Kerala H.C : Filing of return declaring undisclosed income does not give any immunity to assessee from penalty under section 158BFA(2)

High Court Of Kerala

CIT vs. Heera Construction Co. (P.) Ltd.

Section : 158BFA

C.N. Ramachandran Nair And Bhabani Prasad, JJ.

IT Appeal No. 202 Of 2010

April 4, 2011

JUDGMENT

C.N. Ramachandran Nair, J.-The respondent-assessee is a private limited company engaged in real estate business, i.e., construction and sale of commercial and residential apartments and buildings. A search was conducted by the Income-tax Department in the business premises and in the residence of directors of the company under section 132 of the Income-tax Act (hereinafter referred to as “the Act” for short). Pursuant to the search, the Assessing Officer proposed to make block assessment under section 158BC of the Act and as the first step, the assessee was called upon to furnish return of undisclosed income in Form No. 2B. Even though assessee filed return disclosing undisclosed income of Rs. 79,10,187 the assessee did not remit the tax thereon, which was Rs. 48,41,034 prior to or along with filing of return. The Assessing Officer proceeded to make assessment by making substantial addition to the returned income and the total income assessed was Rs. 1,32,89,530. However, in appeal, the Commissioner (Appeals) reduced the addition to the returned income to Rs. 23,32,026. We are informed that assessment appeal has become final and the addition to the returned income assessed is Rs. 23,32,026. Besides completing the assessment on the undisclosed income, which comprises the income returned by the assessee and the addition made thereto by the officer, the Assessing Officer proceeded to levy penalty under section 158BFA(2) of the Act. The Assessing Officer noticed that the assessee though disclosed Rs.79,10,187 as undisclosed income by filing return in Form No. 2B pursuant to notice issued by the officer under section 158BC, the assessee did not pay the tax on the admitted undisclosed income returned either prior to or along with filing of return as required under the proviso to section 158BFA(2) to get immunity from payment of penalty at least in respect of tax on such undisclosed income returned by the assessee. Therefore, penalty was levied at equal amount of tax on the entire undisclosed income assessed under section 158BC(c) of the Act, which comprises the undisclosed income returned by the assessee and addition made by the Assessing Officer thereto. Even though the penalty levied by the officer with reference to the income originally assessed was Rs. 81,33,192 being the minimum of penalty leviable on the total income, when the assessee filed appeal against the penalty order, the Commissioner of Income-tax (Appeals) held that no penalty could be levied with reference to the tax payable on the undisclosed income returned by the assessee pursuant to the notice issued by the officer after search. So far as the penalty on the balance income assessed is concerned, the Commissioner of Income-tax (Appeals) held that only minimum penalty is leviable, i.e., at equal amount of tax on the additions sustained by him. Accordingly, he reduced the penalty to Rs. 13,99,216, which is the tax on the addition sustained by him in the assessment appeal which is Rs. 23,32,026. The Department challenged the Commissioner of Income-tax (Appeals) order before the Tribunal by specifically taking the ground that the assessee is not entitled to get any immunity from penalty on the tax payable on the undisclosed income returned by it for the reason that they have not complied with the mandatory condition of payment of the admitted tax along with the return filed in Form 2B as required in the first proviso to section 158BFA(2) of the Act. When the appellant was heard by the two-member Bench of the Tribunal, the Judicial Member allowed the Departmental appeal by reversing the order of the Commissioner of Income-tax (Appeals) and by restoring the minimum penalty levied by the officer with reference to the tax payable on the total undisclosed income assessed. However, the Accountant Member disagreed with the order of the Judicial Member and he dismissed the Departmental appeal confirming the order of the Commissioner of Income-tax (Appeals). When the matter was referred to the third Member, the President of the Tribunal, he concurred with the Accountant Member through separate order, as a result of which, by majority, the Tribunal dismissed the appeal filed by the Revenue. It is against the majority decision of the Tribunal, the Revenue has filed this appeal before us.

2. We have heard senior counsel Shri P.K.R. Menon appearing for the Revenue and advocate Shri S. Sreedhar along with advocate Shri B.Kamalahasan, appearing for the respondent-assessee.

