Madras H.C : Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was right in law in confirming penalty levied by the assessing officer under Section 271(1)(c) of the Income Tax Act, 1961 ?

High Court Of Madras

S.M.J. Housing Vs. CIT, Central-II

Assessment Year : 2005-06

Section : 271(1)(c), 132

Mrs. Chitra Venkataraman And Ms. K.B.K. Vasuki, Jj.

Tax Case (Appeal) No. 213 Of 2013

M.P. No. 1 Of 2013

July  1, 2013

JUDGMENT

Mrs. Chitra Venkataraman, J. – The following substantial questions of law are raised by the assessee in the present Tax Case Appeal preferred as against the order of the Income Tax Appellate Tribunal, Chennai ‘D’ Bench dated 02.06.2011 passed in ITA.No.2142/Mds/2010 for the assessment year 2005-06.

“1. Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was right in law in confirming penalty levied by the assessing officer under Section 271(1)(c) of the Income Tax Act, 1961 ?
2. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in confirming the penalty levied by the assessing officer under Section 271(1)(c) of the Income Tax Act, 1961, even though the Commissioner of Income Tax (Appeals) deleted the penalty since the assessee has not concealed any income nor filed any inaccurate particulars of income ?
3. Whether Explanation 5 below to Section 271(1)(c) is applicable to the facts and in the circumstances of the case and particularly in view of the two Explanations provided after clause (b) of the said Explanation?
4. Whether the Income-Tax Appellate Tribunal failed to appreciate that Section 153C is inapplicable to the present case since no material relating to the appellant firm was found during the search conducted in the premises of its partner ?
5. Whether the Income-tax Appellate Tribunal failed to note that the other partners of the appellant firm were not searched or were not given an opportunity of being represented before proceedings were taken against the firm ?”

2. The assessee is a firm. It filed its return of income on 30.08.2006 showing business income of Rs.4,57,39,982/-. On 26.10.2005, a search was conducted in the residential premises of one of the partners of the assessee’s firm. It is stated that certain materials relating to the firm were seized. Based on this, notice under Section 153A(a) read with Section 153C of the Income Tax Act, 1961 (hereinafter called as the “Act”) was issued on 15.10.2007. The assessee filed the return of income for the assessment year 2005-06 on 19.12.2007, declaring a total income of Rs.4,57,39,982/-.

3. A reading of the assessment order passed on 31.12.2007 under Section 143(3) read with Section 153C of the Act shows that the declared income of Rs.4,57,39,982/- was accepted by the Assessing Officer and accordingly, the assessment was made on the firm. It was found as a matter of fact that the expenditure incurred by the assessee were the amounts paid by cheques and the transactions of the assessee were reflected in the books of account. The Assessing Officer pointed out that the firm was formed on 16.12.2003 and was dissolved on 17.02.2006. During the year under consideration, property at Perungudi was negotiated by the assessee. The property belonged to M/s. SAS Engineering Pvt Ltd. A tripartite agreement was entered into between the assessee, M/s. Vishranthi Homes Pvt Ltd and with M/s. SAS Engineering Pvt Ltd, by which the income from development of the property was to be shared by the parties. The Assessing Officer pointed out that the books of account of the assessee revealed the purchase price of the property and the related expenditure incurred therein. Thus, the assessment was completed accepting the returns. The Assessing Officer, however, pointed out that till the date of search i.e., on 26.10.2005, there was no return of income for the assessment year 2005-06. In the circumstances, penalty proceedings under Section 271(1)(c) of the Act was initiated.

4. The Deputy Commissioner of Income Tax initiated proceedings under Section 271(1)(c) of the Act and viewed that even though the due date for filing of the return fell on 31.10.2005, as on the date of search, i.e., on 26.10.2005, there was no obligation to file the return and there was no search in the assessee’s premises; the assessee, formed as a firm on 16.12.2003, was dissolved on 31.03.2005 under the deed of dissolution dated 17.02.2006. On the date of search, though no books of account pertaining to the firm were found, only during the course of post search investigation, books of account were filed before the DDIT(Inv.). Thus, by inference, the Deputy Commissioner held that the assessee had come forward with books of account and filed the return of income on 30.08.2006, consequent on the search only. Thus, the Deputy Commissioner invoked Section 271(1)(c) proceedings holding that there was concealment of income and levy of penalty is warranted. The Assessing Officer rejected the plea of the assessee that there was no concealment. However, on the view that the return was filed after the search, the penalty proposal was confirmed.

5. Aggrieved by the said order, the assessee went on appeal before the Commissioner of Income Tax (Appeals), who allowed the assessee’s appeal and pointed out that as on the date of search i.e., 26.10.2005, the due date for filing the returns had not fallen due and the assessee filed its return of income on 30.08.2006 and paid the tax on the due date. He pointed out that the delay in the filing of the return was due to the seizure of computer and other materials by the Department and only on getting the books of account audited under Section 44AB of the Act, which was also accepted by the Assessing Officer, that the assessee could file the return. In the circumstances, accepting the contentions of the assessee that there was no concealment of income, the Commissioner of Income Tax (Appeals) allowed the assessee’s appeal, thereby levy of penalty was cancelled.

