Penalty on Undisclosed Income unearthed during the Search & Survey –Analysis in present scenario
– CA Vidhan Surana & CA Sunil Maloo
The legislature has intentionally drafted the provisions relating to Search and Survey in the statue book of Income Tax Act, 1961 with the target of unearthing the undisclosed income of any person in form of any money, bullion, jewellery or other valuable article or thing.
Search carried out u/s 132 of the Income Tax Act is looked upon by the assessee as a thorough invasion of his privacy. The Powers of the Search operation u/s 132 are much wider than the Survey proceedings as prescribed u/s 133A of the Act.
The most primary reason for Search being far more feared is that it empowers the authorities to make assessments / reassessment for Six Assessment Year immediately preceding the Assessment year in which the search is conducted, whereas in Survey only those Assessment years are assessed / reassessed for which the information collected during the survey belongs to.
Even though the ultimate objective for both Search and Survey is same, i.e. to curb the practice of having undisclosed incomes, yet the scope of powers attributed to the officers investigating illustrates the wide dissimilarity. Not only the authority of the officers even the penalty provisions relating to the undisclosed income detected during the Search and Survey is dissimilar.
Under the Income Tax Act, 1961 penalty is to be levied on the amount of “tax sought to be evaded” in respect of the concealment of particulars of income or furnishing inaccurate particulars of the income. Nevertheless, in case of SEARCH penalty is also levied in respect of “Undisclosed Income” too.
“Penalty in case of Search” – whether the disclosures made during the Search safeguards Assessee from Penalty???
Presently the Income Tax Act, 1961 contains special provisions in respect of penalty where the Search has been initiated. These provisions are summarized as under:-
|1||271(1)(c) read with Explanation 5A||Applicable to Search carried out on or after 01/06/2007|
|2||271AAA||Applicable to Search carried out on or after 01/06/2007 but before 01/07/2012|
|3||271AAB||Applicable to Search carried out on or after 01/07/2012|
In the course of Search operations, generally the Assessee declares his undisclosed income in the statement recorded u/s 132(4) under the impression that if the disclosure of undisclosed income is made then penalty shall not be initiated / levied.
The Search action of the department inclines the Assessee towards making maximum disclosure of the undisclosed income if any, which might result into timely targeted recovery of taxes on the disclosure made by the Assessee.
Let’s analyze, the real question that whether under the amended law, is there any direct provision which enables the Assessee immunity from the penalty provisions, if the undisclosed income is admitted in statement u/s 132(4) of the Act during the search?
The coup de grâce regarding which most assessee are unaware about is that once the disclosure of additional / undisclosed income is made and unaccounted income is admitted in the statement u/s 132(4) of the Act, then same shall be the minimum binding commitment made by him to the department with respect to his unaccounted income, which could not and should not be retracted subsequently. Mere act of retraction on part of the Assessee shall not serve the purpose and the department can still proceed on the basis of the statement so recorded and corroborative evidences collected during the search. Therefore, the Assessee must be cautious and well aware as to the commitment he is making by admitting the additional undisclosed income in the statement u/s 132(4) of the Act.
The penalty provisions are being regularly strengthened. Counter to this the immunity provisions inbuilt the sections levying the penalty are being made fully non-operative or non-practicable. This fact is clearly apparent from the Memorandum explaining the provisions of the Finance Bill 2012:-
PENALTY ON UNDISCLOSED INCOME FOUND DURING THE COURSE OF SEARCH
Under the existing provisions of section 271AAA of the Income-tax Act, no penalty is levied if the assessee admits the undisclosed income in a statement under sub-section (4) of section 132 recorded in the course of search and specifies the manner in which such income has been derived and pays the tax together with interest, if any, in respect of such income. As a result, undisclosed income (for the current year in which search takes place or the previous year which has ended before the search and for which return is not yet due) found during the course of search attracts a tax at the rate of 30% and no penalty is leviable.
In order to strengthen the penal provisions, it is proposed to provide that the provisions of section 271AAA will not be applicable for searches conducted on or after 1st July, 2012. It is also proposed to insert a new provision in the Act (section 271AAB) for levy of penalty in a case where search has been initiated on or after 1st July, 2012. The new section provides that,-
(i) If undisclosed income is admitted during the course of search, the taxpayer will be liable for penalty at the rate of 10% of undisclosed income subject to the fulfillment of certain conditions.
(ii) If undisclosed income is not admitted during the course of search but disclosed in the return of income filed after the search, the taxpayer will be liable for penalty at the rate of 20% of undisclosed income subject to the fulfillment of certain conditions.
