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Gebilal Kanhaialal (Huf) v. Assistant Commissioner Of Income-Tax
Factual and Procedural Background
A search was conducted at the residential and business premises of the assessee from July 29, 1987, to August 1, 1987. During the search, the assessee surrendered Rs. 22,32,000 relating to income from the pawning business for various years, including Rs. 9,00,000 for the assessment year 1987-88 and Rs. 11,00,000 for 1988-89. Based on this surrender, an assessment order under section 143(3) of the Income-tax Act was passed, and the surrendered amount was taxed. Subsequently, penalty proceedings were initiated under section 271(1)(c) of the Act, and a penalty of Rs. 10,71,320 was imposed by the Assessing Officer on August 31, 1995. The Commissioner of Income-tax (Appeals) cancelled the penalty on December 18, 1995, but the Income Tax Appellate Tribunal (Tribunal) restored the penalty in appeal.
Legal Issues Presented
- Whether the Tribunal was justified in restoring the penalty levied under section 271(1)(c) of the Act in respect of income surrendered during the examination of the assessee's karta under section 132(4) during the search?
- Whether the time-lag between the surrender offer during the statement under section 132(4) and filing of the return for the surrendered amount affects the operation of Explanation 5 to section 271(1)(c)?
- Whether there is any requirement regarding the timing of payment of tax and interest on the surrendered income to avail the benefit of Explanation 5 to section 271(1)(c), and whether the length of time between the statement under section 132(4) and payment affects the operation of Explanation 5?
- In case the particulars of surrendered income are liable to investigation and found incorrect, what are the consequences?
Arguments of the Parties
Appellant's Arguments
- The assessee surrendered Rs. 22,32,000 during the search and paid tax along with interest before completion of assessment.
- The assessee is entitled to the benefit of Explanation 5 to section 271(1)(c) of the Act, which exempts penalty if tax and interest are paid on surrendered income disclosed during the search.
- Relied on the Delhi High Court decision in Commissioner Of Income-Tax v. Chhabra Emporium, [2003] 264 ITR 249, in support of the entitlement to the benefit.
Respondent's Arguments
- Returns were not filed in time, and tax along with interest was not paid timely.
- Therefore, the assessee is not eligible for the benefit of Explanation 5 to section 271(1)(c) of the Act.
- Referred to para. 9 of the Tribunal's order dated May 13, 2003, to support the imposition of penalty.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner Of Income-Tax v. Chhabra Emporium, [2003] 264 ITR 249 | Entitlement to benefit under Explanation 5 to section 271(1)(c) when tax and interest are paid on surrendered income disclosed during search. | Relied upon by the assessee's counsel to argue for exemption from penalty. |
| Mahendra Chiman Lal Shah v. Asst. CIT | Tax must be paid before completion of assessment to avail penalty exemption under Explanation 5 to section 271(1)(c). | Applied by the Tribunal to justify restoration of penalty due to non-payment of tax and interest before assessment completion. |
Court's Reasoning and Analysis
The court examined the facts that the search under section 132 began on July 29, 1987, and ended on August 1, 1987, during which the assessee surrendered concealed income amounting to Rs. 22,32,000. The assessee made a statement under subsection (4) of section 132 disclosing the concealed income and paid the tax along with interest before the completion of the assessment. Explanation 5 to section 271(1)(c) of the Income-tax Act exempts penalty if the assessee discloses concealed income during the search and pays tax with interest on it before the expiry of the time specified for furnishing the return under section 139(1). The court found that the Tribunal erred in restoring the penalty because the assessee fulfilled the conditions stipulated in Explanation 5 by surrendering income during the search, making a statement under section 132(4), and paying tax and interest before assessment completion. The court noted that the Tribunal had relied on the principle that tax must be paid before assessment completion but failed to appreciate that the assessee had indeed paid tax and interest timely. Consequently, the penalty imposed under section 271(1)(c) was not justified.
Holding and Implications
The appeal is allowed and the order of the Tribunal restoring the penalty under section 271(1)(c) is set aside.
The direct effect of this decision is the cancellation of the penalty imposed on the assessee for the surrendered income disclosed during the search. The court's ruling clarifies that timely payment of tax and interest on surrendered income during the course of a search, as per Explanation 5 to section 271(1)(c), exempts the assessee from penalty. No new precedent beyond the application of the existing Explanation 5 was established.
1. This appeal was admitted in terms of the following questions:
“(i) Whether, on the facts and circumstances of the case, the Tribunal was justified in restoring the penalty levied under section 271(1)(c) of the Act in respect of income which was offered to be surrendered for the assessment year 1987-88 during the examination of its karta under section 132(4) of the Act, when search was being conducted on its premises?
(ii) Whether the time-lag between making the offer to surrender during the statement under section 132(4) and filing of return for offering surrendered amount for taxation has any effect on the operation of Explanation 5 to section 271(1)(c)?
