Penalty can be levied on unrecorded receipts, expenditure and investments declared by assessee pursuant to search

Brief of the case:

In the case of ACIT Vs. Dr. Nitin Laxmikant Lad Pune Bench of ITAT have held that where assessee had furnished original return of income in which he had not declared its receipts from the profession, but pursuant to the search and seizure operation, certain incriminating documents were seized, which contained unrecorded receipts, expenses and investments in various financial years and the assessee in response thereto, declared the additional professional fees and paid taxes, no question of levy of penalty u/s 271 (1) (c) arises.

Facts of the case:

• Search and seizure action under section 132 of the Act was conducted at the residential premises and Clinic of the assessee on 16.01.2009. During the course of search, certain books of account and documents were seized from the premises of the assessee.
• Assessee had originally filed its ROI declaring total income of Rs.8,37,090/-. The assessee had further revised its return of income on 30.11.2006 declaring total income of Rs.9,08,700/-.
• Notice under section 153A of the Act was issued to the assessee and in response, the assessee furnished return of income declaring total income of Rs.15,70,040/- including additional income of Rs.6,61,344/- and agricultural income of Rs.50,000/-.
• During the course of search and seizure, incriminating documents marked as A-1, A-3, A-8, A-9, A-18 & A-19 were seized, which contained unrecorded receipts, expenses and investments in various financial years.
• Accordingly, the assessee re-constructed the accounts and credited the unaccounted receipts to the Profit & Loss Account and offered net surplus of income over expenditure to tax.
• During the year under consideration, on the basis of seized material, additional professional fees of Rs.22,96,542/- was noted and the assessee declared gross receipts in the return filed pursuant to notice under section 153A of the Act at Rs.79,39,778/- as against Rs.56,43,236/- shown in the original return.
• Assessee also amended other mistakes in the original return filed under section 139(1) and the total income from house property, profession and other sources after deduction under section VI-A worked out to Rs.15,70,040/- i.e. declaring additional income of Rs.6,61,344/-.
• AO noted that though the assessee had declared additional income of Rs.6,61,344/- in the return of income filed in response to notice under section 153A of the Act, but no such income was declared in the original return of income filed.
• The said additional income was detected during the course of search and seizure operation conducted at the residence of the assessee.
• AO held that that the said declaration of income was not voluntary and since the assessee had concealed the particulars of said income within the meaning of Explanation 5A to section 271(1)(c) of the Act, penalty proceedings under section 271(1)(c) of the Act were initiated.
• On verification of the assessment records, the AO noted that the assessment for this assessment year had been completed under section 143(3) of the Act in the past vide order dated 26.12.2007.
• The assessee failed to include the said enhanced income of Rs.6,00,000/- in the return of income filed under section 153A of the Act.
• AO noted that the said issue had been examined at length during the original assessment proceedings and the claim of the assessee was found to be non-genuine, and the addition in this regard has been confirmed by Pune Bench of Tribunal.
• The said loans totaling Rs.6,00,000/- since were shown in the balance sheet filed along with return of income filed pursuant to notice under section 153A of the Act, the same was held to be unexplained and income from undisclosed sources.
• AO further initiated penalty proceedings under section 271(1)(c) of the Act against such addition of Rs.6,00,000/-.
• AO finally held that since the assessee had concealed particulars of income, the assessee was liable to levy of penalty under section 271(1)(c) of the Act at Rs.4,24,570/-.

Contention of the assessee:

• With a view to settle the matter and to avoid protracted litigation with the Department and also with a view to buy peace of mind, he had declared additional income of Rs.1.30 crores for the periods envisaged under section 153A of the Act and till assessment year 2009-10 i.e. date of search, covering of the group of assessees.
• The manner of earning the said additional income was also stated during the course of statement record under section 132(4).
• Additional income offered in the return of income submitted under section 153A of the Act included the income declared except the addition of Rs.6,00,000/- and since the assessment was completed without making any further addition to the returned income, there was no justification for levy of penalty.
• Explanation 5A to section 271(1)(c) of the Act was introduced w.e.f. 01.06.2007 and search was conducted on 16.01.2009 and the said explanation was amended by Finance Act,2009.
• The Finance Bill, 2009 was presented on 06.07.2009 and was assented on 19.08.2009 i.e. on the date of filing the return of income, law which was prevailing on that date should be applied.
• Due date for filing the return of income had expired, but it was the contention of assessee that penalty provisions could not be amended retrospectively.
• Where the assessee had declared additional income on estimate basis, there was no basis for invoking Explanation 5A to section 271(1)(c) of the Act.
• In the absence of incriminating documents found during search, there was no merit in levy of penalty under section 271(1)(c) of the Act on the said sum of Rs.6,00,000/-.
• Since the additional taxes have been paid there is no question of levy of penalty under section 271(1)(c) of the Act.