3. Since we have to only consider the scope of section 158BFA(2) of the Act, we extract hereunder the said provision :

“158BFA. Levy of interest and penalty in certain cases.-(1)…

(2) The Assessing Officer or the Commissioner (Appeals) in the course of any proceedings under this Chapter, may direct that a person shall pay by way of penalty a sum which shall not be less than the amount of tax leviable but which shall not exceed three times the amount of tax so leviable in respect of the undisclosed income determined by the Assessing Officer under clause (c) of section 158BC:

Provided that no order imposing penalty shall be made in respect of a person if-

(i) such person has furnished a return under clause (a) of section 158BC ;

(ii) the tax payable on the basis of such return has been paid or, if the assets seized consist of money, the assessee offers the money so seized to be adjusted against the tax payable ;

(iii) evidence of tax paid is furnished along with the return ; and

(iv) an appeal is not filed against the assessment of that part of income which is shown in the return :

Provided further that the provisions of the preceding proviso shall not apply where the undisclosed income determined by the Assessing Officer is in excess of the income shown in the return and in such cases the penalty shall be imposed on that portion of undisclosed income determined which is in excess of the amount of undisclosed income shown in the return.”

4. The main controversy is whether the Tribunal is justified in holding that penalty under the above provision could not be levied with reference to tax on undisclosed income returned by the assessee, even if such assessee has not complied with the requirements of clauses (ii) and (iii) of the first proviso abovestated, which requires the assessee to remit tax before filing return and produce proof thereof along with the return. The assessee does not dispute its liability for penalty on the additional income assessed, i.e., the income assessed over and above the returned income and the minimum penalty attributable to the tax on such income stands sustained by the orders of the Commissioner of Income-tax (Appeals), which is not contested by the assessee in further appeal.

5. The contention raised by the senior counsel for the Revenue is that the four conditions provided in the first proviso are mandatory for getting immunity from payment of penalty on the undisclosed income returned by the assessee. In other words, the Revenue’s stand is that filing of return on undisclosed income does not give any immunity to the assessee from penalty under section 158BFA(2) unless the assessee satisfies all the conditions including payment of tax prior to filing of return and production of proof of such payment along with the return so filed. Admittedly, the assessee did not pay tax along with the return filed returning undisclosed income. The assessee did not even pay the admitted tax for maintainability of the appeal filed against assessment before the first appellate authority and consequently the first appeal filed got dismissed on account of non-payment of admitted tax. The assessee, however, approached the Commissioner of Income-tax on the administrative side and based on the instalment facility obtained by the assessee, the assessee paid the admitted tax in easy instalments and only on payment of arrears of tax, the quantum appeal filed against the assessment itself was entertained by the Commissioner of Income-tax (Appeals) that too after remand by the Tribunal.

6. In short the question to be considered is whether the assessee forfeits immunity available to it from penalty on the undisclosed income returned on account of non-payment of the admitted tax along with the return filed declaring undisclosed income. While the Revenue’s counsel submitted that satisfaction of the conditions in the first proviso is mandatory to get immunity from penalty with reference to the undisclosed income, the learned counsel for the assessee relied on the decision of the Rajasthan High Court in CIT v. Satyendra Kumar Dosi reported in [2009] 315 ITR 172 (Raj) and contended that the penalty under section 158BFA(2) itself is discretionary and when the Commissioner of Income-tax (Appeals) as well as the Tribunal exercised the discretion in favour of the assessee, then there is no scope for interference by this court on the reduction granted by the Commissioner of Income-tax (Appeals).

7. Even though learned counsel for both sides relied on several decisions, we do not think there is any need to consider those decisions which are on general principles applicable to penalty matters and not on the special provision above referred. Further, we have to take note of the fact that the defence of reasonable cause provided under section 273B of the Act against all other cases of penalty covered by the Act is not applicable for penalty that could be levied under section 158BFA(2) of the Act. Therefore, we have to consider the nature and scope of penalty strictly in accordance with the provisions contained in the above specific provisions of the Act.

