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Dilip Kedia v. Assistant Commissioner of Income-tax, Central Circle-4
Structured Summary of the Tribunal Order
Factual and Procedural Background
This appeal challenges the order of the CIT(A)-VII, Hyderabad dated 21/10/2011 for assessment year 2007-08, concerning levy of penalty under Section 271(1)(c) of the Income-tax Act, 1961 on additional income offered following search and seizure operations conducted under Section 132 on 01.02.2008 (the "Kedia Group" search).
During the search, loose sheets and documents (Annexures A/PDK/Res/3 and A/PDK/Res/4) were seized. Sri Ravinder Kedia (Director of M/s. Binju Metals and Alloys Industries Pvt. Ltd.) identified pages as petty cash books and explained certain scribblings as receipts/payments not reflected in regular books. He indicated acronyms ("BM" = Binju Metals; "DK" = Dilip Kedia) and identified a "Peak Credit" in the name of Sri Dilip Kedia (page 101 of Annexure A/PDK/Res/3) amounting to Rs. 48,34,810/-, which was offered as additional income for financial year 2006-07 (AY 2007-08).
The assessee subsequently filed an original return on 07.07.2008 and a revised return on 12.11.2008 in response to notice under section 153A, in which an amount of Rs. 50,00,000/- was offered as additional income (the revised figure exceeded the Rs. 48,34,810/- noted during search). The Assessing Officer levied penalty of Rs. 16,28,258/- under section 271(1)(c) on that addition. The assessee appealed to the CIT(A), which dismissed the appeal; the assessee then appealed to the Tribunal.
Legal Issues Presented
- Whether penalty under section 271(1)(c) is leviable where additional income is offered by the assessee in a statement recorded under section 132(4) during a search and later included in a revised return filed in response to notice under section 153A.
- Whether the immunity from penalty under section 271AAA applies when an assessee makes a statement under section 132(4) admitting undisclosed income and pays tax and interest.
- Whether Explanation 5 or Explanation 5A to section 271(1)(c) applies to searches initiated on or after 1.6.2007 and to returns/revised returns filed before the amendment (Finance (No.2) Act, 2009) became part of the statute.
- Whether the law in force at the time of filing the return (original or revised) governs the levy of penalty, notwithstanding a later retrospective amendment to Explanation 5A.
Arguments of the Parties
Assessee's Arguments (Appellant)
- The additional income was offered in the course of a statement recorded under section 132(4) during the search operations and therefore the assessee is entitled to immunity under section 271AAA (read with section 132(4)).
- The Assessing Officer could not make additions or levy penalty solely on the basis of seized documents or the statement; the AO should have independently established concealment by other evidence and not rely merely on the statement given under section 132(4).
- The revised return (filed pursuant to notice under section 153A) was accepted by the AO without further additions; therefore penalty should not be imposed.
Revenue / CIT(A) Position (as reflected in the record)
- CIT(A) held that sub-clause (b) of clause (2) to Explanation 5A of section 271(1)(c) is applicable because the due date had expired with no return filed by the appellant (CIT(A) concluded that the provisions of Explanation 5A apply to the case and that section 271AAA was inapplicable).
