2019 (6) TMI 659 - AT - Income Tax

Penalty u/s 271(1)(c) - voluntary action of appellant in declaring additional income once in the revised return and again in response to notice u/s 153A - undisclosed expenditure towards capital cost/purchase of land - validity of Documents found and seized during the course of search - owner of the undisclosed income - HELD THAT - Admission and surrender has been made by the assessee in his individual capacity and not by the companies/firms the second limb can only be said to be satisfied in the instant case. In the instant case the first limb is not satisfied therefore the penalty cannot be levied as the requirement is satisfaction of both the limbs individually and cumulatively. Admittedly the assessee is a partner in M/s Manglam Vardhman Developers and also a Director in M/s Richwell Enterprises Pvt. Ltd. However by merely becoming a partner in a firm or a director in the company the transactions undertaken by the firm/companies will remain the transactions of the firm/companies even though the same have been executed/undertaken by the partner/director in his fiduciary capacity. The assessee and his son were not doing any construction business in his individual capacity rather the business of construction of residential complex and other related activities have been carried out by the companies/firms wherein the assessee and his son were partner/Director. Therefore basis the statements of the assessee and his son other documents/transactions found during the course of search and even as per the tax filings which have been accepted by the Revenue we find that that it is the companies/ firms and not the assessee and his son which are found to be the owner of the undisclosed income. The fact that the assessee and his son have declared the undisclosed income in their individual return of income and have paid taxes thereon and the fact that the Revenue has also accepted the same the same is true as far as the quantum proceedings are concerned and which has now attained finality however when it comes to penalty proceedings the provisions have to be read strictly and only where the conditions specified therein are satisfied the penalty can be held justified. In explanation 5A to section 271(1)(c) it talks about where in course of search initiated under section 132 on or after 1st day of June 2007 the assessee is found to be the owner of any income based on any entry in any books of account or other documents or transactions and in section 271AAB it talks about any income of the specified previous year represented wholly or partly by any entry in the books of accounts or other documents or transactions found during the course of search u/s 132 and therefore the reasoning applied therein applies equally in the instant case and therefore capital expenditure and payment towards purchase of land cannot be held as undisclosed income in the hands of the assessee. Assessee cannot be fastened with the penalty so envisaged under explanation 5A to section 271(1)(c) and the order of the ld CIT(A) directing deleting of penalty is upheld for the reasons as stated above. - Decided in favour of assessee.

Issues Involved:
1. Legality of the penalty imposed under Section 271(1)(c) of the Income Tax Act.
2. Applicability of Explanation 5A to Section 271(1)(c).
3. Requirement of specific charge in penalty notices.
4. Whether the penalty is automatic or requires specific conditions to be met.
5. Examination of incriminating material found during the search.
6. Satisfaction of conditions for invoking Explanation 5A.

Detailed Analysis:

1. Legality of the Penalty Imposed under Section 271(1)(c):
The Revenue filed appeals against the order of the CIT(A) which deleted the penalty imposed under Section 271(1)(c) of the Income Tax Act. The primary issue was whether the CIT(A) was justified in deleting the penalty of Rs. 1,23,40,919/- imposed by the AO.

2. Applicability of Explanation 5A to Section 271(1)(c):
The CIT(A) held that the prerequisite for invoking Explanation 5A to Section 271(1)(c) is that the assessee should be found to be the owner of any money, bullion, etc., found during the course of search, which represents his undisclosed income for any previous year. The AO did not examine whether the income shown in the return of income was based on any money, bullion, jewellery, or any entry in the books of accounts found during the search. The CIT(A) relied on the Co-ordinate Bench in the case of Radhe Shyam Mittal, which held that penalty under Section 271(1)(c) read with Explanation 5A cannot be levied if the addition is not based on any incriminating material found during the search.

3. Requirement of Specific Charge in Penalty Notices:
The CIT(A) noted that the AO did not specify whether the penalty was for concealment of particulars of income or furnishing inaccurate particulars of income. The CIT(A) relied on the Hon’ble Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory and the Rajasthan High Court in the case of Sheveta Construction Co. Pvt. Ltd., which required clear specification of the charge.

4. Whether the Penalty is Automatic or Requires Specific Conditions to be Met:
The CIT(A) held that the levy of penalty is not automatic and that the deeming provisions of Explanation 5A should be strictly construed. The onus to prove that the condition exists for the levy of penalty is upon the Revenue. The CIT(A) found that the AO did not provide sufficient evidence to show that the additional income was based on any incriminating material found during the search.

5. Examination of Incriminating Material Found During the Search:
The CIT(A) found that the AO did not examine whether the income shown in the return of income was based on any money, bullion, jewellery, or any entry in the books of accounts found during the search. The AO merely accepted the additional income offered by the appellant without providing any finding on how the additional income was earned concerning the seized material found during the search.

6. Satisfaction of Conditions for Invoking Explanation 5A:
The CIT(A) held that for invoking Explanation 5A, the earlier part of the explanation should also be applicable, which provides that in the course of the search, the assessee should be found to be the owner of any money, bullion, or jewellery, etc., or any income based on any entry in books of accounts or other documents found during the search. Since this precondition was not satisfied, the CIT(A) concluded that the levy of penalty was not tenable.

Conclusion:
The Tribunal upheld the CIT(A)’s decision to delete the penalty, stating that the conditions for invoking Explanation 5A were not satisfied. The Tribunal emphasized the need for specific findings by the AO regarding the ownership of undisclosed income based on incriminating material found during the search. The Tribunal also highlighted the importance of specifying the exact charge in penalty notices and the necessity for the AO to apply their mind before levying the penalty. The appeals filed by the Revenue were dismissed.

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