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Commissioner Of Income-Tax v. Radha Kishan Goel
Structured Summary of the Opinion (Rajes Kumar, J.)
Factual and Procedural Background
The Income-tax Appellate Tribunal referred a question under section 256(1) of the Income-tax Act, 1961 for the opinion of this Court relating to the assessment year 1989–90. The referred question asked whether, on the facts and circumstances, the Tribunal was justified in holding that the conditions laid down in Explanation 5(2) to section 271(1)(c) were fulfilled and no penalty was leviable under section 271(1)(c).
A search was conducted on August 30, 1988 at the assessee’s residential and business premises; cash, jewellery and other valuables were found and seized. During assessment proceedings settled on an agreed basis, the assessee moved an application before the Commissioner of Income-tax. The Commissioner of Income-tax, Kanpur, observed that penalty proceedings under section 271(1)(c) might not be applicable where additional income is covered by Explanation 5 to section 271(1)(c) because such income stood surrendered in a statement under section 132(4).
Assessment was completed on total income of Rs. 24,43,980, which included unexplained cash of Rs. 1,65,000 and unexplained jewellery of Rs. 22,63,557. The assessing officer concluded Explanation 5(2) did not apply because all its ingredients were not satisfied and imposed a penalty of Rs. 12,63,100. The Commissioner (Appeals) confirmed the penalty. The Tribunal allowed the assessee’s appeal, deleted the penalty and held that Explanation 5(2) to section 271(1)(c) applied. The present opinion reviews that referral.
Counsel for the Revenue (Sri A.N. Mahajan) and counsel for the assessee (Sri Shakeel Ahmad) were heard by the Court.
Legal Issues Presented
- Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the conditions laid down in Explanation 5(2) to section 271(1)(c) of the Income-tax Act, 1961 were fulfilled and, consequently, that no penalty was leviable under section 271(1)(c)?
Arguments of the Parties
Revenue's Arguments
- Explanation 5 (added by the Taxation Laws (Amendment) Act, 1984 with effect from October 1, 1984) creates specific requirements for avoiding penalty when assets are found in a search.
- Explanation 5(2) requires that, in the statement under section 132(4) made in the course of search, the assessee must "specify the manner in which such income has been derived."
- The assessee's statement under section 132(4) admitted the assets as undisclosed income but did not specify the manner of derivation; therefore Explanation 5(2) is not applicable and the Tribunal erred in holding otherwise.
Assessee's Arguments
- Explanation 5(2) should be read in totality and in the context of the object behind its enactment: to allow an assessee to admit acquisition from undisclosed income to facilitate agreed settlement and avoid litigation.
- The central requirement of Explanation 5(2) is the admission in the statement that the items found were acquired from undisclosed income; specifying the manner of derivation should not be given disproportionate importance.
- Under section 132(4) the authorised officer records the statement; if the officer does not ask about the manner, the assessee cannot be expected to volunteer it. Subsequent disclosure during assessment proceeding or in the return (e.g., that the income was from other sources) should be treated as satisfying Explanation 5(2).
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The Court began by reproducing the text of Explanation 5 to section 271(1)(c) (as inserted by the Taxation Laws (Amendment) Act, 1984) and section 132(4) of the Act. Explanation 5 creates a deeming provision that treats assets found in a search as indicative of concealed income unless certain conditions are met; clause (2) provides an exception where, in the course of the search, the assessee makes a statement under section 132(4) admitting acquisition of the assets from income not disclosed in the return, specifies in that statement the manner in which such income has been derived, and pays tax with interest on that income.
The Court analysed the scheme and object of Explanation 5: while it seeks to bring within the penalty net cases where assets indicate undeclared income, clause (2) is an exception intended to encourage an assessee to make a "clean and fair confession" during a search so litigation may be avoided and tax and interest recovered promptly.
Turning to section 132(4), the Court observed that the authorised officer records statements during search and is free to frame questions; therefore the content of the recorded statement will depend on what the officer asks. The Court emphasized the practical realities of searches — presence of several officers, police, disconnection of communications, blocked ingress and egress, and the intense stress and mental strain on the searched person — and held that it is unrealistic to expect an assessee to volunteer information that the officer has not specifically asked for at that time.
Applying these considerations, the Court concluded that if the statement recorded under section 132(4) admits that the assets were acquired from undisclosed income but does not specify the manner of derivation, that omission does not automatically disqualify the assessee from relying on Explanation 5(2). The Court held that:
- Because the authorised officer records the statement and may not ask about the manner of derivation, an absence of such specification in the recorded statement should not be fatal.