(iii) In a case not covered under (i) and (ii) above, the taxpayer will be liable for penalty at the rate ranging from 30% to 90% of undisclosed income.
These amendments will take effect from the 1st day of July, 2012 and will, accordingly, apply to any search and seizure action taken after this date.
[Clauses 89, 95, 96]
As a result, now both the immunity provisions i.e. Explanation 5 to Section 271(1)(c) and Section 271AAA of the Act, have been made non-operative and accordingly now entire undisclosed income as detected in the Search shall be subject to the penalty provisions irrespective of the fact whether the same is duly disclosed or admitted by the Assessee at the time of Search. Nonetheless, a small relief is made available by Finance Act, 2012 in by inserting section 271AAB by providing payable penalty slab rates of 10%, 20% and 30% to 90% of the undisclosed income, subject to fulfillment of difficult conditions.
By going through the conditions prescribed for applicability of the lower slab of penalty on undisclosed income, it is apparent that fulfillment of such conditions is not only impracticable but also unfeasible in most of the cases. The unrealistic conditions are as follows:-
|Section||Conditions for applicability of lower slab of the penalty||Quantum of Penalty||Remarks|
|271AAB(1)(a)||a) Admission of such income in statement u/s 132(4)
b) Specified and SUBSTANTIATE the manner in which such undisclosed income was derived
c) Pays the tax and interest on such undisclosed income before the specified date;
d) Furnish the return of income for specified previous year and declare such undisclosed income therein
|Penalty Leviable @ 10% of undisclosed income||This clause is practically not possible in each and every cases, because even after the disclosure of income in the statement u/s 132(4), most of the Assessee could not substantiate the same.
And also the discretion always lies with the department whether to appreciate the manner so substantiated by the Assessee or to outright reject the same stating it to be a “Make believe Story”
|271AAB(1)(b)||a) Such Undisclosed Income NOT admitted in statement u/s 132(4); and
b) Furnish the return of income for specified previous year and declare such undisclosed income therein
c) Pays the tax and interest on such undisclosed income before the specified date;
|Penalty Leviable @ 20% of undisclosed income||In this clause, there is no condition to substantiate the manner in which such undisclosed income was derived. Only covers subsequent disclosure prior to assessments with higher quantum.|
|271AAB(1)(c)||a) Undisclosed income of specified previous year not covered in clause (a) and (b) of section 271AAB(1).||Penalty Leviable @ 30% to 90% of undisclosed income||Quantum of penalty same as per section 271(1)(c) r.s. Expl. 5A|
The definition of the term “Specified Previous Year” has been provided in explanation (b) to section 271AAB, which reads as under:-
|(b) “specified previous year” means the previous year–|
which has ended before the date of search, but the date of furnishing the return of income under sub-section (1) of section 139 for such year has not expired before the date of search and the assessee has not furnished the return of income for the previous year before the date of search; or
Technically there cannot be any undisclosed income for any Assessee till he is lawfully having prescribed time for filing of return and has not yet filed the return. (as the law does not specifically prescribes maintaining day to day books, but practically the Assessee should)
It is the prerogative of assessee as its always open for him to include any income before the due date of filing the return.
|(ii)||in which search was conducted;||
Here also, the question of undisclosed income does not arise as the income is generally declared in the return of income, and return shall be filed after the end of the year in which search is carried out. Hence, once again the Assessee can still disclose all such incomes in his return.
On in depth reading of the above explanation which is definition of the term “Specified previous year”, one may conclude that the same is defined to include only those periods for which the Assessee already had a lawful right to disclose any such income into its return of income yet to be filed. This neutralizes the so-called relief of lower penalty, based on slab rate as per section 271AAB as there is no extra benefit even if a taxpayer admits and declares his undisclosed income of such “Specified previous year” in the statement recorded u/s 132(4) of the Act. Accordingly, this makes the above condition totally impracticable.
Similarly, explanation 5A to section 271(1)(c) of the Act, covers the period other than the period already covered by the “Specified Previous Year”, in this provision also there is no immunity available to the Assessee for the undisclosed income. This explanation 5A reads as under:-
[Explanation 5A.–Where, in the course of a search initiated under section 132 on or after the 1st day of June, 2007, the assessee is found to be the owner of —
(i) 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 utilising (wholly or in part) his income for any previous year; or
(ii) any income based on any entry in any books of account or other documents or transactions and he claims that such entry in the books of account or other documents or transactions represents his income (wholly or in part) for any previous year,
which has ended before the date of search and, —
(a) where the return of income for such previous year has been furnished before the said date but such income has not been declared therein; or
(b) the due date for filing the return of income for such previous year has expired but the assessee has not filed the return,
Thus under the amended provisions of the Income Tax Act with respect to the penalty in cases of Search as applicable today, there is no immunity as such, even if the full disclosure of such income is made in the statement u/s 132(4) of the Act and also taxes has been paid thereon.
