No Section 271(1)(c) Penalty on Voluntary Income Disclosure: ITAT Visakhapatnam

Raghuram Hume Pipes Private Limited Vs ACIT (ITAT Visakhapatnam)

Issue: ITAT Visakhapatnam order on Whether penalty u/s 271(1)(c) of IT Act can be levied on income voluntarily disclosed by the assessee in the return of income filed in response to notice u/s 148, which was based on disclosure made during the course of survey proceedings u/s 133A, when there is no independent evidence of concealment or furnishing inaccurate particulars of income

Facts of the Case:

1. Business Activity: The assessee is engaged in executing contract works for Government Departments such as Irrigation, Public Health, Rural Water Supply, and various Municipal Corporations, classified as a Special Class Contractor.

2. Original Return of Income: For Assessment Year (AY) 2016-17, the assessee filed its return of income under Section 139(1) on time, declaring total income of Rs. 3,38,91,662/-.

3. Survey and Post-Survey Proceedings:

• A survey under Section 133A was conducted on 25.03.2019.
• During the survey, the Revenue confronted the assessee regarding lower profit margins (3.5% to 4%) in comparison to the industry norm (8% to 10%).
• The assessee explained that the lower profits were due to increasing raw material costs, but to buy peace and avoid litigation, it agreed to voluntarily offer higher profit  percentages:
  • 6% for AY 2016-17
  • 6.5% for AY 2017-18
  • 7% for AY 2018-19

4. Revised Return under Section 148:

• Based on the survey findings, proceedings under Section 147 were initiated.
• A notice under Section 148 was issued on 30.03.2019.
• In response, the assessee filed its return on 28.12.2019, admitting an enhanced income of Rs. 4,03,16,660/-, reflecting the additional income disclosed during the survey.

The assessment was completed under Section 143(3) r.w.s. 147 accepting the returned income.

5. Penalty Proceedings under Section 271(1)(c):

• The Assessing Officer (AO) initiated penalty proceedings under Section 271(1)(c) alleging concealment of income amounting to Rs. 64,25,000/- (the difference between the originally returned and subsequently assessed income).
• A penalty of Rs. 24,18,000/- was levied with the approval of the Additional Commissioner under Section 274(2).

6. Assessee’s Contentions:

• The additional income was voluntarily offered post-survey and was fully disclosed in the return filed under Section 148.
• There was no concealment or furnishing of inaccurate particulars in the original return; the lower profits reflected genuine business circumstances.
• The revised profit percentages were agreed upon to avoid prolonged litigation, not due to the discovery of concealment.
• The return in response to Section 148 included the entire additional income, and the income was brought to tax.

7. Revenue’s Contentions (AO’s Stand):

• The return under Section 148 was filed belatedly, beyond the specified period of 30 days, and thus considered non-est by the AO.
• Without the survey proceedings, the assessee would not have disclosed the additional income.
• This demonstrated the assessee’s intention to conceal, warranting the levy of penalty under Section 271(1)(c).

8. Findings of the CIT(A):

• The CIT(A) upheld the AO’s order, holding that the assessee had failed to account for its correct income in the original return under Section 139(1).
• Confirmed that the additional income declared in response to Section 148 was due to the survey proceedings, and thus, penalty was justified. ITAT Visakhapatnam’s Observations and Decision:

9. Voluntary Disclosure and No Evidence of Concealment:

• The Tribunal emphasized that penalty proceedings under Section 271(1)(c) are penal in nature and must be strictly construed.
• There was no independent evidence produced by the AO that the assessee deliberately concealed income or furnished inaccurate particulars.
• The voluntary disclosure of additional income was made by the assessee in the return filed in response to Section 148, and the income was brought to tax.

10. No Penalty on Voluntary Disclosure:

• The Tribunal placed reliance on:
• Muninaga Reddy v. ACIT (ITAT Bangalore)
• CIT v. SAS Pharmaceuticals [(2011) 11 taxmann.com 207 (Delhi HC)]
• Both decisions affirm that no penalty can be levied when the assessee has voluntarily disclosed income and offered it for taxation without any concealment in the return.

