ITAT Bangalore Upholds Penalty Despite Deletion of ₹23.83 Lakh Quantum Addition

Budnar Jayakar Shetty Vs DCIT (ITAT Bangalore)

Deletion of One Addition Will Not Wipe Out Penalty Levied on Another Surviving Income: ITAT Bangalore Upholds Section 271(1)(c) Penalty

Summary: The Bangalore Bench of the Income Tax Appellate Tribunal has held that the deletion of a particular quantum addition does not automatically invalidate the entire penalty order where the penalty sustained by the appellate authority was not computed with reference to the deleted addition.

The Tribunal also held that income disclosed only after detection during search proceedings cannot be regarded as a voluntary disclosure so as to grant immunity from penalty under Section 271(1)(c).

Facts of the case

The assessee was the General Manager of Badagabettu Credit Co-operative Society Limited, Udupi. He filed his original return of income for Assessment Year 2016-17 on 5 August 2016, declaring total income of ₹8,26,030. The return was processed under Section 143(1).

A search under Section 132 was subsequently conducted on 1 February 2017 at the business premises of the co-operative society. Certain documents were seized from the assessee’s chamber. The assessee’s residence was also searched, and his statement was recorded under Section 132(4).

During the search proceedings, the assessee agreed to offer an additional amount of ₹83 lakh. The amount was subsequently disclosed in the return filed in response to proceedings under Section 153C. Against this income, the assessee claimed deduction of ₹23,83,069 under Section 57, representing interest paid on loans.

The Assessing Officer assessed salary income of ₹9,81,498 and business or professional income of ₹83 lakh. He disallowed the deduction of ₹23,83,069 and determined the net taxable income at ₹91,26,026 after allowing Chapter VI-A deduction.

Penalty proceedings under Section 271(1)(c) were thereafter initiated.

Deletion of the Section 57 disallowance

In the quantum appeal, the CIT(A) accepted the assessee’s claim for deduction of ₹23,83,069.

The CIT(A) found that the amount represented interest paid on loans obtained from the co-operative society in connection with investment in a hotel and lodging project. As the related unexplained investment addition made for the preceding assessment year had already been deleted, the corresponding interest expenditure was held allowable.

The quantum addition of ₹23,83,069 was accordingly deleted.

Nevertheless, the penalty proceedings continued. The Assessing Officer levied penalty under Section 271(1)(c), and the CIT(A) confirmed the penalty to the extent of ₹16,59,756.

Assessee’s contention

The principal contention of the assessee before the Tribunal was that once the quantum addition of ₹23,83,069 had been deleted, the penalty based upon that addition could not survive.

Reliance was placed on RBJ Infratech Pvt. Ltd. v. ACIT, ITA No. 9530/Del/2019, in which the Delhi Tribunal, following the Supreme Court judgment in K.C. Builders v. ACIT [2004] 135 Taxman 461 (SC), held that where the underlying addition was deleted, the corresponding concealment penalty had no independent legs to stand.

The assessee also contended that the original return filed under Section 139 became non-est upon filing the return under Section 153C. Therefore, the income disclosed in the Section 153C return could not be compared with the income shown in the original return for levying penalty.

A further ground alleged violation of natural justice. It was claimed that the show-cause notice was issued on 24 October 2019 fixing the hearing for 8 November 2019, whereas the penalty itself was allegedly levied on 24 October 2019.

Finding regarding the deleted addition

The Tribunal accepted that the quantum addition of ₹23,83,069 had been deleted by the CIT(A). However, it found that the penalty ultimately sustained was not levied with reference to that deleted amount.

The CIT(A), while deciding the penalty appeal, had not included ₹23,83,069 in the income forming the basis of the sustained penalty. Therefore, the principle that penalty cannot survive after deletion of the underlying addition did not assist the assessee.

In other words, although the proposition relied upon by the assessee was legally correct, it had no factual application because the penalty under challenge related to other income which continued to remain assessed.

Disclosure made only after search

The CIT(A) had relied upon the Supreme Court decision in MAK Data Pvt. Ltd. v. CIT [2013] 358 ITR 593 (SC). In that case, the Supreme Court held that a voluntary disclosure does not by itself release an assessee from penalty and that the law does not provide automatic immunity merely because concealed income is subsequently surrendered.

In the present case, the additional income was based upon entries in books of account or documents relating to a previous year for which the original return had already been filed before the search. The income had not been disclosed in that original return.

The authorities also found that the assessee had given evasive replies in his statement under Section 132(4) regarding the actual investment made in the hotel project. The subsequent declaration, therefore, could not be described as spontaneous or voluntary.

The assessee had not advanced any effective argument before the Tribunal to rebut these specific findings. Consequently, the Tribunal held that the penalty sustained by the CIT(A) was justified.

Other grounds rejected

The allegation that the penalty order was passed even before the date fixed for hearing was rejected because the assessee did not produce supporting evidence or advance proper arguments on the issue.

