2000 (5) TMI 154 - AT - Income Tax

Summary

Issues Involved:
1. Legitimacy of the penalty levied under section 271(1)(c) of the Income-tax Act.
2. Ownership and taxability of the seized jewellery.
3. Applicability of Explanation 5 to section 271(1)(c) of the Income-tax Act.
4. Validity of protective addition and penalty initiation.

Issue-wise Detailed Analysis:

1. Legitimacy of the Penalty Levied under Section 271(1)(c):
The Revenue appealed against the cancellation of a penalty amounting to Rs. 1,93,536 levied under section 271(1)(c) of the Income-tax Act. The penalty was initially imposed on the grounds that the ITAT had converted the protective addition of Rs. 1,53,677 to a substantive basis. The assessee argued that the penalty was initiated under section 271(1)(c) read with Explanation 5, which was not applicable since the search and seizure occurred before the insertion of Explanation 5. The CIT (Appeals) cancelled the penalty, noting that the assessee had paid advance tax and had included a note in the return explaining the non-inclusion of the jewellery's value due to the Revenue's stance in the section 132(5) order.

2. Ownership and Taxability of the Seized Jewellery:
During a search operation, jewellery valued at Rs. 1,53,677 was found and seized. The assessee identified the jewellery as hers, and her husband corroborated this statement. However, the Assessing Officer (AO) held that the jewellery belonged to the husband and was acquired from undisclosed sources. This led to the jewellery being taxed in the husband's hands under section 69A, with a protective addition in the assessee's hands. The ITAT later ruled that the addition should be on a substantive basis in the assessee's hands, leading to the penalty proceedings.

3. Applicability of Explanation 5 to Section 271(1)(c):
The assessee contended that Explanation 5 to section 271(1)(c) was not applicable as it was inserted after the search took place. The CIT (Appeals) agreed, stating that Explanation 5, which deems concealed income from assets found during a search, could not apply retrospectively to searches conducted before its introduction. The Tribunal upheld this view, confirming that Explanation 5 could not be applied to the present case.

4. Validity of Protective Addition and Penalty Initiation:
The AO initially treated the jewellery as belonging to the husband and made a protective addition in the assessee's hands. The Tribunal noted that penalty proceedings based on a protective addition were not valid. The AO's satisfaction for initiating penalty proceedings was based on the finding that the jewellery belonged to the husband, not the assessee. The Tribunal emphasized that the satisfaction required for initiating penalty proceedings must be reached during the assessment process, and protective penalty proceedings are not warranted by law. The Tribunal also highlighted that the assessee had made a note in Part-III of the return, indicating the jewellery's value, which was not found to be false or untrue, providing a protective measure against the penalty.

Conclusion:
The Tribunal confirmed the CIT (Appeals) decision to cancel the penalty, noting that the initiation of penalty proceedings was based on an incorrect premise and lacked the necessary satisfaction. The Tribunal also held that Explanation 5 was not applicable and that the assessee's actions, including the advance tax payment and the note in the return, indicated an intention to disclose the income. Therefore, the Revenue's appeal was dismissed.