By TIOL News Service

CHENNAI, AUG 19, 2013: THE issues before the Bench are - Whether when the assessee's return was not yet due on the date of the search conducted on the premises of its partner, the Revenue is justified to initiate penalty proceedings as assessee’s return was filed subsequent to the search and Whether when penalty proceedings were initiated against the assessee firm, Explanation 5 to section 271(1)(c) was applicable when there were no materials seized during the search indicating deemed concealment of income by the assessee. And the verdict goes in favour of the assessee.

Facts of the case

The assessee firm, formed in December 2003, was dissolved March 2005, under a deed of dissolution dated February 17, 2006. The assessee firm had filed its return of income on August 30, 2006. During the year, the assessee had negotiated on property belonging to M/s SAS Engineering, and entered into a tripartite agreement with M/s.Vishranthi Homes Pvt Ltd and with M/s.SAS Engineering Pvt Ltd under which the income from development of the property was to be shared by the parties. On Octobe 26, 2005, a search was conducted in the residential premises of one of the partners of the assessee's firm, and certain materials were seized, based on which, notice was issued against the assessee under section 153A(a) read with Section 153C. In December 2007, the assessee filed its return of income for the assessment year 2005-06, declaring income, with the assessee’s transactions including expenditure incurred by the assessee on the purchase of the property, related expenses and the amounts paid by cheques, being reflected in its books of accounts.

The AO completed the assessment, accepting the return filed by the assessee. However, the AO pointed out that till the date of the search, that is, October 26, 2005, there was no return of income for the assessment year 2005-06. In the circumstances, penalty proceedings under Section 271(1)(c) were initiated by the Deputy Commissioner of Income Tax. According to the DCIT, even though the due date for filing of the return fell on October 31, 2005, as on the date of the search, that is October 26, 2005, there was no obligation to file the return and there was no search in the assessee's premises. On the date of search, though no books of accounts pertaining to the firm were found, only during the course of post search investigation, books of accounts were filed before the DDIT(Inv.). Thus, by inference, the DCIT held that the assessee had come forward with books of account and filed the return of income on August 30, 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 was warranted. The AO rejected the assessee’s plea that there was no concealment. On the view that the return was filed after the search, the penalty proposal was confirmed.

In appeal, the CIT(A) deleted the penalty holding that the assessee had not concealed any income nor filed any inaccurate particulars of income. The CIT(A) observed that as on the date of search, the due date for filing the returns had not fallen due and the assessee filed its return of income on August 30, 2006 and paid the tax on the due date. The delay in the filing of the return was due to the seizure of computer and other materials by the Department and the assessee could file the return only on getting the books of accounts audited under Section 44AB, which was also accepted by the AO. The CIT(A) thus held that there was no concealment of income, and the levy of penalty was cancelled.

The Tribunal confirmed the penalty levied by the AO under Section 271(1)(c). 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 31.03.2005. The Tribunal held that "It is a clear cut case of concealment of income because had there been no search in the residence of the partner, the net profit would have gone untaxed. If any assessee is caught napping and thereafter he deposited tax and comes forward, claiming that “Look, I have paid tax so I am not exigible to any penalty,” 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 to the search, the assessee had come forward with the books of accounts 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. The mere payment of tax, that too after the 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.

In appeal before the High Court, the assessee raised the question whether Explanation 5 to section 271(1)(c) was applicable particularly in view of the two explanations provided after clause (b) of this explanation? Even to apply Explanation 5 to Section 271(1)(c), there were no materials seized during search that indicated that the assessee was in possession of any cash or any other materials, to hold that there was deemed concealment. Thus, with no concealment, Explanation 5 to Section 271(1)(c) of the Act could not be applied to levy penalty.

The assessee also contended that Section 153C was inapplicable to the present case as no incriminating material relating to the transactions of the assessee firm were found during the search conducted in the premises of its partner. The other partners of the assessee firm were not searched and not given an opportunity of being represented before proceedings being taken against the firm. Also, as on the date of the search, the due date for filing of the return was not over. The assessee also contended that when the Revenue had accepted the returned income, holding that the transactions were reflected in the books of accounts, and there was no allegation that the assessee had not maintained the books of accounts even on the date of search, no penalty could be levied by invoking Section 271(1)(c). the search was only on the partner's premises whereby the order levying penalty on the assesee firm was totally misdirected.

Having heard the parties, the High Court held that,

++ 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;

++ 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 accounts or absence of books of accounts relating to the transactions of the firm. Admittedly, as on the date of search in the partner's premises, the books of accounts of the firm were not found. The absence of books of accounts of the firm in the partners' residence, certainly would not lead to a further inference that there were no books of accounts of the firm maintained by the assessee;

++ 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);

++ as regards the reliance on Explanation 5 of Section 271(1)(c), we do not find that the same would be of any assistance to the Revenue. Considering Explanation 5,…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 accounts 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;

++ thus we do not find any assistance in Explanation 5 to Section 271(1)(c), 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 accounts 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;

++ in the result, the Tax Case Appeal is allowed. No costs. Consequently, connected MP is closed.

(See 2013-TIOL-629-HC-MAD-IT)