3. Penalty Cannot Be Levied on Assumptions or Surmises:

• The AO’s reasoning was based on assumptions, i.e., had the survey not taken place, the income would not have been disclosed.
• The Tribunal held that penalty cannot be imposed on the basis of conjectures, possibilities, or surmises.

11. Explanation 5 and 5A to Section 271(1)(c):

• The Tribunal clarified that these explanations do not apply, as the assessee declared and paid tax on the additional income through the return filed in response to Section 148.

12. Conclusion and Final Decision:

• The ITAT held that there was no justification for levying penalty under Section 271(1)(c).
• The assessee had made a full and voluntary disclosure, and there was no case of concealment or furnishing inaccurate particulars.
• The Tribunal allowed the appeal, and the penalty of Rs. 24,18,000/- was deleted.

FULL TEXT OF THE ORDER OF ITAT VISAKHAPATNAM

This appeal filed by the assessee is against the order of the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi (“Ld.CI T(A)”) vide DIN & Order No. ITBA/NFAC/S/ 2 5 0 / 2 0 2 3-2 4 / 10622755098(1), dated 08/03/2024 for the AY 2016-17 arising out of the order passed U/s. 271(1)(c) of the Income Tax Act, 1961 (“the Act” ).

Brief facts of the case are that the assessee is engaged in the business of executing contract works in the Government Departments like Irrigation, Public Health, Rural Water Supply and various Municipal Corporations as Special Class Contractor. The assessee-company filed its return of income for the AY 2016-17 admitting a total income of Rs. 3,38,91,662/-. A survey U/s. 133A of the Act was conducted in this case on 25/03/2019 and subsequently, initiated proceedings U/s. 147 of the Act. In response to the notice U/s. 148 of the Act issued on 30/03/2019, the assessee filed the return of income on 28/12/2019 admitting a total income of Rs. 4,03,16,660/-. Subsequently, notices U/s. 143(2) and 142(1) of the Act were issued and served on the assessee through e-mail. The assessee filed the information called for in response to the above notices and after examining the information filed by the assessee, the Ld.AO completed the assessment accepting the return of income filed by the assessee. Thereafter, the Ld. AO initiated the penalty proceedings U/s. 271(1)(c) of the Act and issued a show cause notice dated 22/02/2021 to the assessee. In response to the show cause notice, the assessee vide letter dated 09/03/2021 submitted its reply. Considering the reply furnished by the assessee, the Ld. AO found that the assesses has willfully committed the default of not disclosing the true particulars of its income amounting to Rs. 64,25,000/- being the difference between the returned income and assessed income U/s. 143(3) r.w.s 147 of the Act and thereafter, levied penalty /s. 271(1)(c) of the Act for Rs. 24,18,000/- with the approval of the Additional Commissioner of Income Tax as per the provisions of section 274(2) of the Act. On being aggrieved by the order of the Ld. AO, the assessee filed an appeal before the Ld. CIT(A). Before the Ld.CIT(A), the assessee has made similar submissions and accepted voluntarily the low profits declared while filing the original return of income and thereafter filed the return of income in response to the notice U/s. 148 of the Act admitting the income accepted during the survey proceedings. The Ld. CIT(A) considered that the assessee has failed account for its income while filing the original return of income U/s. 139(1) of the Act and thereafter, confirmed the order of the Ld. AO. On being aggrieved by the order of the Ld. CIT(A), the assessee filed an appeal before us by raising the following grounds of appeal:

“1. That on the facts and in the circumstances of the case, the order passed by the Assessing Officer U/s. 271(1)(c) of the Act, dated 23/03/2022 upheld by the Ld. CIT(A) vide order U/s. 250 of the Act dated 08/03/2024 is not in accordance with the facts of the case and the provisions of law.

2. That the Ld. CIT(A) erred in upholding the actions of the AO in levying the penalty U/s. 271(1)(c) of the Act despite there being no concealment of income or furnishing of inaccurate particulars the essential ingredients required to be established before levying such penalty.

3 . The Ld. CIT(A) ought to have acknowledged that the assessee company had offered additional income in the return of income filed in response to notice U/s. 148 of the Act and this return of income was duly accepted by the

4. Therefore, the levy of penalty U/s. 271(1)(c) is unwarranted and uncalled for.

5. The levy of penalty U/s. 271(1)(c) is unsustainable on the ground that the assessee had voluntarily and in good faith disclosed the addition income in response to the reassessment notice, and there was no deliberate act of concealment of furnishing of inaccurate particulars of income.

