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2008 (8) TMI 385 - AT - Income TaxBlock Assessment in search case - Levy of penalty u/s 158BFA(2) - assessment u/s 158BC - whether the penalty is not legally tenable as the expenses were not covered in the definition of undisclosed income prior to the amendment of undisclosed income in section 158B(b) of the Act by the Finance Act, 2002, retrospective from July 1, 1995? - difference of opinion between the Members - Third Member order. Ld AM order - HELD THAT - He noted that regular assessment procedure and block assessment procedure are different since Chapter-XIV-B is a special procedure for assessment of search cases. Ld A.M. held that the assessee, under Chapter XIV-B, has been given a chance to file the return and come clean. Under section 158BFA(2), penalty is leviable only on that portion of the undisclosed income determined by the AO, over and above the amount disclosed by the assessee in the return. The learned AM, further held that section 158BFA(2) is materially different from section 271(1)(c), and u/s 271(1)(c), the element of concealment is necessarily to be present for invoking the section 271(1)(c); not so for invoking section 158BFA(2), though discretionary power is given to AO under the said section to levy or not to levy the penalty. Since the assessee was not able to give explanation regarding the cash credit or the interest paid on account of diversion of loan, the AO rightly levied the penalty and the CIT(A) confirmed it. Ld JM order - HELD THAT - Mere reference of assessee's name in the statement u/s 132(4) is not sufficient to invoke the proceedings u/s 158BD. There was no reference made of any material found in the course of search, on the basis of which the undisclosed income could be determined. Since the additions were made not on the basis of any seized material but on the basis of the statement, only because it was not challenged by the assessee before the higher forum, the learned JM held that the penalty levied is liable to be quashed. The learned JM held that the section as it stands now and stood then is materially different and has no scope for levying the penalty. Third Member order - That the view taken by the learned JM is correct. First of all, a discretion is given to the AO to levy or not to levy the penalty as the wording in section 158BFA(2) reads The Assessing Officer or the Commissioner (Appeals) in the course of any proceedings under this Chapter, may direct that a person shall pay.... . On this point there is no dispute between the Members. The reasoning of the learned AM that mere failure on the part of the assessee or the explanation given by the assessee was not satisfactory to the Officer and that itself is sufficient to levy the penalty, particularly on the basis of facts in the instant case; I am afraid is difficult to accept. As rightly noted by the learned JM, at the time when the assessee filed the return on 31-5-2001, the section as it stood then was materially different from, as it exists now. Section 158B(b), which defines undisclosed income , was subjected to change by insertion of the words or any expense, deduction or allowance claimed under this Act which is found to be false with retrospective effect from 1-7-1995 by the Finance Act, 2002, after the wordings for the purposes of this Act . The learned JM rightly noted that The words 'underlined by us' were included by Finance Act, 2002 which shows than at the time when the return was filed, the disallowance of expenses was not within the ambit of the expression 'Undisclosed income'. So at the time of filing the return, assessee was not obliged to declare the same in its return particularly when no material or evidence was found relating to such expenses in the course of search carried out at the business premises of the group concerns. Further there is no material on record to prove expenditure claimed by the assessee was false. There is no such finding in the assessment order. The factum of falsity cannot be assumed or inferred but has to be proved on the basis of material or evidence. No adverse inference can be drawn merely because the appeal was not filed by the assessee . Therefore, I uphold the view taken by the learned JM. Hon'ble Third Member has concurred with the view of the Hon'ble JM that penalty u/s 158BFA(2) of the Act could not have been levied, since additions itself could not have been made legally. In accordance with the majority view, the penalty levied u/s 158BFA(2) of the Act is hereby deleted. In the result, appeal of the assessee is allowed.
Issues Involved:
1. Levy of penalty under section 158BFA(2) of the Income-tax Act, 1961. 2. Disallowance of interest expenditure. 3. Addition for unexplained cash credit. 4. Non-grant of set off of business loss. Detailed Analysis: 1. Levy of Penalty under Section 158BFA(2): The primary issue was whether the Assessing Officer (AO) was justified in levying a penalty under section 158BFA(2). The Tribunal noted that section 158BFA(2) is distinct from section 271(1)(c) as it does not require the element of concealment. Penalty under section 158BFA(2) is levied on the difference between the undisclosed income returned by the assessee and the income assessed by the AO. The Tribunal emphasized that the penalty is not automatic and the AO has discretion based on the word 'may' used in the section. 2. Disallowance of Interest Expenditure: The assessee claimed an interest expenditure of Rs. 54,180 on a bank loan. The CIT(A) upheld the AO's disallowance, concluding that the loan was diverted to a sister concern without business purpose, making the claim inadmissible. The Tribunal observed that no material evidence was provided by the assessee to support the business purpose of the loan. 3. Addition for Unexplained Cash Credit: An unexplained cash credit of Rs. 10,500 was added by the AO. The assessee admitted this as undisclosed income during assessment proceedings, stating the inability to obtain confirmation from the loan creditor due to the age of the transaction. The CIT(A) upheld the addition, noting that the assessee failed to provide an explanation during the assessment. 4. Non-grant of Set Off of Business Loss: The assessee claimed a set off of business loss of Rs. 18,698, which was disallowed due to a retrospective amendment to section 158BB(1)(b) by the Finance Act, 2002. The CIT(A) found the assessee's explanation reasonable and deleted the penalty on this account. Judgments and Reasoning: Accountant Member's View: The Accountant Member upheld the penalty, stating that the assessee had sufficient opportunity to disclose all undisclosed income in the return filed post-search. The Member emphasized that the AO is not required to prove concealment under section 158BFA(2), and the assessee's failure to provide explanations justified the penalty. Judicial Member's View: The Judicial Member disagreed, highlighting that the initiation of proceedings under section 158BD was questionable as no search was conducted at the assessee's premises. The additions were based on regular books and not on any material found during the search. The Member noted that the definition of 'undisclosed income' did not include disallowance of expenses at the time of filing the return, and the assessee's claims were not proven false. Third Member's Decision: The Third Member concurred with the Judicial Member, noting that the penalty under section 158BFA(2) is discretionary and should not be levied automatically. The Member emphasized that the retrospective amendment to the definition of 'undisclosed income' could not be applied to the assessee's case. The penalty was deleted as the additions themselves were not legally sustainable. Conclusion: In accordance with the majority view, the penalty levied under section 158BFA(2) was deleted, and the appeal of the assessee was allowed. The Tribunal concluded that the AO was not justified in levying the penalty given the facts and circumstances of the case.
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