- In the absence of any contrary indication in the recorded statement, the manner in which the income was derived may be inferred on the facts and circumstances (for example from business or other sources) and the object of Explanation 5(2) — to obtain a fair admission and tax recovery — is accomplished by the admission of non-disclosure itself.
- Accordingly, mere non-statement of the manner of derivation in the section 132(4) statement will not render Explanation 5(2) inapplicable where the other conditions are satisfied and the circumstances support the necessary inference.
The Court applied this reasoning to the facts before it and found no error in the Tribunal's conclusion that Explanation 5(2) applied and that penalty under section 271(1)(c) was not leviable.
Holding and Implications
Holding: The Court answered the referred question in the affirmative, i.e., in favour of the assessee and against the Revenue, and held that there was no error in the Tribunal's order which had applied Explanation 5(2) to section 271(1)(c) and deleted the penalty.
Direct Effect: The Tribunal's deletion of the penalty under section 271(1)(c) is upheld; the assessee is not liable for the penalty imposed by the assessing officer and confirmed by the Commissioner (Appeals).
Implications: The opinion explains and applies a particular interpretive approach to Explanation 5(2) — namely that an omission in a section 132(4) statement to specify the manner of derivation of admitted undisclosed income will not automatically disqualify an assessee from the protections of Explanation 5(2) where the circumstances permit an inference as to manner. The opinion does not state any broader rule of precedent beyond the reasoning applied to the present facts; accordingly, the direct consequence described above is the main effect recorded in the opinion.
Rajes Kumar, J.:— The Tribunal has referred the following question under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), for the opinion of this court relating to the assessment year 1989–90:
“Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the conditions laid down in Explanation 5(2) to section 271(1)(c) were fulfilled and no penalty was leviable under section 271(1)(c)?”
2. The brief facts of the case are follows: A search was conducted at the residential as well as business premises of the assessee opposite party (hereinafter referred to as “the assessee”) on August 30, 1988, during the course of which cash, jewellery and other valuable articles and things were found and seized. It appears that during the course of the assessment proceedings to settle the dispute on agreed basis the assessee moved an application before the Commissioner of Income-tax on which direction was issued by the Commissioner of Income-tax, Kanpur, in which it was remarked that penalty proceedings under section 271(1)(c) of the Act may not be applicable where additional income is covered by Explanation 5 to section 271(1)(c) of the Act as the said income stood surrendered in the statement under section 132(4) of the Act for which returns were due to be filed within the statutory period. Assessment was completed on an income of Rs. 24,43,980 which included unexplained cash of Rs. 1,65,000 and unexplained jewellery of Rs. 22,63,557. The unexplained income as stated above was taken in assessment in accordance with the directions issued by the Commissioner of Income-tax. Thereafter, the assessing authority examined the matter and concluded that the provisions of Explanation 5 to section 271(1)(c) of the Act were not applicable to the present case as all the ingredients of Explanation 5(2) were not fulfilled and consequently a penalty of Rs. 12,63,100 was imposed. The said penalty order was also confirmed by the Commissioner of Income-tax (Appeals) in an appeal filed by the assessee. The assessee filed the second appeal before the Tribunal. The Tribunal allowed the appeal and deleted the penalty. The Tribunal held that the provisions of Explanation 5(2) to section 271(1)(c) of the Act were fully attracted on the facts and circumstances of the case.
3. Heard Sri A.N Mahajan, learned standing counsel for the Revenue and Sri Shakeel Ahmad learned counsel for the assessee.
4. Learned standing counsel submitted that Explanation 5 stood added under section 271(1)(c) of the Act by the Taxation Laws (Amendment) Act, 1984, with effect from October 1, 1984, which deals with the penalty in the cases of search. He submitted that under Explanation 5 any money, bullion, jewellery or other valuable article or thing which are found at the time of search are deemed to be concealed income unless such income is recorded in the books of account or declared or disclosed to the Chief Commissioner or Commissioner before the date of search or during the course of search makes a statement under sub-section (4) of section 132 of the Act that any money, bullion, jewellery or other valuable articles or things found in his possession or in 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 the time specified in sub-section (1) of section 139 of the Act 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. He submitted that though the assessee has made the statement recorded under section 132(4) of the Act that the unexplained cash and unexplained jewellery were undisclosed income in the statement the manner in which such income has been derived has not been disclosed and, therefore, Explanation 5(2) is not applicable in the present case and the Tribunal has committed an error in holding that Explanation 5(2) to section 271(1)(c) of the Act was attracted.