(iii) Whether there is any requirement of the time when tax and interest on the income surrendered during the statement made under section 132(4) is to be paid for availing of the benefit of Explanation 5 to section 271(1)(c); and whether the length of period between the statement under section 132(4) and the payment of tax and interest on income so surrendered has any effect on operation of Explanation to section 271(1)?
(iv) In case the particulars of the income earned by the assessee and to be surrendered by virtue of his statement under section 132 are liable to be investigated and if so, if such particulars are found to be incorrect, what are the consequences?”
2. A search was carried out at the residential and business premises of the assessee on July 29, 1987. During the course of search, the assessee has surrendered a sum of Rs. 22,32,000 against the investment made in pawning business for various years as per slip found attached with the pawned ornaments and a sum of Rs. 20,00,000 (Rs. 9,00,000 for the assessment year 1987-88 and Rs. 11,00,000 for the assessment year 1988-89).
3. On the basis of surrender, the assessment order under section 143(3) of the Income-tax Act has been passed and the Assessing Officer taxed that.
4. The Assessing Officer has also initiated penalty proceedings under section 271(1)(c) of the Act and imposed the penalty of Rs. 10,71,320 vide order dated August 31, 1995. In appeal before the Commissioner of Income-tax (Appeals), the Commissioner of Income-tax (Appeals) has cancelled the penalty vide his order dated December 18, 1995. In appeal before the Tribunal, the Tribunal restored the penalty imposed by the Assessing Officer.
5. The case of the assessee is that during the course of search, the assessee has surrendered Rs. 22,32,000, on that amount there should be no penalty in view of the Explanation 5 to section 271(1)(c) of the Act. The penalty has been imposed on the ground that as tax has not been paid along with interest in time, the benefit of Explanation 5 to section 271(1)(c) of the Act cannot be extended to the assessee.
6. Mr. Vineet Kothari, learned counsel for the assessee, brought to our notice the relevant facts that the assessee during the search has surrendered the amount of Rs. 22,32,000 for tax and that has been paid before completion of the assessment along with interest. Therefore, he is entitled to the benefit of Explanation 5 to section 271(1)(c) of the Act. He has placed reliance on the decision of the Delhi High Court in the case of Commissioner Of Income-Tax v. Chhabra Emporium, [2003] 264 ITR 249. On the other hand, Mr. K.K Bissa, learned counsel for the Department, submits that as the returns are not filed in time and the tax along with interest has not been paid, the assessee is not eligible for the benefit of Explanation 5 to section 271(1)(c) of the Act. He has also drew our attention to para. 9 of the order of the Tribunal dated May 13, 2003.
7. While restoring the penalty, the Tribunal has concluded its decision for imposing of penalty in para. 9 which reads as under:
“Last contention is that he pays tax together with interest, if any, in respect of such income. The assessee has given the reasons for non-payment of taxes as the Department has seized all the articles including cash, though no specific time limit had been laid down for payment of tax. However, we agree with the decision of the Income-tax Appellate Tribunal, Ahmedabad Bench, in the case of Mahendra Chiman Lal Shah v. Asst. CIT (supra). In this case it was held that the tax should be paid before the completion of assessment when the Assessing Officer is required to record the reasons for his satisfaction for initiation of penalty proceedings. In this case, the return had not been filed on the due date and the additional income had not been declared during the relevant year. Besides, the tax had also been paid till the date of assessment by the Assessing Officer. We find that the learned Commissioner of Income-tax (Appeals) could not examine the provisions of law in detail and appreciate the facts of the case correctly. The order passed by the learned Commissioner of Income-tax (Appeals) cancelling the penalty levied under section 271(1)(c) of the Act is hereby set aside and that of the Assessing Officer restored.”
8. The facts are not in dispute that search under section 132 of the Act has been started from July 29, 1987, and that has been concluded on August 1, 1987, and during the course of search, the assessee has surrendered Rs. 22,32,000. The relevant part of the statement of the assessee reads as under:
*********1
This statement has been given on August 1, 1987. Sub-clause (2) of Explanation 5 to section 271(1)(c) of the Act provides that during the course of search, in a statement under sub-section (4) of section 132, if the assessee has disclosed concealed income and the manner in which it has been derived and if the tax is paid on that income along with interest, then there will be no penalty under section 271(1)(c) of the Act. The relevant sub-clause (2) of Explanation 5 to section 271(1)(c) of the Act is reproduced as under:
“(2) he, in the course of the search, makes a statement under sub-section (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.”
9. There is no dispute on the facts that search was continued till August 1, 1987, and on August 1, 1987, in the statement, the assessee has disclosed a particular concealed income and surrendered it for the tax and tax has been paid along with interest. In these circumstances, the Tribunal has committed error in restoring the penalty order of the Assessing Officer.
10. In the result, we allow the appeal and set aside the impugned order of the Tribunal, whereby the penalty has been imposed.
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