The legislative language of explanation 5A to section 271(1)(c) of the Act, is so strict that it provides no escape route from levy of penalty. This provision is strictly applicable even if the Assessee is duly disclosing the additional unaccounted income as admitted in statement u/s 132(4) by paying appropriate tax in the return of income filed u/s 153A of the Act and the assessment u/s 153A is made without any deviation from the returned income.
Recently, a case with such facts was decided by the ITAT CHANDIGARH BENCH in case of Shri Rajnish Vohra Vs. DCIT, in ITA number ITA No. 516/CHD/2012, held as under:-
30. Further, the provisions of Section 153A are specifically brought on the Statute book, for assessment, in case of search u/s 132(1) or requisition of books of account u/s 132A of the Act. The opening sentence of Section 153A of the Act, overrides the provisions of Section 139, 147, 148, 149, 151 and 153 of the Act. The assessee has declared undisclosed income, in the return filed, in response to notice u/s 153A of the Act and the CIT(Appeals), having regard to the facts of the case, invoked the currently applicable Explanation 5A Section 271(1) (c) of the Act and upheld the penalty, levied by the AO. In such a fact-situation, the CIT(Appeals) has acted in accordance with the currently operative and relevant penal provisions, with reference to the return of income, f i led in response to Section 153A of the Act.
31. In view of the above legal and factual discussions, and having regard to the express statutory provisions of Section 271(1) (c) of the Act read with Explanation 5A thereunder, as inserted by the Finance (No. 2) Act, 2009, with retrospective effect from 01.06.2007, we do not find any infirmity, in the findings of ld CIT(Appeals) . Therefore, the findings of the CIT(Appeals) are upheld and, consequently, the grounds of appeal of the assessee are dismissed.
However, still the applicability of explanation 5A can be ruled out based on the interpretation of the term “due date for filing the return of income” as used in clause (b) of this explanation. The clause (b) can be termed as a saving clause wherein penalty u/s 271(1)(c) can’t be levied.
For the purpose of clause (b), one has to see whether or not the assessee has shown the income in the return of income which is filed on the “due date”. Provisions of section 139(1) provides for various types of assesses to file return of income before the due date and such due date has been provided in the Explanation 2, which varies from year–to–year.
Whereas, provisions of section 139(4) and section 139(5) provides for extension of period of “due date” as per the circumstances mentioned therein and it enlarges the time frame provided in section 139(1). The operating line of sub–section 4 of section 139 provides that “any person who has not furnished the return within the time allowed”, here the time allowed refers to time limit prescribed under section 139(1), and hence in such case, the time limit is extended.
Wherever in the legislature the term “due date” has been specified or the date for any compliance has been specified, the same has been categorically specified in the Act. For e.g., under section 44AB where the assessee is required to get his accounts audited before the specified date and furnish by that date, the specified date has been specifically mentioned as the date provided in section 139(1). Similarly, in section 43B also, the “due date” has been specifically provided as the date mentioned in sub–section (1) of section 139. In the aforesaid Explanation 5A, the legislature has not specified the due date as provided in section 139(1) but has merely envisaged the words “due date”.
This “due date” can be very well inferred as due date of the filing of return of income filed under section 139, which invariably includes section 139(4) as well as section 139(5) of the Act. Where the legislature has provided the consequences of filing of the return of income under section 139(4), then the same has also been specifically provided. For e.g., section 139(3), provides that for the purpose of carry forward losses under sections 72 to 74A, the return of income should be filed within the time limit provided under section 139(1), otherwise losses cannot be set–off. In absence of such a restriction, the limitation of time of “due date” cannot be strictly reckoned with section 139(1) only. Thus, the meaning of the words “due date”, sans any limitation or restriction as given in clause (b) of Explanation 5A, cannot be read as “due date” as provided in section 139(1). The words “due date” therefore, can also safely mean date of filing of the return of income under section 139(4) and section 139(5) of the Act.