Contention of the revenue:

• Assessee in the return of income filed pursuant to issue of notice under section 153A of the Act had declared income of Rs.15,70,040/- and agricultural income of Rs.50,000/-, which included additional income of Rs.6,61,344/-.
• However, the assessment was completed on the income of Rs. completed on the income of Rs.15,70,040/ 15,70,040/- and addition o and addition of Rs.6,00,000/ f Rs.6,00,000/- and agricultural income of Rs.50,000/-.
• Merely because the income disclosed under section 132(4) of the Act has been declared by the assessee, there is no merit in the order of CIT(A) in deleting the penalty under section 271(1)(c).
• The assessee’s claim could not be accepted as the law does not provide any immunity from levy of penalty to the assessee, who offered income, which was not disclosed in the regular return of income filed and which was unearthed during the course of search and was declared in the return subsequent to search.
• The declaration made under section 132(4) of the Act does not entitle the assessee from immunity from penalty proceedings.
• The addition of Rs. 6,00,000/- was confirmed by ITAT in assessee’s hand.
• Amount added in the hands of the assessee represent concealed income and the penalty proceedings are covered by Explanation 5A to section 271(1)(c).

Held by CIT (A):

• No direct linkage with regard to the seized material and the additional income of Rs.6,61,344/- on account of business income and Rs.50,000/- on account of agricultural income declared, had been established.
• Therefore, Explanation 5A to section 271(1)(c) of the Act was not applicable to the case under appeal.
• CIT (A) relied upon the decision of Hon’ble Gujarat High Court in National Textiles Vs. CIT [2001] 249 ITR 125 (Guj) and the Hon’ble Punjab & Haryana High Court in Harigopal Singh Vs. CIT (2002) 258 ITR 85 (P&H) where it was held It is settled position of law that penalty u/s 271(1)(c) cannot be levied merely because it is lawfull to do so. Use of discretion to levy penalty is independent of the decision as to whether concealment is there or not. Deeming provisions of Explanation 5A helps the AO in deciding the concealment part of the penalty provision. However, the discretion part is not explained by deeming provision. Since the AO has not brought on record any material to support his decision regarding discretion, the penalty is not leviable on the facts of the case.
• Where the Assessing Officer had not imposed penalty under section 271(1)(c) of the Act in consequent to original assessment proceedings vis-à-vis taxability of impugned amount of Rs.6,00,000/-, in the absence of any incriminating documents found, no penalty could be levied on the said addition of Rs.6,00,000/- by invoking the provisions of Explanation 5A to section 271(1)(c) of the Act.

Held by ITAT:

• The issue arising in the present appeal is whether in cases where the assessee pursuant to search and seizure operation at his premises had declared additional income in the return of income, in response to notice under section 153A of the Act, whether in such cases, penalty under section 271(1)(c) of the Act is leviable.
• The issue is squarely covered by the case before Pune Bench of ITAT in Mrs.Sarita Kaur Manjeet Singh Chopra Vs. ITO in ITA No.1562/PN/2013 where it was held that the case of the assessee is squarely covered by the provisions of Explanation 5A to section 271(1)(c) of the Act and the assessee is exigible to levy of penalty on such income which was detected during the course of search and seizure operation, which in turn has been offered by the assessee in return of income filed pursuant to notice issued under section 153A of the Act.
• By following the judgment in the case of Mrs.Sarita Kaur Manjeet Singh Chopra Vs. ITO (supra). ITAT uphold the levy of penalty under section 271(1)(c) of the Act on unrecorded receipts, expenditure and investments declared by the assessee pursuant to search.
• Penalty of Rs. 6,00,000/- was made by AO in AY 2005-06 while passing the order under section 143(3) of the Act, which in turn, was confirmed by the CIT(A) & ITAT.
• While filing the return of income under section 153A of the Act, the assessee had not included the said additional income.
• The penalty proceedings, if any had to be initiated and levied pursuant to proceedings under section 143(3) and not pursuant to proceedings under section 143(3) r.w.s. 153A of the Act.
• Hence, ITAT direct the AO to levy penalty under section 271(1)(c) of the Act on the additional income assessed in the hands of assessee pursuant to search and delete the penalty for concealment on the alleged addition of Rs.6,00,000/-.
• The Revenue is also in appeal in assessment years 2006-07, 2007-08 and 2008-09 against the deletion of penalty levied under section 271(1)(c) of the Act. The said penalty for concealment was levied on account of unrecorded professional receipts, expenditure, etc. in the respective years.
• Following its own order in assessment year 2005-06,ITAT uphold the levy of penalty in assessment years 2006-07, 2007-08 and 2008-09.
• In all the other years, there is no further addition made under section 68 of the Act, hence, order on the said issue is only restricted to assessment year 2005-06.