5. Learned counsel for the assessee submitted that Explanation 5(2) should be read in totality and in the context of the object for which Explanation 5 has been added. He submitted that the object of Explanation 5 is not to allow opportunity to the assessee to disclose the money, bullion and other valuable articles or things found in his possession during the course of search in the return which is to be filed subsequently, however, by clause (2) of Explanation 5 immunity has been given in case, the assessee made the statement admitting that such money, bullion, jewellery or other valuable articles or thing acquired out of the income which is undisclosed to avoid further litigation and settle the issue on agreed basis. He submitted that in substance under Explanation 5(2) the main requirement is the admission in the statement that the items found are acquired from undisclosed income. He submitted that the manner in which such income has been derived may not be given much importance. He further submitted that under section 132(4) of the Act statement is being recorded by the officers and the assessee only states what the officer asks or puts a query. In case the officer did not put any question with regard to the manner in which such income has been derived, it was not expected from the assessee to state the manner in which such income has been derived and in case manner has been disclosed subsequently during the course of assessment it should be considered for the purpose of Explanation 5(2). He submitted that in the return and during the course of assessment proceedings it was disclosed that the income was derived from other sources, which amount to the proper compliance with Explanation 5(2).
6. Having heard learned counsel for the parties, we have given anxious consideration to the submissions and also perused the order of the Tribunal and the authorities below. Explanation 5 to section 271(1)(c) of the Act, which has been added by the Taxation Laws (Amendment) Act, 1984, with effect from October 1, 1984, reads as follows:
“Where in the course of a search under section 132, 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 subsection (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 subsection (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 sub-section (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.”
7. Section 132(4) of the Act reads as follows:
“The authorised officer may, during the course of the search or seizure, examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing and any statement made by such person during such examination may thereafter be used in evidence in any proceeding under the Indian Income-tax Act, 1922 (11 of 1922) or under this Act.
Explanation.— For the removal of doubts, it is hereby declared that the examination of any person, under this sub-section may be not merely in respect of any books of account, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act.”
8. From a perusal of Explanation 5 it is evident that in circumstances which otherwise did not attract the penalty provisions of section 271(1)(c) of the Act, now a deeming provision was introduced as to attract the penalty provisions to those cases as well. But an exception is provided in clause (2) of Explanation 5 where the deeming provision will not apply if during the course of search the assessee makes the statement under sub-section (4) of section 132 of the Act that the money, bullion, jewellery, etc., found in his possession 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 section 139 of the Act 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. The exception appears to be to provide an opportunity to the assessee to make a clean and fair confession and to surrender his income and also to deposit the tax and interest thereon which may result in an agreed assessment. The paramount intention appears to be that in the case of fair and clean confession and surrender of his income, during the course of search further litigation may be avoided and the Revenue may get the tax and interest, etc., at an earliest and the assessee may be saved from further litigation.
9. Under section 132(4) of the Act, it is the authorised officer, who examines on oath any person, who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing, therefore, it is for the authorised officer to record the statement in his own way. Therefore, it is not expected from the person to state those things, which are not asked by the authorised officer.
10. It is a matter of common knowledge, which cannot be ignored that the search is being conducted with the complete team of the officers consisting of several officers with the police force. Usually telephone and all other connections are disconnected and all ingress and egress are blocked. During the course of search person is so tortured harassed and put to a mental agony that he loses his normal mental state of mind and at that stage it cannot be expected from a person to pre-empt the statement required to be given in law as a part of his defence. In these circumstances, we are of the view that under section 132(4) of the Act unless the authorised officer puts a specific question with regard to the manner in which income has been derived, it is not expected from the person to make a statement in this regard and in case in the statement the manner in which income has been derived has not been stated but has been stated subsequently, that amounts to the compliance with Explanation 5(2) of the Act. We are also of the opinion that in case there is nothing to the contrary in the statement recorded under section 132(4) of the Act, in the absence of any specific statement about the manner in which such income has been derived, it can be inferred that such undisclosed income was derived from the business which he was carrying on or from other sources. The object of the provision is achieved by making the statement admitting the non-disclosure of money, bullion, jewellery, etc. Thus, we are of the opinion that much importance should not be attached to the statement about the manner in which such income has been derived. It can be inferred on the facts and circumstances of the case, in the absence of anything to the contrary. Therefore, mere non-statement of the manner in which such income was derived would not make Explanation 5(2) inapplicable.
11. For the reasons stated above, we are of the considered view that there is no error in the order of the Tribunal and the same is upheld.
12. The question referred hereinabove is answered in the affirmative, i.e, in favour of the assessee and against the Revenue.
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