revenue, would certainly have been inequitable. Question formulated at the time of admission of the appeal is answered in the affirmative and in favour of the assessee

Summary

Issues:
- Interpretation of penalty provisions under Section 158BFA(2) of the Income Tax Act, 1961.
- Determination of undisclosed income in block assessment.
- Judicial discretion in initiating penalty proceedings.
- Understanding between revenue, company, and director regarding disclosure of income.

Interpretation of Penalty Provisions under Section 158BFA(2):
The High Court considered a judgment by the Income Tax Appellate Tribunal regarding the penalty leviable under Section 158BFA(2) of the Income Tax Act, 1961. The Tribunal dismissed the revenue's appeal, leading to the question of whether the penalty should be imposed based on the undisclosed income determined. The Court analyzed the assessment of undisclosed income and the subsequent reduction by the Commissioner of Income Tax (Appeals) to determine the appropriate penalty amount.

Determination of Undisclosed Income in Block Assessment:
Following a search and seizure, discrepancies arose in the assessment of undisclosed income between the company and its director. The assessing officer initially determined the undisclosed income of the company at a higher amount, which was later reduced by the CIT(A). The Tribunal affirmed the reduced undisclosed income. The Court deliberated on whether penalty proceedings should continue based on the revised undisclosed income amount.

Judicial Discretion in Initiating Penalty Proceedings:
The CIT(A) exercised judicial discretion by not initiating penalty proceedings after reducing the undisclosed income amount. The Court examined technical arguments regarding the initiation and revision of penalty proceedings based on the final determination of undisclosed income. It emphasized the importance of clear findings regarding concealment and the relevance of the original disclosure made by the director.

Understanding Between Revenue, Company, and Director Regarding Disclosure of Income:
The Court acknowledged an understanding between the revenue, company, and director regarding the disclosure of income post-search and seizure. It noted that the revenue was uncertain about the allocation of undisclosed income between the company and the director, leading to an understanding where the director disclosed a higher amount. The Court upheld the decisions of the CIT(A) and Tribunal, concluding that imposing a penalty would be inequitable given the circumstances and the understanding reached.

In conclusion, the High Court dismissed the appeal, ruling in favor of the assessee based on the assessment of undisclosed income, the exercise of judicial discretion, and the understanding between the parties involved in the disclosure process post-search and seizure.