The contention that the original return became non-est after filing the return under Section 153C was also rejected by the Tribunal in light of the principles laid down in MAK Data.

The appeal was accordingly dismissed.

Author’s comments

The importance of this decision lies in identifying the precise income on which penalty has been levied. It is not sufficient to demonstrate that one of the additions made in assessment has been deleted. The assessee must establish a direct link between the deleted addition and the amount forming the foundation of the penalty.

The principle in K.C. Builders remains unaffected: if the very addition on which penalty was imposed is deleted, the corresponding penalty ordinarily cannot survive. But where the penalty relates to another surviving item—particularly income offered after detection during search—the deletion of an unrelated disallowance will not invalidate the penalty.

The ruling also reiterates that surrender after detection is not necessarily voluntary disclosure. The timing of disclosure, incriminating material found during search, answers given under Section 132(4), particulars disclosed in the original return and the assessee’s explanation for the omission are all relevant.

However, reliance on MAK Data does not mean that every post-search disclosure automatically attracts penalty. The statutory conditions, applicable deeming provisions, nature of the seized material and the precise charge in the penalty notice must still be independently examined.

The practical lesson is clear: in penalty appeals involving several adjustments, a proper reconciliation should be prepared showing the assessed income, deleted additions, surviving additions and the exact tax sought to be evaded. Penalty must be tested item by item and not merely with reference to the final assessment figure.

Cases Discussed

• RBJ Infratech Pvt. Ltd. Vs ITO (ITAT Delhi) — penalty corresponding to an addition already deleted by the Tribunal cannot survive.
• K.C. Builders Vs ACIT (Supreme Court) — where the additions forming the basis of concealment penalty are deleted, the corresponding penalty cannot stand independently.
• MAK Data P. Ltd. v. CIT (Supreme Court) — surrender made following detection does not by itself provide immunity from penalty.

FULL TEXT OF THE JUDGMENT/ORDER OF INCOME TAX APPELLATE TRIBUNAL, BANGALORE

This appeal by assessee is directed against the order of CIT(A)-2, Panaji dated 2.12.2021 for the assessment year 2016-17, wherein he confirmed the levy of penalty u/s 271(1)(c) of the Income-tax Act,1961 [‘the Act’ for short].

2. Facts of the case are that assessee filed original return of income for assessment year 2016-17 on 5.8.2016 disclosing total income of Rs.8,26,030/-. The same was processed under section 143(1) of the Act. There was search in the case of assessee u/s 132 of the Act on 1.2.2017 at the business premises of M/s. Badagubettu Credit Co-operative Society Limited, Udupi. The present assessee is the General Manager of this Society. During the course of search action, certain documents were seized from his chamber at the premises of Badagubettu Credit Co-operative Society Ltd. At the same time, residence of the assessee was searched u/s 132 of the Act on 1.2.2017 and statements were recorded from him u/s 132(4) of the Act and various incriminating materials were found. Thereafter assessment order was framed u/s 153C of the Act. The assessee agreed for addition of Rs.83 lakhs vide statement recorded u/s 132(4) of the Act and the same was disclosed in the return of income. However, claimed a deduction of Rs.23,83,069/- u/s 57 of the Act. The A.O. computed the income of the assessee as follows:-

Thus, the A.O. disallowed the claim of expenditure of Rs.23,83,069/-.

2.1 Further, the A.O. initiated the penalty proceedings u/s 271(1)(c) of the Act. In mean time, the assesse filed appeal before CIT(A) challenging the disallowance of Rs.23,83,069/-. The CIT(A) deleted addition vide his order dated 2.4.2019, by observing as under:-

“I have gone through the rival contentions regarding investment in Hotel and Lodging building of M/s. Grand De Himalaya Hotels & Resorts Private Limited, the appellant has declared additional income under section 132(4) and the said declaration has been reduced by claiming deduction under section 57 such as loans from Badagabettu Co-op. Society Ltd. vide account No.CCL/S5 and CCL/S 6 amounting to Rs.40,00,000/- and Rs.2,00,00,000/- respectively and interest paid on said loan from Badagabettu Co-op. Society Ltd. I hold that, the unexplained investment brought to tax under section 69A in the preceding assessment year 2015-16 amounting to Rs.1,30,00,000/-, I have deleted the said additions made by my order in ITA No.100/CIT(A)-2/18-19 of even date. Accordingly, interest paid on such loans during the assessment year under question should be allowed as deduction. Hence, I direct the AO to consider the above claim of the appellant as disclosed in the revised return of income filed and accordingly delete the additions made amounting to Rs.23,83,069/-. The first ground of appeal is allowed.”

