2017 (1) TMI 988 - AT - Income Tax

Penalty under section 271(1)(c) - addition on the basis of entries found in kaccha books - Held that - Unless during the course of search, the assessee was found to be owner of any money, bullion, jewellery or other valuable things or articles, Explanation 5 would not apply. Thus, it emerges out that concept of concealment in the present appeals is being conceived on the basis of entries found in kaccha books. This inference has been drawn on the basis of Explanation 5. If the Explanation 5 is taken out and held as not applicable, then it would reveal that the department does not have any material harbor a belief that income has been concealed. This was a lacunae in Explanation 5 and that is the reason that after 1.6.2007 a new Explanation i.e. Explanation-5A has been appended which infers the income embedded in the entries found in the note books during the course of search. As n the present case the income of the assessee has been determined on the basis of seized material found during the course of search. These entries were found in katchha book. Hon ble High Court in the case of Pr.CIT Vs. Shri Jignesh Venilal Koralwala 2016 (7) TMI 938 - GUJARAT HIGH COURT has held that Explanation 5 would not be applicable unless during search, the assessee is found to be owner of any money, bullion, jewellery or other valuable article or thing is found. No such things were found during the course of search and addition was made on the basis of narrations in the diary. - Decided in favour of assessee

Summary

Issues Involved:
1. Confirmation of penalty under section 271(1)(c) of the Income Tax Act, 1961 for the assessment years 2001-02 to 2007-08.
2. Applicability of Explanation-5 of Section 271(1)(c) to the income unearthed during search operations.

Issue-Wise Detailed Analysis:

1. Confirmation of Penalty under Section 271(1)(c):

The solitary grievance of the assessee was that the CIT(A) erred in confirming penalties under section 271(1)(c) for the assessment years 2001-02 to 2007-08. The penalties ranged from ?12,200 to ?11,40,000 for the respective years.

A search and seizure operation was conducted on 4.8.2006, leading to the discovery of four kaccha books containing unrecorded cash transactions. Based on these, the assessee offered income at 5% of the unaccounted sales, which was slightly adjusted by the Assessing Officer (AO) to 5.17%. The Tribunal, in quantum appeals, further scaled it down to 5.2% for the assessment years 2001-02 to 2003-04.

The AO initiated penalty proceedings and imposed penalties for the respective assessment years. The CIT(A) upheld these penalties. The assessee contended that since the income was estimated, no penalty should be imposed. However, it was noted that the income was not estimated due to rejection of books but was based on unrecorded cash transactions discovered during the search. Hence, this argument was rejected.

2. Applicability of Explanation-5 of Section 271(1)(c):

The assessee argued that the penalty was imposed under Explanation-5 of Section 271(1)(c), which does not cover income based on entries found in diaries or notebooks. This explanation is applicable if assets like money, bullion, or jewelry are found during the search. The assessee relied on the judgment in Pr.CIT Vs. Shri Jignesh Venilla Koralwala, where it was held that Explanation-5 does not apply to income based on entries in books or documents unless such assets are found.

The Tribunal noted that the concealment was based on entries in kaccha books, and since no money, bullion, or other valuable articles were found, Explanation-5 was not applicable. This gap was addressed by the insertion of Explanation-5A after 1.6.2007, which covers income based on entries in books or documents.

The Tribunal, following the jurisdictional High Court's judgment, concluded that Explanation-5 does not apply to the present case as no such assets were found during the search. Therefore, the penalties were deleted.

Conclusion:

The Tribunal allowed the appeals of the assessee and deleted the penalties for the assessment years 2001-02 to 2007-08. The order was pronounced on 16th January 2017 at Ahmedabad.