HIGH COURT OF ANDHRA PRADESH
Commissioner of Income-tax
ITT Appeal Nos. 13, 14, 41 & 83 of 2000
DECEMBER 1, 2011
Madan B. Lokur, CJ.
In these appeals under section 260A of the Income-tax Act, 1961 (for short “the Act”), which arise out of a common order passed by the Income-tax Appellate Tribunal (hereinafter referred to as “the Tribunal”), Hyderabad, the following substantial question of law has been framed for consideration :
“Whether, in the facts and in the circumstances of the case, the Appellate Tribunal is justified in law in applying clause (2) of Explanation 5 to section 271(1)(c) in favour of the assessee and confirming the order of the first appellate authority setting aside the penalty ?”
2. Since the issue in all the appeals is the same, it would suffice if the facts in ITTA No. 41 of 2000 are narrated.
3. The facts leading up to TITA No. 41 of 2000 indicate that a search was carried out in the business premises of the assessee on September 20, 1989. During the course of search, it was discovered that the assessee had invested an amount of Rs. 11 lakhs in two properties and this had not been disclosed.
4. The statement of the assessee was recorded under section 132(4) of the Act in which it was explained that apart from the fact that the assessee is a petty contractor supplying electrical panels for M/s. Voltas and M/s. Blue Star, he is also uneducated and illiterate. The assessee was under the impression that since tax was deducted at source before payments were made, no further tax was required to be paid. The assessee admitted the investment of Rs. 11 lakhs in the properties.
5. Thereafter, the assessee filed returns for the assessment years 1985-86 to 1989-90. These returns were accepted as they were, without any further payment of tax and regularized after issuance of a notice under section 148 of the Act.
6. The assessee paid the tax due and with regard to interest thereon, an application was made for waiver. Ultimately, as recorded by the Tribunal, the application for waiver was accepted. As such, the returns filed by the assessee were accepted as they were and there was no tax liability in this regard.
7. The Revenue then initiated proceedings against the assessee for the imposition of penalty under section 271(1)(c) of the Act. The Assessing Officer was of the view that the assessee did not fulfill the requirements of clause (2) of Explanation 5 to section 271(1)(c) and, therefore, was liable to pay penalty.
8. On appeal, the Commissioner of Income-tax (Appeals), disagreed with the Assessing Officer and came to the conclusion that since the assessee had paid the entire tax and the conduct of the assessee was not contumacious, the imposition of penalty was not justified.
9. Feeling aggrieved, the Revenue preferred an appeal before the Tribunal which was dismissed. It is only thereafter that the present appeals under section 260A of the Act were filed and the substantial question of law mentioned above was framed for consideration.
10. The only contention of the learned counsel for the Revenue is that the assessee has not complied with the provisions of clause (2) of Explanation 5 to section 271(1)(c) of the Act and as such, the imposition of penalty by the Assessing Officer was justified. In this regard, the relevant portion of Explanation 5 is reproduced below :
“Explanation 5. – Where in the course of a search initiated under section 132 before the 1st day of June, 2007, the assessee is found to be the owner of any money, bullion, jewellery or other valuable article or thing (hereafter in this Explanation referred to as assets) and the assessee claims that such assets have been acquired by him by utilizing (wholly or in part) his income,-
(a) for any previous year which has ended before the date of the search, but the return of income for such year has not been furnished before the said date or, where such return has been furnished before the said date, such income has not been declared therein ; or
(b) for any previous year which is to end on or after the date of the search, then notwithstanding that such income is declared by him in any return of income furnished on or after the date of search, he shall, for the purposes of imposition of a penalty under clause (c) of sub-section (1) of this section, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income, unless,-
(1) such income is, or the transactions resulting in such income are recorded,-
(i) in a case falling under clause (a), before the date of the search ; and
(ii) in a case falling under clause (b), on or before such date, in the books of account, if any, maintained by him for any source of income or such income is otherwise disclosed to the Chief Commissioner or Commissioner before the said date ; or
(2) he in the course of the search, makes a statement under sub-section (4) of section 132 that any money, bullion, jewellery or other valuable article or thing found in his possession or under his control, has been acquired out of his income which has not been disclosed so far in his return of income to be furnished before the expiry of time specified in sub-section (1) of section 139, and also specifies in the statement the manner in which such income has been derived and pays the tax, together with interest, if any, in respect of such income.”
11. The argument on non-compliance advanced before us was also advanced by the Revenue before the Tribunal, but this was rejected by the Tribunal inasmuch as it was held that the assessee had made a statement under sub-section (4) of section 132 of the Act stating that he had acquired the property out of the income which was not disclosed by him. Subsequently, the assessee filed a return of income before the expiry of time specified under section 139 of the Act and he also paid the tax thereon. As regards the interest, that was subsequently waived by the Revenue. The Tribunal, therefore, came to the conclusion that the ingredients of clause (2) of Explanation 5 to section 271(1)(c) of the Act had been fully met by the assessee.
12. Secondly, the Tribunal also took into consideration the fact that the assessee was a petty contractor and was illiterate and uneducated. That apart, the assessment has been regularized by the Revenue by issuance of a notice under section 148 of the Act and the return filed by the assessee was accepted, as it is, on payment of the necessary tax. The Tribunal also took into consideration the fact that payments received by the assessee from M/s. Voltas and M/s. Blue Star were after deduction of tax at source and it is under these circumstances, that the assessee believed that he was not liable to pay any further tax. The Tribunal came to the same conclusion as the Commissioner of Income-tax (Appeals) that the conduct of the assessee was not contumacious.
13. Taking all these facts into consideration the Tribunal was of the view that no case was made out for imposition of penalty under section 271(1)(c) of the Act.
14. We are in agreement with the view expressed by the Tribunal. The material on record concurrently shows that the assessee had fully complied with the provisions of clause (2) of Explanation 5 to section 271(1)(c) of the Act. Moreover, the assessee had not acted in a contumacious manner. In fact, the assessee had made a clean breast of the entire facts and had admitted the purchase of the property from the income which was not disclosed. The non-disclosure of the income was due to the circumstances mentioned above, viz., that the assessee was an uneducated and illiterate petty contractor who received payments only after deduction of tax at source. It is under these circumstances that the assessee believed bona fide that no further tax was required to be paid.
15. In T. Ashok Pai v. CIT  292 ITR 11the Supreme Court observed that if the explanation given by an assessee is taken to be bona fide, the question of imposition of penalty under section 271(1)(c) of the Act would not arise. Although the findings arrived at in assessment proceedings would constitute good material for penalty proceedings, yet in penalty proceedings, the matter has to be looked at differently since the consequences for the assessee would be different, and penal. Therefore, the rule of strict construction would apply.
16. In the present case, both the Commissioner of Income-tax (Appeals) and the Tribunal were satisfied about the bona fides of the assessee. That being the position, coupled with the fact that the assessee had complied with the provisions of clause (2) of Explanation 5 to section 271(1)(c) of the Act, no case for imposition of penalty was made out.
17. In view of the above, we answer the question in the affirmative, in favour of the assessee and against the Revenue. Consequently, the appeals are dismissed.