3. Now the assessee is in appeal before us with regard to levy of penalty u/s 271(1)(c) of the Act. The contention of the Ld. A.R. is that the penalty cannot be sustained in view of the deletion of addition by Ld. CIT(A) and she also relied on the order of the Tribunal in the case of RBJ Infratech Pvt. Ltd. in ITA No.9530/Del/2019 dated 30.3.2021, wherein coordinate bench of Delhi taken following view:-

“B.1 After hearing both sides, we are of the view that penalty u/s 271(1)(c) of IT Act levied by AO has no legs to stand at present, when the corresponding additions made by the AO have already been deleted by ITAT vide its aforesaid order dated 22.12.2020 when the aforesaid quantum addition does not survive, the penalty levied u/s 271(1)(c) of IT Act on the corresponding quantum addition also cannot survive. We take support from judicial precent in the case of KC Builders Vs. ACIT 135 Taxman 461 (SC), in which the Hon’ble Apex Court held that where the additions made in the assessment order, on the basis of which penalty for concealment was levied, are deleted, by ITAT or otherwise, the penalty cannot stand by itself and is liable to be cancelled. In such

a situation, there is no basis at all at present for sustaining the penalty u/s 271(1)(c) of IT Act, and therefore, in such a case, such penalty cannot survive presently. In view of the foregoing, the penalty levied u/s 271(1)(c) of IT Act (in respect of quantum addition already deleted by ITAT in aforesaid order dated 22.12.2020 in ITA No.3152/Del/2018) is hereby cancelled. Accordingly, appeal filed by the assessee is allowed.

Order was already orally pronounced in the open court on 25.3.2021 after conclusion of the hearing in the presence of representatives of both sides. Now this order in writing is signed today on 30.3.2021.”

4. In view of the above order of the Tribunal, she prayed that penalty may be deleted.

5. Ld. D.R. not put any serious objection.

6. We have heard the rival submissions and perused the materials available on record. Admittedly, the Ld. CIT(A) already deleted the quantum addition made by the AO in this case at Rs.23,83,069/- vide order dated 2.4.2019 for assessment year 2016-17 in ITA No.101/CIT(A)-2/18-19. However, the AO levied penalty on account of difference between the income offered in original return of income and final assessed income. The final assessed income includes an amount of Rs.23,83,069/-. In our opinion, A.O. cannot levy penalty which is already deleted by the Ld. CIT(A). It is also noted that Ld. CIT(A) not considered this amount of Rs.23,83,069/- while levying penalty vide his order 24.10.2019. The Ld. CIT(A) while dealing with the appeal relating to levy of penalty u/s 271(1)(c) of the Act, he confirmed the levy of penalty to the extent of Rs.16,59,756/- as levied by AO and he relied on the judgement of Hon’ble Supreme Court in the case of MAK Data Pvt. Ltd. Vs. CIT in Civil Appeal No.9772 of 20123 (arising out of Special Leave Petition No.18389 of 2013) wherein it was held that in cases where the offer of surrender was made in view of detection made by AO in the course of search & seizure operation, then the statute did not recognize those types of defenses under the explanation 1 to section 271(1)(c) of the Act. It emphasized that in such cases:-

(i) Voluntary disclosure does not release the appellant assessee from the mischief of penalty proceedings.

(ii) The law does not provide that when an assessee makes a voluntary disclosure of his concealed income, he had to be absolved from penalty.

6.1 Further, it was observed by Ld. CIT(A) that the income declared by the assessee is based on entry in books of accounts/other documents pertaining to any previous year which commenced before the date of search and return of income has been filed before search but such income was not declared then, even if the assessee declared such income in the return of income filed after search, he will be deemed to have concealment/furnished inaccurate particular of income. It has to be noted that not only the appellant had not disclosed this income in his original return of income but even in the statement recorded u/s 132(4) of the Act, he had given evasive reply regarding the actual investment made in the hotel project. Therefore, at no stretch of imagination, the disclosure could be termed as voluntary. It is also to be noted that before us, she had only made a plea that the Ld. CIT(A) has already deleted the quantum addition and no penalty could be levied. However, she has not put any argument with regard to the above finding of the Ld. CIT(A). Since she has not made any argument on the above issue, and also lower authorities have not considered any deleted additions for levy of penalty, there is no merit in the argument of assessee’s counsel that no penalty could be levied when addition is deleted where there is no levy of penalty on this deleted amount.

In view of the above, we are of the opinion that sustaining penalty by Ld. CIT(A) is justified and reject all the grounds raised by the assessee in this appeal.

6.2 Further, the assessee argued that A.O. issued the show cause notice for levy of penalty on 24.10.2019, which was posted for hearing on 8.11.2019 and levied penalty u/s 271(1)(c) of the Act on 24.10.2019, which is opposed to law and against the natural justice. However, no evidence has been placed before us or any argument was made before us. Accordingly, this ground is rejected.

6.3. The assessee also raised a ground that AO ignored the fact that once the revised return filed u/s 153C of the Act, the original return u/s 139 of the Act abates and becomes non-est. However, we find that in view of judgement of Hon’ble Supreme Court in the case of MAK Data Pvt. Ltd. (supra) these ground of appeal have no merit.

7. In the result, the appeal of the assessee is dismissed.

Order pronounced in the open court on 6th Jun, 2022