2017 (7) TMI 29 - AT - Income Tax

Penalty u/s. 271(1)(c) - undisclosed assets - unexplained cash found - non-explanation by the assessee - Held that - The cash found is in fact from the business premises of the four firms, only two of which belong to the assessee. Two, it is the source of the assets found or admitted (refer s. 292C), for which explanation, supported by material, is to be furnished, and do not themselves explain the assets. In fact, once the amount of undisclosed assets has been arrived at (Rs.141.96 lacs), its configuration loses significance, and it is this amount which had to be explained, which could be either in terms of assets already disclosed (and accepted) and/or the income disclosed since. The assessee had no case either in the quantum proceedings (in the second round) nor has any in the penalty proceedings, proceeded with on the conclusion of the former. We, accordingly, find no merit in the assessee s case in the instant proceedings. CIT(A) has clearly misled himself in stating that the assessee has explained the residual assets of ₹ 57.52 lacs, with we rather finding the assessee to have been allowed unmerited relief in assessment. The very fact that the tribunal restored the matter back qua the said amount implies that it did not consider the same as explained. The quantum proceedings stand since finalized. The penalty can therefore only be levied with reference to the income assessed. The income returned pursuant to the search is the same as originally disclosed. There is no question of the assessee having agreed to an amount, disclosing income to that extent, which he continues to contest even in the second round. The AO, however, has levied penalty on the entire income assessed (Rs. 34.86 lacs), which includes ₹ 2.73 lacs returned by the assessee. The same can only be levied with reference to the tax sought to be evaded as defined in Explanation 4 to s. 271(1)(c). The AO shall recompute the penalty amount, and the assessee gets part relief.

Issues Involved:
1. Maintainability of the penalty levied under Section 271(1)(c) of the Income Tax Act, 1961.
2. Explanation and substantiation of undisclosed income and assets.
3. Credit for income declared and profits offered in previous assessment years.
4. Legitimacy of the penalty levied on the entire assessed income.

Issue-wise Detailed Analysis:

1. Maintainability of the Penalty Levied under Section 271(1)(c):
The core issue was whether the penalty of ?13,52,746/- levied under Section 271(1)(c) of the Income Tax Act, 1961, was maintainable. The penalty was initially imposed by the Assessing Officer (AO) due to the assessee's failure to explain the income assessed for the year, which was ?34.86 lacs. The Commissioner of Income Tax (Appeals) [CIT(A)] had deleted the penalty, referencing the tribunal’s order which indicated how the assessee’s explanation should be considered. The tribunal had previously set aside the assessment to the AO for reconsideration of the assessee’s explanation for ?57.52 lacs, while finding ?84.44 lacs as explained. The CIT(A) held that not accepting the assessee’s explanation regarding the opening cash balance did not automatically constitute concealment or furnishing inaccurate particulars of income.

2. Explanation and Substantiation of Undisclosed Income and Assets:
The background facts revealed a survey and search conducted at the assessee's business and residential premises, yielding unaccounted assets including gold, silver, diamonds, and cash. The assessee admitted to these assets being unaccounted, leading to their assessment as undisclosed income. Additionally, a secret file named 'Dhanraj' found on a computer system revealed further undisclosed loans and cash balances. The assessee explained these amounts as proceeds from the sale of jewellery belonging to self and family members in earlier years. The tribunal, in a previous order, had partially accepted this explanation, deleting ?84.44 lacs of the addition and remanding the balance ?57.52 lacs to the AO for reconsideration.

3. Credit for Income Declared and Profits Offered in Previous Assessment Years:
The AO, in the second round of assessment, allowed credit for income declared and profits offered in previous years, totaling ?25.39 lacs, and assessed the income at ?34.85 lacs. The assessee did not contest this assessment further. However, the tribunal observed that the assessee had already been allowed credit for the entire jewellery sold during the previous years, implying that no part of the sale had been realized and was still outstanding. The tribunal noted that the assessee had not provided any new material or explanation for the balance assets of ?57.52 lacs in the second round.

4. Legitimacy of the Penalty Levied on the Entire Assessed Income:
The tribunal found that the CIT(A) had erred in stating that the assessee had explained the residual assets of ?57.52 lacs. The tribunal held that the penalty could only be levied with reference to the income assessed and not on the entire income, including the ?2.73 lacs returned by the assessee. The tribunal cited various Supreme Court decisions affirming that penalty under Section 271(1)(c) is leviable where the assessee is unable to furnish a substantiated explanation. The AO was directed to recompute the penalty amount based on the tax sought to be evaded, as defined in Explanation 4 to Section 271(1)(c).

Conclusion:
The tribunal partially allowed the appeal, directing the AO to recompute the penalty amount, thereby granting the assessee partial relief. The penalty was to be levied only on the portion of the income assessed that was not substantiated by the assessee, excluding the income already returned. The order was pronounced on January 23, 2017, at Chennai.

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