2009 (8) TMI 120 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of penalty levied under Section 158BFA(2) of the IT Act.
2. Applicability of the mandatory and discretionary provisions of Section 158BFA(2).
3. Calculation of penalty based on undisclosed income.
4. Interpretation of statutory provisions and judicial precedents.

Issue-wise Detailed Analysis:

1. Deletion of Penalty Levied under Section 158BFA(2) of the IT Act:
The Revenue appealed against the CIT(A)'s decision to reduce the penalty from Rs. 81,33,192 to Rs. 13,99,216 for the block period from 1st April 1995 to 14th June 2001. The AO had imposed a minimum penalty based on the tax and surcharge payable under Section 140A, which was Rs. 48,41,034, but the assessee had not paid this tax while filing the block return. The CIT(A) reduced the penalty, considering that the Tribunal had directed the first appellate authority to decide the appeal on merits, despite the assessee not paying the tax initially.

2. Applicability of the Mandatory and Discretionary Provisions of Section 158BFA(2):
The Tribunal examined whether the mandatory clause of Section 158BFA(2) applied to the assessee. The mandatory proviso was deemed inapplicable as the assessee did not pay the full tax with the return. The second mandatory proviso was considered, which states that if the undisclosed income determined by the AO exceeds the income shown in the return, the penalty should be imposed on the excess portion. The AO followed this proviso and initiated penalty proceedings. The CIT(A) reduced the penalty, but the Tribunal found this reduction unjustified as the mandatory provision required considering the excess undisclosed income for penalty purposes.

3. Calculation of Penalty Based on Undisclosed Income:
The AO determined the undisclosed income at Rs. 1,32,89,530, significantly higher than the Rs. 79,10,187 declared by the assessee. The penalty was imposed on the entire assessed undisclosed income. The CIT(A) reduced the penalty by excluding the admitted undisclosed income, but the Tribunal found this approach incorrect. The Tribunal emphasized that the penalty should be based on the excess undisclosed income determined by the AO, as per the second proviso of Section 158BFA(2).

4. Interpretation of Statutory Provisions and Judicial Precedents:
The Tribunal referenced various judicial precedents, including the decision of the Mumbai Bench in Dy. CIT vs. Spark Electro Communication Systems and the Kerala High Court's ruling in P.P. Ummerkutty vs. Asstt. CIT, which upheld the constitutional validity of Section 158BFA. The Tribunal concluded that the penalty provisions under Section 158BFA(2) are mandatory and should be strictly construed. The Tribunal set aside the CIT(A)'s order and restored the AO's order, emphasizing that the excess undisclosed income must be considered for penalty imposition.

Separate Judgment by N. Barathvaja Sankar, A.M.:
N. Barathvaja Sankar disagreed with the majority opinion, arguing that the penalty under Section 158BFA(2) is discretionary, not mandatory. He cited various judicial decisions supporting this view, including the Bangalore Bench's ruling in Nemichand vs. Asstt. CIT and the Bombay High Court's decision in CIT vs. Dodsal Ltd. He emphasized that penalties should be construed strictly and in favor of the taxpayer in case of ambiguity. He noted that the assessee faced financial difficulties and paid the tax in installments before the appeal was heard, which should be considered for penalty calculation. He concluded that the disclosed income should be excluded for penalty purposes, and the Revenue's appeal should be dismissed.

Third Member Decision by Vimal Gandhi, President:
The matter was referred to the President due to a difference of opinion. Vimal Gandhi examined the facts and statutory provisions, concluding that the second proviso to Section 158BFA(2) applies, which excludes the undisclosed income shown in the return from penalty calculation. He agreed with the view that the penalty provisions are discretionary and should be interpreted favorably for the taxpayer. He upheld the CIT(A)'s decision to exclude the admitted undisclosed income for penalty purposes and disagreed with the AO's approach.

Conclusion:
The Tribunal allowed the Revenue's appeal, restoring the AO's order. However, the President, acting as the third member, supported the CIT(A)'s approach, emphasizing the discretionary nature of penalty provisions and the need to exclude the admitted undisclosed income from penalty calculation. The matter was referred back to the regular Bench for final disposal in accordance with the third member's decision.