2018 (2) TMI 1287 - HC - Income Tax

Penalty u/s 271AAA - assessee neither specified the manner of undisclosed income nor substantiate the manner in which the income was derived - tribunal deleted the penalty - Held that - Commissioner of Income Tax (Appeals) as well as the Tribunal both concurrently found that all the requirements of explanation 5 below subsection (4) of section 132 of the Act were satisfied. With respect to disclosure of the manner in which the income was earned the said authorities were of the opinion that while recording the statement of the assessee during search no question regarding this issue was put by the Revenue officer. See Commissioner of Income Tax v. Mahendra C. Shah reported in 2008 (2) TMI 32 - GUJARAT HIGH COURT wherein held considering the social environment it is not possible to expect from an assessee whether literate or illiterate to be specific and to the point regarding the conditions stipulated by Exception No. 2 while making statement under Section 132(4) of the Act. The view taken by the Tribunal as well as Allahabad High Court to the effect that even if the statement does not specify the manner in which the income is derived if the income is declared and tax thereon paid there would be substantial compliance not warranting any further denial of the benefit under Exception No. 2 in Explanation 5 is commendable. - Decided against revenue

Summary

Issues:
1. Interpretation of section 271AAA of the Income Tax Act, 1961.
2. Assessment of penalty for undisclosed income.
3. Compliance with the conditions under section 271AAA.
4. Application of explanation 5 under subsection (4) of section 132 of the Act.

Analysis:
The case involved Tax Appeals challenging the penalty imposed under section 271AAA of the Income Tax Act, 1961. The assessee, engaged in the business of manufacturing and processing, disclosed previously undisclosed income during a search and seizure operation. The Income Tax Officer initiated penalty proceedings as the assessee failed to disclose the manner of earning the income offered to tax. Both the Commissioner of Income Tax (Appeals) and the Tribunal found that the requirements of explanation 5 under subsection (4) of section 132 of the Act were satisfied. They noted that no questions regarding the manner of earning income were asked during the search. Reference was made to the decision in Commissioner of Income Tax v. Mahendra C. Shah, where it was held that substantial compliance with the conditions under section 132(4) is acceptable even if the manner of income derivation is not specified.

The High Court found that the issue was covered against the Revenue based on the judgment in the case of Mahendra C. Shah. The Court emphasized that the authorized officer must explain the provisions of Explanation 5 in its entirety to the assessee during the statement recording process. It was noted that expecting precise details from the assessee, especially in a question and answer format, may not be practical given the circumstances. The Court agreed with the view that if the income is declared and tax paid, substantial compliance with the conditions under section 132(4) is sufficient, as held by the Tribunal and the Allahabad High Court. Consequently, the Tax Appeals were dismissed.