By TIOL News Service

AHMEDABAD, AUG 02, 2017: THE issue before court is - Whether when Revenue has failed to question the assessee while recording his statement u/s 132(4) as regards the manner of deriving undisclosed income, the Revenue cannot jump to the consequential requirement of substantiating the manner of deriving such income. YES is the verdict.

Facts of the case:

During the subject year, a search action u/s 132 was carried out in the group cases of assessee. During such search, the assessee had made disclosure of Rs. 3,05,47,400/- as undisclosed income. Subsequently, the return of income was filed in response to notice u/s 153A declaring total income of Rs. 3,11,74,590/-. The assessee had also offered the income admitting the statement recorded u/s 132(4) for taxation in the return filed for the assessment year 2010-11 and tax along with interest was also paid. Despite such fact, the AO proceeded to impose penalty u/s 271AAA amounting to Rs. 30,54,750/-. On appeal, the CIT(A) deleted the penalty.

On appeal, the HC held that,

++ from the perusal of the orders on record, it becomes clear that the assessee had admitted the undisclosed income in his statement recorded u/s 132(4) during the survey. The assessee had owned up to such income in the return filed and had also paid tax and interest on such sum. The AO imposed a penalty on the ground that the assessee failed to substantiate the manner of earning the income. However, CIT(A) concluded that no question was asked by the DR in the course of recording the statement, regarding the manner of earning such income. It was, on this basis, that the CIT (Appeals) as well as the Tribunal found that the AO committed an error in imposing penalty. As is well known, section 271, providing for penalty for concealment of income etc., contained an Explanation 5 inserted w.e.f. 01.10.1984 and held the field till introduction of Explanation 5A w.e.f 01.06.2007. Under this Explanation 5, prevailing at the relevant time, an assessee could avoid payment of penalty being found to be the owner of any money, bullion, jewellery or other valuable article or thing acquired by undisclosed income, if in the course of search, the assessee made a statement u/s 132(4) admitting acquisition of such asset out of his income not disclosed in the return and also specifies in the statement the manner, in which, such income has been derived and pays the tax together with interest in respect of such income. To avoid penalty, with the aid of Explanation 5 therefore, the assessee had to make a statement u/s 132(4) admitting such undisclosed income and specify in such statement the manner, in which, such income was derived and to pay tax tax, if any, on such income. This provision came-up for consideration before Allahabad High Court in case of Commissioner of Income Tax vs. Radha Kishan Goel, wherein the High Court had rejected the Revenue's appeal primarily on the ground that a statement u/s 132(4) is recorded by the DR and if in such statement no question is asked about the disclosure of manner in which the income is derived, the Revenue cannot impose penalty on the premise that the assessee did not make nay such disclosure;

++ as noted, CIT (Appeals) was specific that no question was put to the assessee while recording statement u/s 132 regarding the manner of deriving the undisclosed income. Counsel for the Revenue, however, vehemently contended that in the present case, the penalty was being imposed u/s 271AAA and the statutory provisions enabling the assessee to avoid such a penalty are entirely different as compared to Explanation 5 to section 271. Sub section (1) of section 271AAA provides for a penalty in addition to tax at the rate of ten percent of the undisclosed income in case where the search has been initiated u/s 132 on or after 1st day of June 2007 but before 1st day of July 2012. Such penalty may, however, be avoided if the conditions specified under sub section (2) are satisfied. Sub section (2) of Section 271AAA thus while retaining the other requirements of avoiding penalty as provided in clause (ii) of Explanation 5 has now introduced an additional requirement of the assessee having to substantiate the manner in which, the undisclosed income was derived. It is this requirement which the counsel for the Revenue would place great emphasis on. According to her, onus is now entirely shifted on the assessee not only to make a disclosure of the undisclosed income but also to specify the manner, in which, the income has been derived and to substantiate the same. This court does not reject this contention totally. However, insofar as the facts of the present case are concerned, the field would still be held by the decision of this Court in case of Commissioner of Income Tax vs. Mahendra C.Shah. Sub-section (2) of section 271AAA imposes an additional condition of the assessee having to substantiate the manner in which, the undisclosed income was derived. This requirement, however, must be seen as consequential to or corollary to the base requirement of specifying the manner, in which, the undisclosed income was derived. It is only when such declaration is made, the question of substantiating such disclosure or claim would arise. If, as in the present case, the Revenue failed to question the assessee while recording his statement u/s 132(4) as regards the manner of deriving such income, the Revenue cannot jump to the consequential or later requirement of substantiating the manner of deriving the income.

(See 2017-TIOL-1455-HC-AHM-IT)