2016 (10) TMI 492 - AT - Income Tax

Penalty under Section 271(1)(c) - assessee made surrender immediately after search and before issuance of any notice and had declared the surrendered income in the returns of income accepted by the Assessing Officer - Held that - The Hon ble Supreme Court in the case of CIT Vs. Suresh Chandra Mittal (2001 (6) TMI 63 - SUPREME Court ) has been pleased to hold that once the revised returns have been regularized by Revenue the explanation of the assessee that he has declared additional income to buy peace and to come out of vexed litigation could be treated as bona fide and penalty under Section 271(1)(c) was not leviable, though the assessee had surrendered additional income by way of revised returns after persistent queries by the Assessing Officer. This decision also supports the case of present assessee, rather it is on better footing as the assessee in the present case had made surrender immediately after search and before issuance of any notice and had declared the surrendered income in the returns of income accepted by the Assessing Officer. Besides, the CBDT has time and again vide its Circulars No. 286 of 2003 and 286 of 2013 prohibited the assessing authorities to make assessment solely on the basis of confessional statements of the assessee and to concentrate on documentary evidence. The very purpose behind it is that in case of retraction from its statements by the assessee, the case of the Revenue should not fail. We thus while setting aside the orders of the authorities below direct the Assessing Officer to delete the penalty questioned in the above ground of the appeals for the assessment years under consideration. The ground is accordingly allowed in favour of assessee

Issues Involved:
1. Validity of the penalty imposed under Section 271(1)(c) of the Income-tax Act, 1961.
2. Whether the penalty notice issued under Section 274 of the Income-tax Act was defective.
3. Applicability of Explanation 5A to Section 271(1)(c) in the context of the surrendered income.
4. Whether the surrender of income by the assessee was bona fide and voluntary.
5. The role of incriminating material found during the search in justifying the penalty.
6. The relevance of CBDT Circulars in the context of penalty proceedings.

Detailed Analysis:

1. Validity of the Penalty Imposed under Section 271(1)(c):
The primary issue revolves around the penalty imposed under Section 271(1)(c) for the assessment years 2006-07 to 2010-11. The assessee contested the penalty, arguing that the surrendered income was not based on any incriminating material found during the search. The Tribunal observed that the penalty was levied without any specific charge of either "concealment of income" or "furnishing inaccurate particulars of income," making the penalty order invalid.

2. Defective Penalty Notice under Section 274:
The Tribunal examined the show cause notice issued under Section 274 and found it defective as it did not specify whether the penalty was for "concealment of income" or "furnishing inaccurate particulars." The Karnataka High Court in CIT v. Manjunatha Cotton & Ginning Factory held that such ambiguity in the notice makes the penalty unsustainable. The Tribunal followed this precedent, emphasizing that the notice must clearly state the charge to uphold the principles of natural justice.

3. Applicability of Explanation 5A to Section 271(1)(c):
Explanation 5A to Section 271(1)(c) was invoked by the Assessing Officer, suggesting that the surrendered income was undisclosed and discovered due to the search. However, the Tribunal noted that the income was surrendered voluntarily and immediately after the search, without any specific incriminating documents linking the surrendered amount to the search findings. The Tribunal referred to similar cases like Sejal Exports (India) and Pawan Kumar Gupta, where penalties were deleted due to lack of specific incriminating evidence.

4. Bona Fide and Voluntary Surrender of Income:
The assessee argued that the surrender was made to buy peace and avoid litigation, a stance supported by the Supreme Court in CIT Vs. Suresh Chandra Mittal. The Tribunal found that the surrender was made voluntarily and immediately after the search, and the income was declared in the returns filed under Section 153A, which were accepted by the Assessing Officer. This indicated a bona fide intention, further supported by the CBDT Circulars discouraging assessments based solely on confessional statements.

5. Role of Incriminating Material in Justifying Penalty:
The Tribunal observed that the Assessing Officer accepted the surrendered income without linking it to any specific incriminating material. The penalty was imposed solely on the basis of the surrendered amount, which the Tribunal found insufficient for justifying the penalty under Section 271(1)(c). The Tribunal emphasized that there must be a clear link between the incriminating material found and the surrendered income to sustain the penalty.

6. Relevance of CBDT Circulars:
The Tribunal referred to CBDT Circulars No. 286 of 2003 and 286 of 2013, which discourage reliance solely on confessional statements for making assessments. The Tribunal highlighted that the surrendered income was accepted without corroborating evidence, contrary to the directives of these circulars. This further weakened the justification for the penalty.

Conclusion:
The Tribunal held that the penalty imposed under Section 271(1)(c) was invalid due to the defective notice under Section 274, lack of specific incriminating material linking the surrendered income, and the bona fide nature of the surrender. The orders of the authorities below were set aside, and the penalty was directed to be deleted for all the assessment years under consideration. The appeals of the assessee were allowed.

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