- CIT(A) relied on case law (including Dilip N. Shroff v. Jt. CIT and K.L. Swamy v. Commr. of Income Tax, Karnataka (Central)) to support the view that where incriminating material exists, the disclosure is not voluntary and Explanation 5/5A or relevant provisions permit imposition of penalty.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Tribunal / How Court Used the Precedent |
|---|---|---|
| Dilip N. Shroff v. Jt. CIT [2007] 291 ITR 519 / 161 Taxman 218 (SC) | Discussed by CIT(A) as relevant to facts where Explanation 1 to section 271(1)(c) applied. | CIT(A) noted the case but held it related to Explanation 1 and therefore not applicable to the present facts (which he considered fall under Explanation 5A). The Tribunal recorded this characterization by CIT(A). |
| K.L. Swamy v. The Commissioner of Income Tax, Karnataka (Central) [1998] 239 ITR 386 / 102 Taxman 491 (Karnataka HC) | Held that if the department has incriminating material regarding disclosed income, disclosure is not voluntary. | CIT(A) relied on this authority to support the view that disclosure based on incriminating material is not voluntary; the Tribunal recorded this reliance in the summary of CIT(A)'s findings. |
| CIT v. Onkar Saran & Sons [1992] 195 ITR 1 / 62 Taxman 440 (SC) | Held that law prevailing at the time when the original return was filed governs the levy of penalty (even where return filed in response to notice involves concealment). | The Tribunal applied this principle to conclude that the law in force on the date of filing of the assessee's return(s) (7.7.2008 and 12.11.2008) governs the question of levy of penalty, not a later amendment (Finance (No.2) Act, 2009) that became part of the statute subsequently. |
| B.N. Sharma v. Commissioner Of Income Tax, Orissa [1997] 226 ITR 442 | Followed the principle that law as on date of filing return controls levy of penalty under comparable circumstances. | The Tribunal noted this authority as following Onkar Saran & Sons and used it to support the same conclusion regarding the applicable law at the time of filing. |
| Engineers Impex Pvt. Ltd. & Ors. v. D.D. Sharma [2000] 244 ITR 247 / [2002] 125 Taxman 1047 (Delhi HC) | Principles that penal provisions must be construed strictly and retrospective penal liability is constitutionally vulnerable under Art. 20(1). | The Tribunal referenced the decision and surrounding discussion to emphasize that penal provisions are to be strictly construed and that retrospective expansions of penal liability raise constitutional concerns; this supported reliance on law prevailing at the time of return filing. |
| G.P. Nayyar v. State (Delhi Administration) AIR 1979 SC 602 | Principle against retrospective creation of offences / ex post facto penal measures (Art. 20(1) of the Constitution). | The Tribunal cited the case within the discussion (via Engineers Impex citation) to underscore the constitutional risks of retrospective penal enactments and the need to apply penal provisions cautiously. |
Court's Reasoning and Analysis
The Tribunal's analysis proceeded in sequential steps, grounded in the statutory provisions, administrative instructions, and judicial decisions recorded in the opinion:
- Factual starting point: the assessee made a statement recorded under section 132(4) during the search (accepted additional income of approximately Rs. 50 lakhs) and subsequently filed an original return on 07.07.2008 and a revised return on 12.11.2008 (pursuant to notice under section 153A) in which the additional income was declared. The AO levied penalty under section 271(1)(c) on the addition.
- The Tribunal identified the relevant statutory provisions for analysis: section 271AAA (new penalty regime where search initiated on or after 1.6.2007), Explanation 5 and Explanation 5A to section 271(1)(c) (deeming provisions concerning additions consequent to search), the CBDT circulars explaining these enactments, and the amendments made by Finance Act, 2007 and Finance (No.2) Act, 2009.
- The Tribunal reviewed section 271AAA's text and the CBDT Circular (3/2008). It recorded the contention and the textual content of section 271AAA including the proviso that subsection (1) shall not apply if the assessee in the course of the search under section 132(4) admits the undisclosed income, substantiates the manner, and pays tax with interest; subsection (3) provides that no penalty under clause (c) of section 271(1) shall be imposed in respect of the undisclosed income referred to in subsection (1).
- The Tribunal then turned to Explanation 5 and Explanation 5A to section 271(1)(c). It noted that Explanation 5 (as originally framed) provided an exclusion where a statement under section 132(4) admitted that assets were acquired out of income and that tax with interest was paid; but Explanation 5 was restricted by the Finance Act, 2007 so that it covered searches initiated before 1.6.2007 (i.e., excluded post-1.6.2007 searches). Accordingly, Explanation 5 could not be invoked for searches after 1.6.2007.
- The Tribunal described Explanation 5A (introduced w.e.f. 1.6.2007 by Finance Act, 2007, and later amended by Finance (No.2) Act, 2009). Initially, Explanation 5A applied deemed concealment to cases where the due date for filing the return had expired and the assessee had not filed the return. The 2009 amendment widened Explanation 5A to cover cases where a return had been filed but the income in question had not been disclosed in that filed return.