6. The Ld. CIT(A) failed to consider the submissions and explanations provided by the assessee, instead, the appeal was dismissed in summary and casual manner, which cannot sustain the test of legal scrutiny.

7. For these and other reasons that are to be urged at the time of hearing of the case, the appellant prays that the impugned order is liable to be set aside in the interest of justice.”

The only issue involved in this appeal by way of the grounds raised above is with respect to the account of levy of penalty U/s.271(1)(c) of the Act which was arising out of the income admitted by the assessee during the survey proceedings. The Ld. Authorized Representative (“Ld. AR”) submitted that the assessee has voluntarily accepted the additional income by enhancing the profit percentage as mentioned in the reply to Question No. 15 during the survey proceedings. He further submitted that the admission was made by the assessee in order to avoid litigation and to buy peace with the Department. He therefore submitted that since it is a voluntary admission of additional income, there is no concealment of income or furnishing of inaccurate particulars of income and hence, levy of penalty U/s. 271(1)(c) of the Act is unsustainable. On this issue, the Ld. AR relied on the decision of the ITAT, Bangalore Bench in the case of Muninaga Reddy vs. ACIT (2017) 37 taxmann.com 440 (Bangalore – Trib.). The Ld. AR also argued that the Ld. AO has not specified under which limb of section 271(1)(c) of the Act, the penalty has been initiated and on this issue, the Ld. AR relied on the following decisions:

(i) CIT vs. SSA’S Emerald Meadows (2016) 73 com 248 (SC)

(ii) Principal Commissioner of Income Tax vs. Blackroak Securities (P.) Ltd (2023) 157 com 564 (Delhi)

(iii) Malla Appalaraju vs. ITO in ITA No. 253/Viz/2023, dated 28/05/2024 (ITAT, Vizag Trib.)

Per contra, the Ld. Departmental Representative (“Ld. DR”) heavily relied on the order of the Ld. CIT(A) and submitted that had there been no survey operation, the assessee would not have admitted the additional income. Further, the Ld. DR also submitted that the assessee filed the return of income after the issue of notice U/s. 148 of the Act with a delay of more than eight months. Hence, it cannot be considered as a voluntary submission and pleaded that the order of the Ld. CIT(A) be upheld.

We have heard both the sides and perused the material available on record as well as the orders of the Ld. Revenue Authorities. It is an admitted fact that the assessee has been confronted by the Survey Team and accepted disclosing of lower profits in the range of 3.5% to 4% on the turnover when compared to the other assessees in the same line of business which were showing a profit percentage of 8% to 10%. The assessee in his reply explained that they are Special Class Contractors attributed the low profits to increase in the cost of raw material year after year. Further, the assessee stated that to buy peace and to avoid litigation with the Department, it has voluntarily offering profit percentage of 6% for the AY 2016-17, 6.5% for the AY 2017-18 and 7% for the AY 2018-19. However, the contention of the Revenue is that the assessee did not file its return of income in response to the notice U/s. 148 of the Act within the specified period of 30 days but has filed belatedly which was considered non-est by the Ld. AO. It was also the contention of the Ld. AO that if the survey proceedings have not been conducted, the assessee would not have disclosed the additional income while filing the return of income belatedly in response to the notice U/s. 148 of the Act. In the case of Muninaga Reddy vs. ACIT (supra) rendered by the Coordinate Bench of the Tribunal at Bangalore held that there can be no concealment or non-disclosure, since the assessee has made complete disclosure in the IT return and offered the surrendered amount for the purpose of tax and therefore no penalty U/s.271(1)(c) could be levied. The Coordinate Bench of Bangalore while coming to such conclusion, relied on the decision of the Hon’ble Delhi High Court in the case of CIT vs. SAS Pharmaceuticals (2011) 11 taxmann.com 207 (Delhi). The Hon’ble Delhi High Court in the case of CIT vs. SAS Pharmaceuticals (supra) vide para 16 of its order held as follows:

“16. No doubt, the discrepancies were found during the survey. This has yielded income from the assessee in the form of amount surrendered by the assessee. Presently, we are not concerned with the assessment of income, but the moot question is to whether this would attract penalty upon the assessee under the provisions of Section 271(1)(c) of the Act.

