2012 (9) TMI 325 - AT - Income Tax

Penalty u/s 271(1)(c) - undisclosed income - Notices u/s 153A - Held that - In case of a search initiated on or after 1.6.2007 as provided in Explanation 5A, the assessee will be liable for penalty/s 271(1)(c) both in respect of assets as well as any income based on any entry in any books of account or other documents or transactions. But no such provision relating to entries was in existence in Explanation 5 prior to insertion of Explanation 5A in section 271(1). Hence the scheme of assessment till insertion of Explanation 5A and section 271AAA by the Finance Act, 2007 gave immunity to the assessees in respect of undisclosed income based on entries recorded in seized material In the case of the assessee the search was conducted on 22.11.2006 and cash of Rs. 1,11,45,350/- was found from the possession of the assessee. The assessee had undisclosed commission income as well as purchases and sales as seen from the statement of affairs made by the assessee based on seized material. The assessee had drawn cash flow statement for the entire period of six years in order to determine undisclosed income based on seized material for each of six assessment years. Explanation 5 to section 271(1) of the Act cannot be invoked in assessment year 2004-05 merely on presumption that the assessee might have been in possession of cash throughout the period covered by search assessments. The income offered to tax u/s 153A for assessment year 2004-05 is based on entries recorded in the seized material. Unlike provisions of Explanation 5A, the provisions of Explanation 5 cannot be invoked in assessment year 2004-05 in respect of entries recorded in seized material - in favour of assessee.

Summary

Issues Involved:
1. Applicability of Explanation 5 to Section 271(1)(c) for searches conducted between 01.06.2003 to 31.05.2007.
2. Imposition of penalty under Section 271(1)(c) based on undisclosed income declared in returns filed under Section 153A.
3. Relevance of precedents and judicial interpretations in similar cases.

Issue-wise Detailed Analysis:

1. Applicability of Explanation 5 to Section 271(1)(c) for searches conducted between 01.06.2003 to 31.05.2007:
The core contention of the appellant was that Explanation 5 to Section 271(1)(c) does not apply to searches conducted between 01.06.2003 and 31.05.2007. The CIT (A) rejected this contention, stating that the appellant's case falls within the general provisions of Section 271(1)(c) as well as Explanation 5. It was emphasized that the appellant failed to establish that their case does not fall within the general provisions of Section 271(1)(c). The CIT (A) cited various judgments to support this view, including Pradip Chandulal Patel v. P.G.Karode, where it was held that penalty was imposable independently of Explanation 5.

2. Imposition of penalty under Section 271(1)(c) based on undisclosed income declared in returns filed under Section 153A:
The assessee argued that the additional income declared in returns filed under Section 153A, based on documents found during the search, should not attract penalties under Section 271(1)(c). The CIT (A) upheld the penalties, stating that the income declared was not voluntary but a result of the search, and thus, the appellant was deemed to have concealed particulars of income or furnished inaccurate particulars. The CIT (A) referenced several judgments, including Sangam Enterprises v. Commissioner of Income-tax and M.Shahul Mameed Batcha v. Income-tax Officer, which supported the imposition of penalties when concealment is discovered during a search.

3. Relevance of precedents and judicial interpretations in similar cases:
The appellant's representative cited the ITAT decision in the case of Prem Arora, where penalties under Section 271(1)(c) were deleted for additional income declared in returns filed under Section 153A following a search on 22.11.2006. The ITAT in the present case found the facts similar to Prem Arora's case and noted that the Finance Act, 2007, which inserted Explanation 5A, applies only to searches initiated on or after 01.06.2007. The ITAT concluded that Explanation 5 did not apply to entries recorded in seized material for searches conducted before 01.06.2007. Consequently, the ITAT directed the deletion of penalties, aligning with the precedent set in Prem Arora's case.

Conclusion:
The ITAT allowed the appeals, setting aside the orders of the authorities below for levying penalties under Section 271(1)(c) for all the assessment years in question. The decision was based on the interpretation that Explanation 5 does not apply to searches conducted before 01.06.2007 concerning entries recorded in seized material. The ITAT's judgment emphasized the importance of judicial consistency and the applicability of legal provisions as amended by the Finance Act, 2007.