- Critical temporal question: the Tribunal asked whether the amendment to Explanation 5A (by Finance (No.2) Act, 2009) applies to returns filed before the amendment became part of the statute. The assessee's returns (original and revised) were filed on 07.07.2008 and 12.11.2008 respectively — both before the 2009 amendment received presidential assent on 13.8.2009.
- The Tribunal relied on binding and persuasive authorities (CIT v. Onkar Saran & Sons; B.N. Sharma; Engineers Impex; and related authorities) to conclude that the law prevailing at the time of filing the return governs the levy of penalty, not a subsequent amendment, even if the amendment is expressed to be retrospective. The Tribunal emphasized that penal provisions must be construed strictly and that retrospective creation or widening of penal liability raises constitutional concerns.
- Applying these principles to the facts, the Tribunal observed that (i) the only material available to the AO to support concealment was the sworn statement recorded under section 132(4); (ii) the AO had not placed any independent material establishing concealment beyond that statement; and (iii) the law (as reflected in Explanation 5A prior to the 2009 amendment) did not render the addition a deemed concealment where the return for the relevant year had already been filed before the amendment.
- On that basis the Tribunal concluded that levy of penalty under section 271(1)(c) on the additional income included in the return solely on the basis of the sworn statement could not be sustained.
Holding and Implications
Core Ruling: The appeal is allowed and the penalty of Rs. 16,28,258/- levied under section 271(1)(c) is deleted.
Direct consequences:
- The Tribunal set aside the levy of penalty of Rs. 16,28,258/- imposed by the Assessing Officer and confirmed as sustained by the CIT(A).
- The assessee's appeal is allowed; the penalty is deleted because, on the facts and law applicable at the time the returns were filed, the addition made on the basis of the sworn statement under section 132(4) could not be treated as deemed concealment for penal purposes in the absence of independent material evidencing concealment.
Broader implications: The opinion reasons from established principles about the temporal application of penal amendments and the need to apply the law in force at the time of filing the return. The Tribunal did not purport to lay down a novel legal principle but applied existing authorities (including the Supreme Court decisions cited) to the facts; no new precedent beyond this adjudication is expressly claimed in the text.
Signed: S.K.J. (on behalf of the Bench)
ORDER
Smt. Asha Vijayaraghavan, Judicial Member - This appeal is directed against the order of the CIT(A)-VII, Hyderabad, passed on 21/10/2011 for the assessment year 2007-08.
2. This is an appeal against the levy of penalty under Section 271(1)(c) in respect of additional income offered pursuant to search and seizure conducted under Section 132 of the I.T Act, 1961 on the Kedia Group of case along with the assessee on 01.02.2008.
3. Briefly the facts of the case are that during the course of search and seizure operations, loose sheets and documents, were found and seized. During the course of search and seizure operations on 01.02.2008, Sri Ravinder Kedia, Director of M/s. Binju Metals and alloyes Industries P Ltd was confronted with the seized Annexures A/PDK/Res/3 and A/PDK/Res/4 and was asked to go through the same and explain the contents thereon. In reply, Sri Ravinder Kedia disposed that pages 1 to 104 of Annexures A/PDK/Res/3 and Pages 1 to 30 of A/PDK/Res/4 are the petty cash books maintained by Sri Mahesh Sharma, Cashier of M/s. Binju Metals and Alloys Industries P Ltd. He deposed that the scribbling in the loose sheet pertains to receipts and payments which were not reflected in the regular books of account of the business concern and are stated to be done for temporary adjustments.
4. With regard to the acronyms, he deposed that "BM" stands for M/s. Binju Metals and alloys Industries Ltd and 'DK' stands for Dilip Kedia. After referring to the above mentioned incriminating evidences, Sri Ravinder Kedia further deposed that the Peak Credit in your name i.e. Sri Dilip Kedia as appearing in page No.101 of annexures A/PDK/Res/3 as on 16/12-02-07 was Rs.48.34,810/- and offered the same as additional income for the financial year 2006-07 relevant for the assessment year 2007-08.
5. Subsequently, assessee offered an amount of Rs.50,00,000/- in the ROI filed in response to the notice u/s.153A as against offered income of Rs.48,34,810/- during the course of S & S Operation. The assessee offered the above income after the S&S Operation only. The Assessing officer levied penalty of Rs. 16,28,258/- u/s 271(1)(c) on the above addition made.