In this connection kind attention is invited to the recent judgment of Mumbai ITAT in case of ITO Vs Mr. Gope M. Rochlani in ITA Number ITA no. 7737/Mum./2011, which has been rendered after placing reliance on judgments of various high courts delivered in context of exemption u/s 54 of the Act. In case of Mr. Gope M. Rochlani (Supra), it was held as under:-
14. In our considered opinion, once the legislature has not specified the “due date” as provided in section 139(1) in Explanation 5A, then by implication, it has to be taken as the date extended under section 139(4). In view of the above, we hold that the assessee gets the benefit / immunity under clause (b) of Explanation to section 271(1)(c) because the assessee has filed its return of income within the “due date” and, therefore, the penalty levied by the Assessing Officer cannot be sustained on this ground. Even though we are not affirming the findings and the conclusions of the learned Commissioner (Appeals), however, as per the discussion made above, penalty is deleted in view of the interpretation of Explanation 5A to section 271(1)(c). Consequently, the ground raised by the Revenue is treated as dismissed.
Following are the citations of the judgments of high courts delivered in context of exemption u/s 54 of the Act based on above analogy (and no contrary decision of any other high court or of Supreme Court):-
However, on an overall it can be concluded that the penal provisions as provided in explanation 5A of the Act are very strict and does not provide for any way out for the Assessee to resist the levy of penalty u/s 271(1)(c).
Still, on perusal of the Income Tax Act, 1961 there are 3 different provisions whereby the Assessee can be granted immunity from the penalty even in cases of Search. There provisions are summarized as under:-
|Particulars||Alternate 1||Alternate 2||Alternate 3|
|Section||245H(1)||273A||273AA w.e.f. 1-4-2008.|
|Competent Authority||Settlement Commission||Commissioner with prior approval of CCIT or DGIT||Commissioner after abatement from settlement commission|
|Conditions prescribed therein||
a. co-operated with the Settlement Commission
b. has made a full and true disclosure of his income and the manner in which such income has been derived
a. prior to the detection by the [Assessing] Officer, of the concealment of particulars of income or of the inaccuracy of particulars furnished in respect of such income, voluntarily and in good faith, made full and true disclosure of such particulars
b. has co-operated in any enquiry relating to the assessment of his income
c. and has either paid or made satisfactory arrangements for the payment of any tax or interest payable in consequence of an order passed under this Act in respect of the relevant assessment year
a. he has made an application for settlement under section 245C and the proceedings for settlement have abated under section 245HA
b. the penalty proceedings have been initiated under this Act
c. if he is satisfied that the person has, after the abatement, co-operated with the income-tax authority in the proceedings before him and has made a full and true disclosure of his income and the manner in which such income has been derived
All the above three sections of the Income Tax Act, 1961 provides for immunity from penalty subject to fulfillment of conditions prescribed therein. The Assessee should apply for any of the above 3 options which best suits to the facts and circumstances of his case. Pertinent to note that all the above three options are available to the Assessee on once in the lifetime basis.
|“When one door closes, another opens; but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us.”
Alexander Graham Bell
Same nuances of the quote applies here as when an Assessee has made an application u/s 245C of the Act, praying for immunity from penalty etc. before the Income Tax Settlement Commission and the proceedings for settlement have been abated under section 245HA whatsoever cause / findings. Even for the cases, where the settlement commission has rejected the application for settlement of the case at any stage, then there is one more specific option available to the Assessee in form of Section 273AA of the Act introduced with effect from 01/04/2008.
Due importance is to be given to the sections 245H and 273AA where emphasizes and stress is given on full and true disclosure of undisclosed income and disclosure of the manner in which such income has been derived, however these sections does not mandate the Assessee to SUBSTANTIATE the manner in which such income is derived, unlike the mandatory unambiguous wording of section 271AAA and section 271AAB of the Act. Below is the summary of the phrase “manner in which such income has been derived” wherever occurred in Income Tax Act:-
Sections where only requirement of is to Disclose the manner
Sections where TWIN requirements are prescribed
Disclose the manner as well as SUBSTANTIATE the same
|245C: Application for settlement of cases||271AAA: Penalty where search has been initiated|
|245H Power of Settlement Commission to grant immunity from prosecution and penalty||Section 271AAB Penalty where search has been initiated.|
|271(1)(c) Explanation 5|
|273AA Power of Commissioner to grant immunity from penalty|
|278AB: Power of Commissioner to grant immunity from prosecution|
Further, the HIGH COURT OF GUJARAT in case of COMMISSIONER OF INCOME TAX vs. MAHENDRA C. SHAH, reported in (2008) 299 ITR 305 (Guj) has held that if the income is declared and taxes have been paid thereon, there would be substantial compliance not warranting any further denial of the benefit, even if the statement u/s 132(4) does not specify the manner in which the undisclosed income is derived.
