2004 (12) TMI 303 - AT - Income Tax

Block assessment - Undisclosed income - Levy of penalty u/s 158BFA(2) - HELD THAT - The scope of Chapter XIV-B is to ease out the tax computations in search cases. But herein it has ended up with all sorts of harassment to the taxpayer who wants to come clean before the Department. Therefore after appreciating these things we read down the provisions and are of the opinion that the AO has miserably failed in not exercising the discretion in favour of the assessee considering the fact that the assessee has just delayed the filing of the return by a fortnight. The conscience of the AO should have tilted in favour of the assessee who has co-operated with the Department in getting the undisclosed income assessed to tax at a higher rate of taxation than under the normal Finance Act. Instead the AO used the discretion against the assessee in imposing the penalty which according to us is unreasonable and as we have already explained even on merits the penalty is not sustainable. We appreciate the efforts made by the assessee s counsel to bring to our attention the possible harassment the AO can cause to the taxpayers for want of necessary provisions in this regard for imposition of penalties under Chapter XIV-B. We therefore even on merits do not agree with the imposition of penalty. The same stands cancelled. In the result appeal is allowed.

Summary

Issues Involved:
1. Levy of penalty u/s 158BFA(2) of the IT Act, 1961.

Summary:

Levy of Penalty u/s 158BFA(2):
The appeal by the assessee challenges the order of the CIT(A) regarding the block assessment period from 1988-89 to 1997-98, specifically disputing the penalty levied u/s 158BFA(2) of the IT Act, 1961. The assessee, an individual, was subjected to a search action leading to a block assessment. A notice u/s 158BC r/w s. 158BD was issued, and the assessee filed a return declaring undisclosed income of Rs. 21,00,525. The assessment determined the undisclosed income at Rs. 21,79,160, with a tax payable of Rs. 13,07,496. The AO levied a penalty of Rs. 10,44,600 u/s 158BFA(2), equal to the tax payable under the block assessment.

The assessee argued against the penalty, stating that the provisions of s. 158BFA(2) do not clearly define the circumstances under which the penalty should be levied. The AO, according to the assessee, misapplied the proviso to justify the penalty. The assessee emphasized that the legislature failed to specify the defaults warranting the penalty and that the additions made were based on estimates and clerical mistakes. The assessee did not appeal the block assessment to avoid further litigation and due to the small amount involved.

The Departmental Representative contended that the assessee did not meet the conditions of the proviso to s. 158BFA(2), thus justifying the penalty. The AO imposed the minimum penalty prescribed by the statute.

The Tribunal analyzed the provisions of s. 158BFA(2), noting that the legislature did not specify the nature of the offence warranting the penalty. The Tribunal emphasized that penalty provisions must be strictly construed and interpreted in favor of the taxpayer in case of ambiguity. The Tribunal found that the AO failed to exercise discretion appropriately, given that the assessee had declared most of the undisclosed income and did not appeal the assessment.

The Tribunal concluded that the penalty was not sustainable on merits, as the additions were based on estimates and clerical mistakes. The Tribunal also highlighted the potential for harassment by the AO due to the ambiguous provisions of s. 158BFA(2). The appeal was allowed, and the penalty was cancelled.