6. Aggrieved the assessee filed an appeal before the CIT(A).
7. The main thrust of the argument of the assessee before the CIT(A) was that they had offered additional income in the course of such proceedings and hence they are covered under the immunity granted under Section 132(4) read with Section 271AAA. The assessee further argued that apart from the fact that in the assessment nothing was found regarding undisclosed income and except for consent given by the person to whom search was made, the AO could not have made any addition on the basis of any clinging evidence from the documents seized in the course of search, which was also argued that the provisions of Section 271AAA will apply and no penalty under Section 271(1)(c) imposed.
8. After considering the submissions of the assessee, the CIT(A) dismissed this arguments holding as under:
"A close look at the provisions of Section 271(1)(c) of the I.T Act 1961 vis-a-vis the facts of the appellant indicate that sub-clause (b) of clause (2) to Explanation 5A of Section 271(1)(c) of the I.T Act, 1961 are applicable to this case as the due date has expired with no return filed by the appellant. The provisions of Section 271AA are found to be inapplicable to this case accordingly, it further reveals that though the appellant has made a declaration albeit, based on the seized material found during the course of search proceedings with the said income admitted his revised return which has been accepted by the assessing officer without making any further additions, the deeming nature of the provisions are not coming to the rescue of assessee in this case. Hence the immunity claimed under sub-section (2) of section 271AAA of the Act by the assessee are not made u/s.132(4) of the I.T Act, 1961 vis a vis the provision of Section 271(1)(c). It is observed that the actions of the appellant are applicable to a situation falling in explanation 1 to Section 271(1)(c) of the Act but not the explanation 5A to Sec.271(1)(c). Further, the case law in the case of Dilip N. Shroff v. Jt. CIT [2007] 291 ITR 519/161 Taxman 218 (SC) as quoted by the appellant are relevant to the facts of a case where the explanation 1 to Section 271(1)(c) and the same is not applicable in this case. Accordingly, it is held that the provisions of Section 271(1)(c) with the relevant explanation i.e. explanation 5A of the I.T Act is applicable in this case. The said provisions of Explanation 5A are deeming in nature without any exceptions provided thereto. Further, it was held by the Hon'ble High Court of Karnataka in the case of K.L Swamy v. The Commr. Of Income Tax, Karnataka (Central)* [1998] 239 ITR 386/102 Taxman 491 wherein it was held that if the department has incriminating material with regard to disclosed income, disclosure is not voluntary, vice versa"
9. Aggrieved by the order of the CIT(A), the assessee is in appeal before us.
10. We have heard both the parties and perused the record. The Assessee filed return of income for the AY 2007-08 under appeal on 7.7.2008. Subsequently he filed a return on 12.11.2008 in response to the Notice u/s 153A. In the revised return he offered the additional income agreed to be offered in the statement given u/s 132(4) in the course of search proceedings. Penalty has been levied u/s 271(1)(c) on this agreed addition. The Assessee has come up on appeal against the levy of penalty on the ground that the addition was offered in the course of a statement given u/s 132(4) in the course of the search proceedings and the revised return was accepted without any further addition.
11. It is a fact that the Assessee had come forward to accept an addition of approximately Rs. 50 lakhs in the statement recorder u/s 132(4) in the course of search. Otherwise he would not have come forward with the offer of Rs. 50 lakhs. The Assessee does not seem to have offered this in his first return filed on 7.7.2008 which was after the search carried out on 1.2.2008. But the Assessee offered the additional income by way of a revised return filed pursuant to the notice u/s 153A.
12. It is the contention of the Assessee that addition should not have been made merely on the basis of the statement given under sec 132(4) but the AO should have independently established the concealment of income by other evidences and not on the basis of the statement of the Assessee alone. While this is true, there are certain explanations u/s 271 which deems the additions made on the basis of search as deemed concealment. The relevant provisions to be considered are sec 271AAA and Explanation 5 and Explanation 5A to sec 271(1)(c).
