Clarification with respect to scope of Explaination 5 to Sec.271(1)(c) read with Sec.132(4). - Income Tax - 1882/1991

INSTRUCTION NO. 1882/1991 Dated: June 5, 1991 Instances have come to the notice of the Board where the provisions of Explanation 5 to section 271(1)(c) read with section 132(4) of the Income-tax Act have not been correctly applied by the Assessing Officers either by not initiating penalty proceedings under section 271(1)(c) or by dropping the said penalty proceedings. It also appeared that the assessees were led to have a wrong notion of the aforesaid provisions while recording their statements in the course of the therein. 2. Under Explanation 5 to section 271(1)(c), an assessee would be deemed to have concealed his income if during the course of a search he is found to be the owner of any money, bullion, jewellery or other valuable article or thing and he claims that such assets have been acquired by him out of his income for any previous year for which the return of income has not been filed before the date of the search, or, if the return has been filed, such income has not been declared therein. 3. The amendment to Explanation 5 to section 271(1)(c) by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, with effect from 10-9-1986, excludes assessees from the purview of levy of such penalty under certain circumstances, which are as follows:- (i) The income relatable to the acquisition of assets, of which the assessee was found to be the owner, is recorded in the books of account maintained by him or the income is otherwise disclosed to the Chief Commissioner or the Commissioner of Income-tax before the date of the search. (ii) The assessee makes a statement under section 132(4) in the course of the search that the assets found in his possession or under his control were acquired out of his income which has not been disclosed in his return at the time for filing of the return under section 139(1) has not expired and also the assessee specifies the manner in which such income was derived and pays the tax, together with interest in respect of such income. 4. The position with regard to the set of circumstances referred to at 3(ii) above was clarified in Board's Instruction No. 1741 dated 29-12-1986 and Instruction No. 1757 dated 12-5-1987. 5. Despite the clarifications given in the aforesaid instructions, the incorrect application and misconceptions about the scope of Explanation 5 to section 271(1)(c) read with section 132(4) still persist. It is, therefore, necessary to further clarify the said provisions. 6. The exclusion from 'deemed concealment' under Explanation 5 to section 271(1)(c) by making a statement under section 132(4) would be possible only in the following circumstances :- (i) in the course of a search the assessee is found to be the owner of any money, bullion, jewellery or other valuable article or thing; (ii) the said assets have not been recorded in the account books of the assessee; (iii) In respect of the assets in the possession of the assessee or under his control, he makes a statement under section 132(4) that the said assets had been acquired by him out of his income for that year for which a return had not been filed so far since the period of filing of the return under section 139(1) had not expired. (iv) the manner in which such income had been derived was specified in the statement; and (v) the tax on such income alongwith the interest was paid. 7. The correct import of the aforesaid provisions may be brought to the notice of all officers working in your region.