Similar view was also taken by Allahabad High Court in the case of COMMISSIONER OF INCOME TAX vs. RADHA KISHAN GOEL, held as under:-
Much importance should not be attached to statement about the manner in which such income has been derived—In the absence of anything to the contrary, it can be inferred from the facts—Thus, non-statement of the manner in which such income was derived would not make Expln. 5(2) inapplicable
Therefore, unless and otherwise the Assessee is required to substantiate the manners of earning the undisclosed income by virtue of provisions of the Income Tax Act, the manners as disclosed by the Assessee should be accepted by the department unless the facts of the case suggests anything contrary thereto. This approach of the department shall promote the Assessee’s to disclose their undisclosed / unaccounted income truly and fully in the statement u/s 132(4) of the Act and/or also during the pendency of Assessment u/s 153A r.w.s. 143(3) of the Act and also in making timely payment of the taxes thereon.
However, at the same time the manner so disclosed by the Assessee should be considered in its true spirit otherwise the Assessee will hesitate in making any disclosures, as same shall not grant them immunity from penalty.
Penalty on Disclosure made during the Survey
Survey action is taken u/s 133A of the Act, wherein the Authorized Officers are authorized to make survey at the business premises / related places. The basic purpose of the survey is to check the business activities of the Assessee and also tax related compliance. This is done with a view to expose the unaccounted income as a result of such discrepancies. The powers during the survey are comparatively lesser than as conferred in section 132 of the Act.
The disclosure during the survey may relate to:-
– current Assessment year in which the survey action is executed; and / or
– Earlier Assessment years
If the disclosure of additional income during the survey is made for the current Assessment year in which the survey action is executed, then the penal provisions are not applicable as the due date for filing the return for such AY has not expired. Such transactions can easily be incorporated in the books of accounts of the current year and can be considered while filing the return of income for such year. As explanation 5A of section 271(1)(c) of the Act is applicable only in relation to Search u/s 132, the same cannot be extended to survey actions u/s 133A of the Act. Thus there cannot be any deemed concealment as referred in such explanation 5A in cases of survey. Kind attention is invited on Vasavi Shelters vs ITO, ITAT BANGALORE BENCH ‘B’ IT APPEAL NOS. 499 & 500 (BANG.) OF 2012 dated 22/02/2013, held as under:-
It necessarily follows that concealment of particulars of income or furnishing of inaccurate particular of income by the assessee has to be in the IT return filed by it. The assessee can furnish the particulars of income in his return and everything would depend upon the IT return filed by the assessee. This view gets supported by Explanations 4 as well as 5 and 5A of s. 271. Obviously, no penalty can be imposed unless the conditions stipulated in the said provisions are duly and unambiguously satisfied. Since the assessee was exposed during survey, may be, it would have not disclosed the income but for the said survey. However, there cannot be any penalty only on surmises, conjectures and possibilities. Sec. 271(1)(c) has to be construed strictly. Unless it is found that there is actually a concealment or non-disclosure of the particulars of income penalty cannot be imposed. There is no such concealment or non-disclosure as the assessee had made a complete disclosure in the IT return and offered the surrendered amount for the purposes of tax
14. Explns. 5 and 5A are also an exception to the rule that when an income which is ultimately brought to tax is declared in a return of income, there can be no question of treating the Assessee as having “concealed particulars of income or furnished inaccurate particulars of income” Those Explanations will also not apply in the present case because those Explanations are applicable only when there is a search u/s.132 of the Act and to a case of Survey u/s. 133A of the Act.
15. For the reasons given above we hold that there can be no justification for imposition of penalty on the income offered in the return of income by the Assessee for both the A.Ys., because there cannot be any penalty on income which is declared in a return of income, on the facts and circumstances of the present case.
However, the additional income disclosed during the survey for any earlier assessment years shall always be subject to regular penal provisions as stipulated in section 271(1)(c) read with explanations thereunder on a case to case basis having regard to the peculiar facts of each and every case.
Therefore, having regard to the law as applicable in the statue book, it can be summarized that the penalty provisions are being made stringent frequently to discourage the practice of keeping unaccounted income / assets amongst the Assessee’s. Therefore, now there is no immunity route available in the sections levying the penalty, which was earlier available in form of Explanation 5 to section 271(1)(c) and also in section 271AAA. But it is worthwhile to mention that the legislature is taking care of the Assessee’s who come forward and make true and full disclosure of undisclosed income and disclose even the manner in which such income is earned, by way of special immunity provisions in form of section 245H (by settlement Commission), Section 273A and Section 273AA (By Commissioner).
Prosecution proceedings may follow, Once penalty is confirmed.
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