8. On an analysis of section 158BFA(2) extracted above, what we find is that penalty on undisclosed income assessed under section 158BC is discretionary and it can be levied by the Assessing Officer as well as by the Commissioner of Income-tax (Appeals). The power is given to the Commissioner (Appeals) because if the Assessing Officer does not levy penalty after completion of assessment, the Commissioner of Income-tax (Appeals) while considering the assessment appeal is always free to consider whether penalty is to be levied, no matter the Assessing Officer has not levied penalty, the Commissioner (Appeals) can order levy of penalty under the said clause. While there is discretion in regard to levy of penalty, depending on the facts and circumstances of each case once the authority competent to levy penalty chooses to levy penalty then the discretion of quantum of penalty ranges from 100 per cent. to 300 per cent. of the tax, which means that the minimum penalty leviable is equal to the amount of tax and maximum is at three times of tax. The discretion in regard to levy of penalty is controlled by two provisos to the said sub-section, which are discussed below.

9. Subject to the second proviso, the first proviso provides complete immunity from penalty on the tax due in respect of the undisclosed income returned by the assessee based on notice issued by the Assessing Officer after search or survey. However, the conditions provided in clauses (i) to (iv) of the first proviso are that the assessee should have filed return pursuant to notice issued by the officer and tax due in respect of the undisclosed income returned has to be paid before filing of return and the evidence of tax payment has to be furnished along with the return filed. However, if cash is seized in the course of search, the requirement of the proviso is satisfied if instead of making payment the assessee allows the Assessing Officer for adjustment of the seized cash towards tax payment based on the return of undisclosed income filed. Apart from the requirement of payment of tax prior to or along with filing the return the assessee should also confirm to the Assessing Officer that no appeal will be filed challenging the assessment on the income voluntarily disclosed by the assessee in the return filed. In other words, if the assessee files appeal challenging the assessment of undisclosed income returned by the assessee, the benefit of exemption from penalty will not be available under the first proviso to the said section. The second proviso is a further condition qualifying the first proviso which says that if the assessment under section 158BC(c) of the Act includes income other than the undisclosed income returned by the assessee then the immunity from the penalty in respect of the undisclosed income returned by the assessee will be lost to the assessee. In other words, the absolute immunity from penalty on the tax payable in respect of the undisclosed income is available only if the Assessing Officer accepts the return filed by the assessee declaring the undisclosed income, which is the undisclosed income assessed under section 158BC(c) of the Act. In other words, if the undisclosed income returned is not accepted by the officer and any addition is made to the income so returned, then the assessee will not be entitled to immunity from penalty on the tax payable on the undisclosed income returned as a matter of right. However, the fact that immunity from penalty is not available as a matter of right does not mean that penalty in respect of undisclosed income returned by the assessee is automatic. It is still within the discretion of the Assessing Officer to consider penalty with reference to income returned by the assessee also. The second proviso to the main section states that penalty is mandatory in respect of undisclosed income assessed over the undisclosed income returned by the assessee pursuant to notice issued by the officer as stated above. In other words, what the section means is that whatever is the income assessed by way of addition to undisclosed income, the same shall be treated as income concealed by the assessee and the assessee has no escape from penalty. Of course, the said section provides that the Assessing Officer has discretion to levy penalty from minimum to maximum as provided under the main section depending on the facts and circumstances of each case. From the above, we conclude the scope of the said section as follows :

(1) Where the income finally assessed under section 158BC(c) of the Act is the only undisclosed income returned by the assessee based on return filed under clause (a) of section 158BC and the assessee has complied with all the conditions of clauses (i) to (iv) of the first proviso, i.e. payment of tax on the undisclosed income or request to the officer to adjust full tax against cash if any seized and held by the Department sufficient to adjust the tax and if the assessee files statement that no appeal will be filed against the undisclosed income returned and assessed based on return filed, no penalty could be levied.