13. The Assessee relied heavily on Sec 271AAA for cancelling the penalty. The section reads as under:
"271AAA. Penalty where search has been initiated.—(1) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section 132 on or after the 1st day of June, 2007, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him, a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year.
(2) Nothing contained in sub-section (1) shall apply if the assessee,—
(3) No penalty under the provisions of clause (c) of sub- section (1) of section 271 shall be imposed upon the assessee in respect of the undisclosed income referred to in sub-section (1).
(4) The provisions of sections 274 and 275 shall, so far as may be, apply in relation to the penalty referred to in this section."
14. In the CBDT circular 3/2008 dated 12.3.2008, provisions of this section has been explained as under (299 ITR 8 St at page 84):
"68.1 A new section 271AAA has also been inserted so as to provide that, in a case where search has been initiated under section 132 on or after 1st June, 2007, the assessee shall be liable to pay by way of penalty, in addition to tax, if any, payable by him, a sum computed at the rate of ten per cent. of the undisclosed income of the specified previous year. However, the provisions of this section shall not be applicable if the assessee-(i) in a statement under sub-section (4) of section 132 in the course of the search, admits the undisclosed income and specifies the manner in which such income has been derived ; (ii) substantiates the manner in which the undisclosed income was derived ; and (iii) pays the tax, together with interest, if any, in respect of the undisclosed income. It is further provided that no penalty under the provisions of clause (c) of sub-section (1) of section 271 shall be levied or imposed upon the assessee in respect of the undisclosed income referred to in this section. It is also provided that the provisions of section 274 and section 275 shall, so far as may be, apply in relation to the penalty leviable under the new section."
15. Therefore provisions of section 271AAA will not apply to the instant case because the Assessee had given in the statement given u/s 132(4) accepting the additional income they will be offering. Apart from the statement, the AO had not brought any evidence regarding the concealment of the income.
16. The other provisions to be considered are Explanation 5 and 5A to sec 271(1)(c). While the explanation deems the income added on the basis of search, Clause (2) of explanation 5 to sec 271(1)(c) provides for an exclusion from the deeming provision. The Sub clause reads 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."
17. In view of this sub clause penalty cannot be levied on the amount accepted and offered in the course of search proceedings, in a statement u/s 132(4).
18. Explanation 5 has been amended by the Finance Act, 2007 to restrict the application of that explanation to searches initiated before 1.6 2007. Hence the Assessee cannot seek exemption under Explanation 5 to sec 271(1)(c). The cases cited by the Assessee wherein penalty was deleted applying Explanation 5, relate to search initiated prior to 1.6.2007 and hence are not applicable to the instant case.
19. A new explanation 5A was introduced by Finance Act, 2007, w.e.f 1.6.2007 to cover searches initiated after 1.6.2007 which read as under:
"Explanation 5A.— Where in the course of a search initiated under section 132 on or after the 1st day of June, 2007, the assessee is found to be the owner of,—
20. While the new explanation does away with the exemption from penalty if the Assessee offers the payment in the course of statement u/s 132(4), but under this explanation as it stood at the time of introduction, deemed concealment of income assessed in consequence of search applied only if the Assessees had not had filed a return of income before the due date for filing of return in the respective years. Explanation 5A was further amended by Finance Act (no.2), 2009 as under:
"Explanation 5A.— Where, in the course of a search initiated under section 132 on or after the 1st day of June, 2007, the assessee is found to be the owner of—
21. In the Circular No 5/2010, dated 3.6.2010 issued by the CBDT explaining the provisions of the Finance (no. 2) Act, 2009, the amendment to explanation 5A was explained as under:
"53.2 By substituting the Explanation 5A it has been clarified that the scope extends to the cases where the assessee has filed the return of income for any previous year and the income found during the course of search relates to such previous year and had not been disclosed in the said return, then such income shall represent deemed concealment of income and assessee shall be liable to pay penalty under section 271."
22. Thus as per the existing Explanation 5A prior to the amendment by Finance (No.2) Act, 2009, if an Assessee had filed the return of income for the years covered by the search, then the addition made shall not be considered as deemed concealment. It is only by the Amendment to explanation 5A by the Finance (No.2) Act, 2009, (which received the assent of the president on 13.8.2009), that addition made in the course of assessment u/s 153A, will be deemed to be concealed income, even if the Assessee had filed a return of income earlier for the relevant Assessment Year. Prior to the amendment, if an assessee had already filed a return of income, the addition made in the assessment made u/s 153A cannot be deemed to be concealed income.
