By TIOL News Service

KOLKATA, JULY 22, 2016: THE issue is - Whether when returns of undisclosed income are filed after proper consultation between the Revenue, the company and its Director, imposition of penalty in such a case would be inequitable. YES is the answer.

Facts of the case

The assessee's premises during the subject were searched and the assessee as well its director S.M.Shroff were both required to furnish returns. Accordingly, S.M.Shroff furnished a return showing an undisclosed income of Rs.2,02,66,971/- whereas the assessee company filed a NIL return. The AO was of the opinion that the undisclosed income of the company was Rs.491.50 lakhs. On appeal, the CIT(A) reduced the sum of Rs.491.50 lakhs to a sum of Rs.37 lakhs. He however did not directed commencement of any penalty proceedings. The AO had on the basis of seized documents assessed the undisclosed income of the company at a sum of Rs.491.50 lakhs and had also started penalty proceedings. When the amount of undisclosed income was reduced by the CIT(A), in the quantum appeal, no fresh penalty proceeding was initiated. The reduction of the undisclosed amount was affirmed by the Tribunal in an appeal preferred by the Revenue.

Having heard the parties, the High Court held that,

++ the question is whether the penalty proceedings initially started by the AO for an undisclosed income of a sum of Rs 491.50 lakhs should be allowed to continue for the sum of Rs.37 lakhs which has ultimately been found to be the undisclosed income of the assessee. This question was answered in the negative by the CIT(A) as he was of the opinion that when the AO was unable to decide that the undisclosed income reflected in the seized document belongs to assessee company or its Managing Director, the question of concealment becomes irrelevant. For the purpose of concealment, there has to be a clear finding that the income treated as concealed income, belong to the assessee. It is true that the penalty is with reference to the undisclosed income finally determined. But for this purpose, if the CIT(A) did not initiate penalty proceedings, he exercised the judicial discretion not to do so. The AO while giving effect to this order cannot conceal this decision. The levy of penalty, entirely technical ground that the assessee declared Nil undisclosed income in the return u/s 158BC and there was some positive income in the nature of undisclosed income after appellate decision, is not justified. The Tribunal was of the opinion that the judicial discretion restricting that the AO permits him not to levy penalty and omission of exercise it appears unjustified;

++ from the recital of the facts appearing from the order of the CIT(A), it appears that there was some sort of understanding between the department and the director of the assessee company as to the person who should disclose the income on the basis of the documents seized. The CIT(A) has referred to that understanding by holding that S.N. Saraf "was acting upon some kind of understanding about the person who should make the declaration". The picture which emerges is that after the search and seizure, the revenue itself was unable to make up its mind as to whether the undisclosed income belonged to the company/assessee or to the director Sri S.N. Shroff. There was in those circumstances an understanding arrived at between the parties on the basis whereof the director made a disclosure of Rs 2.16 crores whereas the company filed a nil return. Ultimately the undisclosed income of the director was assessed at Rs.2.02 crores approximately and undisclosed income of the company was assessed at Rs.37 lakhs. Both the CIT(A) and the Tribunal were of the opinion that in the facts of the case no penalty should be levied upon the company. The understanding arrived at between the revenue, the company and the director has not been disproved nor is that finding assailed. Imposition of penalty, when returns of undisclosed income were filed in consultation with the revenue, would certainly have been inequitable.

(See 2016-TIOL-1471-HC-KOL-IT)