By TIOL News Service

CHANDIGARH, JUNE 19, 2018: THE ISSUE BEFORE THE TRIBUNAL IS - Whether the fact that the assessee being found during search to be the owner of assets acquired out of earlier undisclosed income, is to be construed as 'incriminating material', for purpose of attracting Explanation 5A to Section 271(1)(c). YES IS THE ANSWER.

Facts of the case:

The assessee, an individual, had filed his return declaring income of Rs.9,30,744/-. Consequent to the same, a search action was carried out at the residence of assessee wherein income of Rs.28 lacs was surrendered. Thereafter, the return was revised in response to notice u/s 153A declaring income of Rs.37,30,744/- which included the surrendered income of Rs.28 lacs. Subsequently during assessment proceedings, the AO noted that assessee had purchased two plots at Ludhiana for Rs.27,27,600/-. On being confronted with the same, the assessee explained the source of investment as being out of the surrendered income of Rs.28 lacs. The AO noted that the surrender was made after detection of concealment by the Department by way of search, and therefore initiated penalty proceedings u/s 271(1)(c). During the course of penalty proceedings the assessee contended that entire surrendered income had been disclosed in his return and no amount had been disallowed while computing total income of the year, therefore no penalty u/s 271(1)(c) was leviable. The AO rejected the contention of assessee stating that the surrender was not covered u/s 132(4) as per the provisions of section 271AAA(4)(b). Finally, he levied penalty of Rs.7,66,320/- @ 100% of the tax sought to be evaded on the concealed income of Rs.28 lacs.

On appeal, the FAA held that in the facts of the present case, penalty was leviable in view of Explanation-5A to section 271(1)(c) becoming applicable to searches conducted after June 01, 2007 and as per which the assessee was deemed to have concealed particulars to the extent of income declared after search which was not declared in the original return of income filed.

Tribunal held that,

++ there is no infirmity in the notice and the ground for which penalty was initiated on the assessee has been clearly and unambiguously brought out in the said notice. The assessee has also responded to the notice and was given full opportunity to defend himself against the said charges which was duly availed of also by the assessee. Necessary and requisite reply defending himself from the charges was filed before the AO. It is not the case of assessee that due opportunity was not given to him. Under the said circumstances, it is found that there is no violation of the principles of natural justice in the present case when the assessee having been aware of the specific charge for which penalty was initiated and also having been given due opportunity to defend himself from the said charge. thus, the additional ground of appeal raised by assessee is dismissed;

++ coming to the ground raised challenging the levy of penalty as per Explanation 5A to section 271(1)(c), the FAA has held that since search in the present case was initiated on or after June 01, 2007, the present case is covered by the provisions of Explanation-5A to section 271(1)(c). There is no infirmity in the interpretation of the FAA regarding Explanation 5A to section 271(1)(c) since the language of Explanation 5A is very clear and unambiguous, that the assessee will be deemed to have concealed particulars of his income vis a vis income declared in the return filed in response to notice u/s 153A after search, which was not declared in the original return. Therefore, the FAA has rightly dismissed the contention of assessee that where income returned u/s 153A is accepted, no penalty is leviable;

++ as for the contention of assessee that Explanation-5A to section 271(1)(c) is attracted only when some incriminating material is found during the course of search in the form of money, bullion, jewellery or any income based on an entry in the books of account and since no such incriminating material was found during the course of search in the present case, no penalty as per Explanation-5A to section 271(1)(c) is leviable, there is no merit in the same. Undoubtedly it was the assessee who had surrendered Rs.28 lacs during search. The surrender was never retracted by the assessee. Thus as per the assessee's own admission, he had not disclosed income to the tune of Rs.28 lacs earned during the year. Then subsequently during assessment proceedings, the assessee admits to have invested this income in two properties. What this tantamounts to is that the surrender made by assessee was on account of undisclosed income for the year, invested in assets. And since the assessee had suo moto made the surrender, it tantmounted to the assessee himself coming clean before the Revenue about the fact of earning such income and investing it in assets;

++ thus, at the point of time when the surrender was made by the assessee during search, the Revenue for all purposes had found the assessee to be the owner of assets acquired out of earlier undisclosed income during search. After the suo moto disclosure by assessee, no requirement remained for the Revenue to make any further discovery at all. The requirement of Explanation 5A of the assessee being found during search to be the owner of assets acquired out of earlier undisclosed income is therefore met. The contention of assessee that no incriminating material was found during search, has been rightly dismissed by the CIT(A).

(See 2018-TIOL-882-ITAT-CHD)