(2) Penalty will be leviable in all cases where undisclosed income finally assessed under clause (c) of section 158BC is in excess of the undisclosed income returned by the assessee in the return filed under clause (a) of section 158BC. In such cases, there is no complete immunity from penalty on the tax payable on the undisclosed income returned by the assessee even though the assessee has complied with all the conditions of clauses (i) to (iv) of the first proviso as stated above. This is because the assessee in such a case will be treated as partly dishonest and partly honest and, therefore, the penalty will certainly in the discretion of the Assessing Officer. Of course, if the addition made when compared to the undisclosed income returned by the assessee is relatively small and if the assessee had complied with the conditions of the proviso on the undisclosed income returned by the assessee then certainly the officer will not be justified in levying penalty with reference to the tax payable on the total income assessed under clause (c), which includes tax on undisclosed income returned by the assessee. On the other hand, if on final assessment under clause (c) of section 158BC it is found that the addition made to the undisclosed income returned by the assessee is very high, i.e., substantial either in absolute terms or in relation to the income returned by the assessee, then the officer should consider penalty on the total income assessed including undisclosed income returned by the assessee, no matter the assessee has complied with the conditions of the first proviso above referred to in respect of the undisclosed income returned by the assessee. In other words, the assessee’s dishonesty outweighs the little honesty shown by him and so much so, penalty should be levied with reference to the tax payable on the entire income assessed. So far as range of penalty between 100 per cent. to 300 per cent. of tax is concerned it will depend upon the nature of concealment, conduct of the assessee, etc., which will have to be considered while fixing the quantum of penalty.

10. Applying the above principle to the facts of this case, we notice that the addition made to the returned undisclosed income is around to 25 per cent. of the disclosed income. Therefore, it is not a case of minor addition to the disclosed income or a case of substantial addition to the income disclosed by the assessee. Therefore, we do not think it is a case of levy of maximum penalty. However, the assessee’s contention regarding the immunity from penalty on the tax payable on the undisclosed income returned by them is concerned, we are unable to agree with the findings of the Tribunal because of the payment of tax in instalments under orders issued by the Commissioner of Income-tax is not in compliance with the requirement of clauses (ii) and (iii) of the first proviso to the said section, which requires payment of full tax on the undisclosed income returned either prior to or along with filing of return and production of proof of payment of tax along with the return so filed. The assessee’s financial difficulty which found acceptance by the Commissioner in granting instalment facility for payment of tax and the compliance with the said direction of the Commissioner, is no substitute for the mandatory requirements of clauses (ii) and (iii) of the first proviso abovestated. Probably these are matters which the Assessing Officer has to consider, i.e., whether penalty should be levied with reference to the undisclosed income returned by the assessee without payment of tax along with the return filed by it, or the assessee forfeits the right of immunity from penalty, which in any case will not be available to the assessee because of the second proviso by which the benefits of the first proviso will not be available to the assessee as a matter of right, if the undisclosed income assessed is more than the undisclosed income returned by the assessee.

11. We, therefore, hold that in view of the application of the second proviso, the assessee is not entitled to complete immunity from payment of penalty on the undisclosed income returned by them under clause (a) of section 158BC, not only because of their failure to comply with the provisions of clauses (i) to (iv) of the first proviso but by virtue of the addition made in the assessment of substantial amount of undisclosed income by which the assessee forfeits the benefit of the first proviso in regard to immunity from penalty on the tax payable on undisclosed income returned. In view of our above findings, we have to necessarily allow the appeal by vacating the orders of the Tribunal and that of the first appellate authority, and, therefore, we do so.

12. In the normal course we should remand the matter to the Assessing Officer to reconsider the penalty. However, in view of the proved financial difficulty of the assessee and in view of the discharge of tax liability in instalments granted by the Commissioner, we feel the penalty order could be modified by excluding tax on undisclosed income returned by the assessee but by refixing the penalty on the tax payable on the additional income assessed at twice the amount of tax as against one time fixed by the Commissioner of Income-tax (Appeals) and confirmed by the Tribunal.

13. This income-tax appeal is allowed in part as stated above.

[Citation : 337 ITR 359]

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