6. Aggrieved by the same, the Revenue went on appeal before the Income Tax Appellate Tribunal. Pointing out these facts, the Tribunal held that the returned income could not be considered as voluntarily declared. During the search, it was found that the firm had sold immovable property and earned huge income during the Financial Year ending 31.05.2005. The Tribunal viewed that ” It is clear cut case of concealment of income because had there been no search in the residence of the partner, net profit of Rs.4,57,39,892/- would have gone untaxed. If any assessee is caught napping and thereafter he deposited tax and comes forward to claim that look. “I have paid tax so I am not exigible to any penalty, if this is so, it would defeat the very purpose of Section 271(1)(c).”. Thus, the Tribunal held that when the assessee had not even pleaded any sufficient cause and the only reason given by the assessee was that as on the date of search, the date for filing of return was not over, the said claim could not be accepted as a ground for cancelling the penalty. The Tribunal further pointed out that only consequent on the search, the assessee had come forward with the books of account and filed the return of income; the Revenue was not bound to prove the mens rea in such cases as per the decisions of the Apex Court; as far as the Revenue was concerned, it was enough to show that the assessee had concealed income; mere payment of tax, that too after search, would not exonerate the applicability of the penal provisions. The Tribunal further viewed that even though the return was accepted, yet, the penalty proceedings and assessment proceedings being different, penalty was leviable. Thus, the Revenue’s appeal was allowed. Aggrieved by this, the present Tax Case Appeal has been filed by the assessee.

7. Learned Senior counsel appearing for the assessee submitted that when the Revenue had accepted the returned income holding that the transactions were reflected in the books of account and that the search was only in the partner’s premises and there was no allegation that the assessee had not maintained the books of account even on the date of search, penalty in this case could not be levied invoking Section 271(1)(c) of the Act. He further submitted that even to apply Explanation 5 to Section 271(1)(c) of the Act, there were no materials seized during search that the assessee was in possession of any cash or any other materials to hold that there was deemed concealment in this case. Thus, with no concealment, Explanation 5 to Section 271(1)(c) of the Act could not be applied to levy penalty. He further submitted that as on the date of search, admittedly, due date for filing of the return was not over. It is also admitted that as on the date of search, no incriminating materials were found in the assessee’s partner’s premises relating to the assessee’s transactions. Further there were no allegations that the assessee had not maintained the books of account. In such circumstances, the order levying penalty was totally misdirected. Thus, the Income Tax Appellate Tribunal committed serious error in law in confirming the levy of penalty and the reasons pointed out by the Income Tax Appellate Tribunal are totally irrelevant.

8. Per contra, learned Standing counsel appearing for the Revenue heavily relied on Explanation 5 to Section 271(1)(c) of the Act and supported the order of the Income Tax Appellate Tribunal.

9. We do not agree with the reasoning of the Income Tax Appellate Tribunal. The admitted fact in this case is that the search party did not find any incriminating materials against the firm. Admittedly, search was conducted on 26.10.2005 in the residential premises of one of the partners. Even in the course of search, if certain materials were seized relating to the assessee, yet, nothing was spoken to as regards the non-maintenance of the books of account or absence of books of account relating to the transactions of the firm. Admittedly, as on the date of search in the partner’s premises, the books of account of the firm were not found. The absence of books of account of the firm in the partners’ residence, certainly would not lead to a further inference that there were no books of account of the firm maintained by the assessee.

10. Given the fact that the search itself was conducted on 26.10.2005 i.e., before the due date for filing of the returns i.e., 31.10.2005 and the Department having accepted the returns filed by the assessee filed on 30.08.2006 and no further proceedings were taken between these two dates, we do not find any acceptable ground in the Revenue’s case to attract the provision of Section 271(1)(c) of the Act.

11. As regards the reliance on Explanation 5 of Section 271(1)(c) of the Act, we do not find that the same would be of any assistance to the Revenue. Explanation 5 reads as under :-

“271.— Failure to furnish returns, comply with notices, concealment of income, etc.

Explanation 5. — Where in the course of a search initiated under Section 132 before the 1st day of June, 2007, the assessee is found to be the owner of 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, —

(a) for any previous year which has ended before the date of the search, but the return of income for such year has not been furnished before the said date or, where such return has been furnished before the said date, such income has not been declared therein ; or
(b) for any previous year which is to end on or after the date of the search, then notwithstanding that such income is declared by him in any return of income furnished on or after the date of the search, he shall, for the purposes of imposition of a penalty under clause (c) of sub-section (1) of this section, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income unless —

(1) such income is, or the transactions resulting in such income are recorded, —

(i) in a case falling under clause (a), before the date of the search ; and
(ii) in a case falling under clause (b), on or before such date;
in the books of account, if any, maintained by him for any source of income or such income is otherwise disclosed to the Chief Commissioner or Commissioner before the said date ; or
(2) he, in the course of the search, makes a statement under sub-section (4) of section 132 that any money, bullion, jewellery or other valuable article or thing found in his possession or under his control, has been acquired out of his income which has not been disclosed so far in his return of income to be furnished before the expiry of time specified in subsection (1) of section 139, and also specifies in the statement the manner in which such income has been derived and pays the tax, together with interest, if any, in respect of such income.”

As far as the present assessee is concerned, even though the Revenue would contend that the return filed would be of no consequence, we find that the conditions stated in the Explanation do not apply.

12. Going by the facts that there was no seizure of materials relating to the assessee in the search conducted in the partner’s premises and that the transactions were admittedly recorded in the books of account of the firm, the Income Tax Appellate Tribunal’s view that there was concealment of income for invoking Section 271(1)(c) of the Act could not be sustained.

13. Thus we do not find any assistance in Explanation 5 to Section 271(1)(c) of the Act to support the case of the Revenue. In the circumstances, on the admitted fact herein that the search is one being in the residential premises of the partner, there being no recovery of either cash or any amount seized from the assessee and there being no allegation that the books of account showed inaccurate particulars of income or concealed the particulars of income, the order of the Income Tax Appellate Tribunal is liable to be set aside. Accordingly, the same is set aside.

14. In the result, the Tax Case Appeal is allowed. No costs. Consequently, connected MP is closed.

[Citation : 357 ITR 698]