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. Section 271 (1) (c) of the Act 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 non­disclosure as the assessee had made a complete disclosure in the income tax return and offered the surrendered amount for the purposes of tax.”

The Hon’ble Supreme Court in the case of SAS’S Emerald Medows (supra), relied on by the assessee, dismissed the Special Leave Petition (“SLP”) by holding that the notice issued U/s. 274 r.w.s 271(1)(c) of the Act is bad in law as it did not specify under which limb of section 271(1)(c) penalty proceedings had been initiated.

Further, the decision of the ITAT, Visakhapatnam Bench rendered in the case of Malla Appalaraju vs. ITO (supra) is of no help to the assessee as in the notice U/s. 274 r.w.s 271(1)(c) of the Act it was not mentioned the reason as to why they are invoking the penalty proceedings and hence the facts are distinguishable. The only contention of the Revenue is that the assessee has filed its return of income in response to the notice U/s. 148 of the Act belatedly after a period of nine months and hence, could not be considered as voluntary disclosure. On a perusal of section 271(1)(c) of the Act, Explanation-3 to section 271(1)(c) clearly states that Explanation-3 shall have no application if a notice U/s. 142(1) or 148 of the Act was issued within two years and if an assessee files a return of his income within a period of two years in response to a notice U/s. 148, he would be caught within the mischief of this Explanation. In the instant case, the assessee has filed his return of income belatedly in response to the notice U/s. 148 of the Act by admitting the additional income detected during the survey. Hence, the reliance placed by the assessee in the decision rendered by the Coordinate Bench of the Tribunal in the case of Muninaga Reddy vs. CIT (supra) is of no help to the assessee because the facts are distinguishable. The reliance placed by the Ld. DR in the judgment of the Hon’ble Supreme Court in the case of MAK Data (P.) Ltd vs. CIT (2013) 38 taxmann.com 448 (SC) wherein it was clearly held that the law does not provide that when an assessee makes a voluntary disclosure of his concealed income, it is not absolving from penalty proceedings. Explanation to section 271(1) raises a presumption of concealment, when a difference is noticed by the Ld. AO between the reported income and the assessed income. However, we find that in the case of MAK Data (P.) Ltd vs. CIT (supra), during the assessment proceedings the Ld. AO has noticed the impounded documents during the course of survey proceedings U/s. 133A of the Act and clearly concluded that the surrender of income was not voluntary. In the instant case, no such impounded documents were available before the Ld. AO but the Ld. AO has purely relied on the admission made during the survey proceedings U/s. 133A of the Act by the assessee. Hence, the decision of the Hon’ble Supreme Court in the case of Mak Data (P.) Ltd vs. CIT (supra) cannot be applied to the instant case.

We therefore are of the considered view that the assessee has declared the additional income which was accepted by the Ld. AO and brought to tax. The Ld. AO cannot impose penalty U/s. 271(1)(c) of the Act based on the voluntary disclosure by the assessee. The Ld. AO has also not brought on record any corroborative evidence but has purely proceeded to levy the penalty based on assumptions that the assessee has concealed the income or furnished the inaccurate particulars of income while filing the original return of income wherein if the survey was not conducted on the assessee, this income would not have been admitted by the assessee. There cannot be any penalty based on surmises, conjectures and possibilities. While invoking the penalty provisions of section 271(1)(c) of the Act it has to be construed strictly. Unless it is found that there is an actual concealment or non-disclosure of the particulars of income, penalty cannot be imposed. In the instant case, there is no such concealment or non-disclosure as the assessee has made a complete disclosure in the return of income offered, surrendered the amount for the purpose of tax. The Explanation-5 and 5A to section 271(1) of the Act are also an exception to the Rule that the income 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. We therefore are of the considered opinion that there is no justification in the case of the assessee for imposition of penalty on the income declared in the return of income filed by the assessee. Thus, the grounds raised by the assessee are allowed.

In the result, appeal filed by the assessee is allowed.

Pronounced in the open Court on 07t^h March, 2025.