Penalty u/s 271AAA-what constitutes substantiating how undisclosed income was derived-High Court explains prerequisites of statement u/s 132(4) to avert penalty
ABCAUS Case Law Citation:
ABCAUS 2247 (2018) (03) HC
The Revenue was aggrieved by the order of the ITAT in deleting the penalty u/s 271AAA of the Income Tax Act, 1961 (the Act) imposed by the Assessing Officer (AO) in pursuant to search.
A group of companies were subjected to search under Section 132 of the Act. The assessee too was covered by the search and filed return of income for the relevant assessment year electronically. Subsequently, the case of the assessee was slected for scrutiny u/s 143(2) of the Act and the assessment was completed on the returned income.
During assessment proceedings, the AO noticed that the assessee had reported undisclosed income earned during the relevant financial year during the course of search and after the search proceedings, relating to material found and seized during search. The AO was of the view that the provisions of section 271AAA of the Act, was applicable in respect to the undisclosed income found during the course of search and declared by the assessee in her return of income. He therefore initiated the penalty proceedings under Section 271AAA during assessment proceedings on the ground that assessee had not specified the manner in which the undisclosed income was earned and failed to substantiate it. Finally, he imposed the penalty on the assessee under Section 271AAA.
Being aggrieved with the aforesaid penalty order, assessee appealed before the CIT (A), who deleted the penalty and allowed the assessee’s appeal.
The ITAT noted that in a previous case, it following the decisions of Hon’ble Allahabad High Court and Hon’ble Gujarat High Court had held that in absence of query raised by the authorized officer during the course of recording of statement u/s 132(4) about the manner in which the undisclosed income has been derived and about its substantiation, the AO was not justified in imposing penalty u/s. 271AAA of the Act specially when the offered undisclosed income has been accepted and due tax thereon has been paid by the assessee.
In view of that, the ITAT after noticing its previous order affirmed the reasoning of the CIT(A)
The Hon’ble High Court noted that section 271AAA was brought into force with effect from 01.04.2007 and its scope and effect was explained by CBDT Circular dated 12.03.2008. The Section was amended by the Finance Act, 2012 and its amendments was part of series of amendments with respect to the effect of presumption in the case of search cases under Section 132(4A). These were introduced simultaneously with the omission of Explanation 5 to Section 271(1)(c) on the one hand and insertion of Explanation 5A as well as Section 292C.
The Hon’ble High Court opined that in construing Section 271AAA one must not lose sight of its essential purpose which resulted in its enactment. Penalty at the rate of 10% of the undisclosed amount declared applies if the conditions in Section 271AAA (2) are not met with. This is quite different from the penal provision under Section 271 (1) (c) of the Act, which directs that if income is concealed or inaccurate returns are filed, which are disallowed by the AO, the penalty shall be ―three times the amount of tax sought to be evaded‖. In the case of amounts disclosed during the course of search, the penalty amount is only ten percent of the undisclosed income. Parliament has, therefore, given a different treatment to the latter category. At the same time, if an assessee were to successfully urge the “escape route” so to say, of Section 271AAA (2), all three conditions mentioned in the provision, have to necessarily be fulfilled. In the preset case, the assessee, while declaring the “undisclosed income” also stated, that ―the surrender is being made subject to no penal action of Section 271(1)(c)‖
It was noted that while dealing with a case of similar surrender- but made in the course of survey proceedings, by an assessee (which led to imposition of penalty), the Supreme Court had observed that the defence of the assessee that the surrender was made with a view to avoid litigation, buy peace and to channelize the energy and resources towards productive work and to make amicable settlement with the income tax department is not recognized under the explanation 1 to 271(1)(c) of the Act. It is trite law that the voluntary disclosure does not release the Appellant-assessee from the mischief of penal proceedings. The law does not provide that when an assessee makes a voluntary disclosure of his concealed income, he had to be absolved from penalty.
The Hon’ble High Court opined that the assessee merely stated that the sums advanced were undisclosed income. However, she did not specify how she derived that income and what head it fell in (rent, capital gain, professional or business income out of money lending, source of the money etc). Unless such facts are mentioned with some specificity, it cannot be said that the assessee has fulfilled the requirement that she, in her statement u/s 132 (4) substantiates the manner in which the undisclosed income was derived.
The court opined that the lower appellate authorities misdirected themselves in holding that the conditions in Section 271AAA (2) were satisfied by the assessee. The Hon’ble High Court answered substantial question of law in favour of the revenue and against the assessee.