23. No doubt the amendment to Explanation 5A has been made with retrospective effect from 1.6.2007 and is applicable to searches initiated after 1.6.2007, the issue is whether this amendment to Explanation will apply to returns filed before the amended explanation became part of the Statute in 2009. In the instant case the Assessee had filed return of income on 7.7.2008. He filed revised return pursuant to notice u/s 153A on 12.11.2008. Thus both the original return as well as the revised return was filed before the amendment to Explanation5A became a part of the Statute. The Supreme Court in the cases of CIT v. Onkar Saran & Sons [1992] 195 ITR 1/62 Taxman 440 has held that in case of return filed in response to Notice u/s 148, law prevailing as on the date of filing of return will govern the levy of penalty by holding as under:
"Even in a case where a return filed in response to a notice under section 148 involved an element of concealment, the law applicable would be the law as it stood at the time when the original return was filed for the assessment year in question and not the law as it stood on the date on which the return was filed in response to the notice under section 148."
24. This was followed by the Apex Court in the case of B.N Sharma v. Commissioner Of Income Tax, Orissa [1997] 226 ITR 442 . Therefore the law prevailing as on the date of filing of return should be the basis of levy of penalty and not on the subsequent amendment, even if the amendment is retrospective. The Delhi High Court in the case of Engineers Impex Pvt. Ltd. & Ors.… v. D.D Sharma…. [2000] 244 ITR 247/[2002] 125 Taxman 1047 has held as under:
'12. Penal provisions in the statutes have to be considered strictly in the sense that if there is a reasonable interpretation which would avoid the penalty, that interpretation ought to be adopted. When the legislature imposes a penalty, the words imposing it must be clear and distinct. [CIT v. T.V. Sundaiam Iyengar & Sons Ltd. [1996] 222 ITR 344/88 Taxman 429 (SC) .
13. If by an amendment in an existing statute or by an enactment an ex post facto offence is created, it will be violative of Art. 20(1) of the Constitution. Art. 20(1) is designed to prevent a person from being prosecuted for an act or omission which was considered innocent when done. [G.P. Nayyar v. State (Delhi Administation) AIR 1979 SC 602. An Explanation is appended to a section to explain the meaning of the words contained in the section and normally is to be read to harmonise with and to clear up any ambiguity in the main section. However, in the present case, the Explanation inserted has widened the scope of the main section and has created an obligation breach of which entails penalty and subjects to criminal prosecution. This Explanation to s. 194A has been inserted w.e.f. 1st June, 1987, and obviously is prospective and not retrospective. In case, it was to have the retrospective effect, it would be violative of Art. 20(1) of the Constitution. As the Explanatory Note noticed above itself states, the liability for deduction of tax at source from the interest payable under the existing provisions arises only if interest was actually paid or credited to the "account of the payee". This also clarified the correct scope of s. 194A as existed before the Explanation was inserted and that the scope of this section has been widened by the insertion of the Explanation w.e.f. 1st June, 1987, which has created a liability and obligation to deduct tax on interest even where the interest income is credited to any account in the books of account of the payee including credit given in the account called "interest payable account" or "suspense account".'
25. Considering all the aspects viz., the Assessee had declared the amount he will be offering, in the course of statement recorded u/s 132(4), the AO has not brought on record any other materials or evidence for coming to the conclusion that the Assessee had concealed any income except for the statement recorder u/s 132(4), even the CBDT has cautioned the Assessing officers to make additions based purely on the sworn statements recorded u/s 132(4), the explanation 5 as it stood on the date of filing of return/ revised return by the Assessee, we are opinion that levy of penalty of Rs. On the additional income included in the return based only on the sworn statement of the Assessee cannot be sustained. Accordingly we allow the Assessee's appeal and delete the penalty of Rs. 16,28,258/- levied u/s 271(1)(c).
26. In the result, appeal of the assessee is allowed.
S.K.J
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