Despite concealment, no penalty u/s. 271(1)(c) if book profits assessed u/s. 115JB

ORDER

Per N. V. Vasudevan (JM) :

I.T.A. No.6940/Mum/2008 A.Y. 2003-04 & I.T.A. No.6941/Mum/2008 A.Y. 2005-06 both these appeals are raised by the assessee against two orders both dated 11.11.2008 of Commissioner of Income Tax (Appeals), Central-7, Mumbai relating to the assessment year 2003-04 and 2005-06.

2. In both these appeals the assessee has challenged the order of the learned CIT (Appeals) where by the learned CIT (Appeals) confirmed the order of the AO imposing penalty on assessee u/s. 271 (1) (c) of the Act. The facts and circumstances under which penalty was imposed on the assessee by the AO are as follows :-

3. The assessee is a company engaged in the business of coal rolling manufacturing. There was a search and seizure operation u/s. 132 of the Income Tax Act, 1961 (the Act) carried out by the department in the business premises of the assessee on 17.11.2005. In the course of search, statements of directors were recorded. Based on the incriminating documents found in the course of search, the assessee had through its director, offered an additional income on account of loose papers found in the course of search. In the return of income filed after the search for Assessment year 2003-04 and 2005-06, the income surrender at the time of search was duly offered for tax. The assessee being a company the provisions of section 115 JB of the Act were applicable. Since the total income computed as per the normal provision of the Act in both the aforesaid assessment years was less than the book profits computed u/s. 115 JB of the Act. The AO ultimately levied tax on the total income computed under the provision of section 115 JB of the Act. The position in this regard can be summarised as follows:-

Assessment Year : 2003- 04

Assessment Year : 2004-05

4. In respect to the income disclosed by the assessee in return of income filed after the search towards loose papers found in the course of search, the AO initiated penalty proceedings u/s. 271 (1) (c) of the act and also imposed penalty by holding that the assessee concealed particulars of income. On appeal by the assessee, the learned CIT (Appeals) confirmed the order of the AO. Against the order of the learned CIT (Appeals) assessee has filed the present appeals before the Tribunal. The grounds of appeal raised by the assessee reads as follows :-

“1. That the learned Commissioner of Income Tax (Appeals) erred in law in confirming the penalty of Rs.4,41,000/- at the reate of 100% u/s.271(1)(c) of the Act, without appreciating following facts:

a. Additional income was surrendered during the course of search proceedings on adhoc basis and just to cover up such amount without going for retraction, income was offered on every loose paper which was even slightly doubled upon.

b. Such surrender was made to buy peace of mind and to avoid litigation without taking any credit in the books of accounts.

c. Even after additional income so surrendered and assessed, no tax was payable by the appellant due to carry forward business losses and depreciation of earlier years and only book profit was taxable u/s. 115 JB of the Act.

d. The surrender was made based on noting on loose papers (Annexure A-15) which cannot be considered as detection of concealed income by the department in the background of total income surrender by the group.

e. Explanation 5 to Section 271 (1) (c) of the Act applied to the facts of the case because such surrender was made during the course of search proceedings u/s. 132(4) of the Act and the appellant is eligible for immunity provided there under. Confirming the penalty @ 100% without appreciating aforesaid facts and without any positive proof of concealment against the appellant at 100% of the tax sought to be evaded is very excessive, arbitrary, unjustified, improper, bad in law and deserves to be quashed.

“The judgment of the Supreme Court in Gold Coin Health Food (P) Ltd’s case(supra) clarifies that even if there are losses in a particular year, penalty can be imposed, as even in that situation there can be a tax evasion. As per section 271(1)(c), the penalty can be imposed when any person has concealed the particulars of his income or has furnished incorrect particulars of the income. Once this condition is satisfied, quantum of penalty is to be levied as per clause (iii) of section 271(1)© which stipulates that the penalty shall not exceed three times of “the amount of tax sought to be evaded”. The expression “the amount of tax sought to be evaded” has been clarified and explained in the Explanation 4 thereto, as per which it has to have the effect of reducing the loss declared in the return or converting that loss into income

Under the scheme of the Act, the total income of the assessee is first computed under the normal provisions of the Act and tax payable on such income is compared with the prescribed percentage of the ‘book profits’ computed under section 115JB. The higher of the two amounts is regarded as total income and tax is payable with reference to such income. If the tax payable under the normal provisions is higher, such amount is the total income of the assessee, otherwise ‘book profits’ are deemed as the total income of the assessee in terms of section 115JB.

In the instant case, the income computed as per the normal procedure was less than the income determined by legal fiction, namely, ‘book profits’ under section 115 JB[Para 22]

The income of the assessee was, thus assessed under section 115 JB and not under the normal provisions. It was in that context that the application of Explanation 4 to section 271(1)(c) had to be examined.

The judgment in the case of Gold Coin Health Food (P) Ltd. (supra) obviously, does not deal with such a situation. What was held by the Supreme Court in that case is that even if in the income tax return filed by the assessee losses are shown, penalty can still be imposed in a case where on setting off the concealed income against any loss incurred by the assessee under other head of income or brought forward from earlier years, the total income is reduced to a figure lower than the concealed income or even is a minus figure. The Court was of the opinion that ‘the tax sought to be evaded’ will mean the tax chargeable not as if it was the total income. Once this rationale given by the Supreme Court to the Explanation 4 was applied to the instant case, it would be difficult to sustain the penalty proceedings. Reason was simple. No doubt, there was concealment but that had its repercussions only when the assessment was done under the normal procedure. The assessment as per the normal procedure was, however, not acted upon in the instant case. On the contrary, it was the deemed income assessed under section 115JB which had become the basis of assessment, as it was higher of the two Tax was, thus, paid on the income assessed under section 115JB. Hence, when the computation was made under section 115JB, the aforesaid concealment had no role to play and was totally irrelevant. Therefore, the concealment did not lead to tax evasion at all [Para 25]

Therefore, the order of the Tribunal was to be sustained, though on different grounds.”

7. In our view the aforesaid ruling of the Hon’ble Delhi High Court applies to the facts of the present case. In the facts and circumstances of the present case no penalty could have been imposed on the assessee because there was no tax sought to be evaded because the addition in respect of which penalty was imposed was made while computing total income under the normal provisions of the Act and ultimately the total income of the Assessee was determined on the basis of book profits u/s. 115JB of the Act . We, therefore, cancel the penalty imposed by the Assessing Officer and confirmed by the CIT(A).

8. In the result, both the appeals by the Assessee are allowed.

Order pronounced on this 21st day of January, 2011.