Guide To The Law On Levy Of Penalty On Additions Made In Search & Seizure Proceedings

CA Vinay Kawdia points out that the question as to whether penalty is leviable for additions made pursuant to a search depends on various factors such as the date of initiation of search, the statement given u/s 132(4), whether search was conducted before expiry of due date u/s 139(1) for furnishing the return etc. He adds that the newly inserted section 270A/270AA [Penalty for underreporting and misreporting of income] w.e.f. 01.04.17 is a game changer. He has meticulously analyzed the statutory provisions and the judicial precedents on the subject and explained the entire law in a succinct manner

INTRODUCTION:

The provisions relating to search and seizure were introduced in the Income Tax Act, 1961 (hereinafter referred to as "The Act") to unearth the undisclosed income of any person represented by any money, bullion, jewellery or other valuable article or thing or any entry in any documents etc.

As regards penalty in respect of undisclosed income/assets/transactions unearthed during the course of search, under the Act as a general rule, penalty is to be levied on the amount of “tax sought to be evaded” in respect of the concealment of particulars of income or furnishing of inaccurate particulars of such income. In case of search, the undisclosed income takes the colour of concealment/furnishing of inaccurate particulars of income because of deeming fiction created by Expln. 5A to Section 271(1)(c). Let’s look deeper……..

(A) LEGISLATIVE BACKGROUND:

In the course of Search operations, generally assessee declares his undisclosed income in the statement recorded u/s 132(4). Practically speaking, the disclosure/admission of undisclosed income in the statement u/s 132(4) of the Act amounts to minimum offer made by assessee to the revenue regarding his unaccounted income, which is very difficult to retract subsequently. The assessee must be cautious enough about his disclosures and manner of disclosures of unaccounted income as the manner and way in which assessee makes the declarations, decides the fate of the assessee as regards penal provisions.

Two types of penal provisions are applicable in cases where a search is initiated on or after 1-7-2012:—

• penalty under section 271(1)(c) of the Act read with the Explanation 5A thereof;
• penalty under section 271AAB of the Act [Earlier section 271AAA before 01.07.12]

A.1] Penalty u/s 271(1)(c) read with Explanation 5A thereof – Penalty u/s 271(1)(c) of the Act, is leviable for concealment of income or furnishing inaccurate particulars of such income. Whereas, Explanation 5A creates a deeming fiction in respect of undisclosed income/assets declared during the course of search as follows:

Where undisclosed asset/income is found during the course of search initiated u/s 132 on or after 1-6-2007 for any previous year which has ended before the date of search and,—

(a)	where the return of income for such previous year has been furnished before the said date but such income has not been declared therein; or
(b)	the due date for filing the return of income for such previous year has expired but the assessee has not filed the return,

then, notwithstanding that such income is declared by him in any return of income furnished on or after the date of search, he shall, for the purposes of imposition of a penalty u/s 271(1)(c), be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income.

A.2] Penalty u/s 271AAB:Section 271AAB provides for levy of penalty at slab rates of 10%, 20% and 30% to 90% of the undisclosed income, subject to fulfillment of certain conditions. [in case of search initiated on or after 01.07.12]

Section	Conditions to be fulfilled	Quantum of Penalty as % of Undisclosed income of Specified previous year
271AAB(1)(a)	(a) Assessee must have admitted the undisclosed income in statement recorded u/s 132(4) (b) Assessee specifies & substantiates the manner in which such undisclosed income was derived (c) Pays Tax & Interest on such undisclosed income before the specified date; (d) Files the ROI for specified previous year declaring such undisclosed income therein	10%
271AAB(1)(b)	(a) Assessee does not admit the undisclosed income in statement recorded u/s 132(4) (b) declares such income in the ROI furnished for the specified previous year on or before the specified date (c) Pays the tax and interest on such undisclosed income before the specified date;	20%
271AAB(1)(c)	Undisclosed income of specified previous year not covered in clause (a) and (b) of section 271AAB(1).	30% to 90% – (Flat 60% w.e.f. 01.04.17)

Note:

(1)“Specified previous year” means previous year –

(i) which has ended before the date of search, but the date of furnishing the return of income u/s 139(1) for such year has not expired before the date of search and the assessee has not furnished the return of income for the previous year before the date of search; or

(ii) in which search was conducted;

(2) "specified date" means the due date of furnishing of return of income u/s 139(1) or the date on which the period specified in the notice issued under section 153A for furnishing of return of income expires, as the case may be;

A.3] Both the penalties are mutually exclusive: It is important to note that, both the penalties i.e. penalty u/s 271(1)(c) and u/s 271AAB are mutually exclusive in the sense that, in view of section 271AAB(2), no penalty u/s 271(1)(c) shall be imposed upon the assessee in respect of the undisclosed income referred to in section 271AAB(1). In other words, once the case of the assessee falls under any of the clauses of section 271AAB(1), the respective provision shall apply and no penalty u/s 271(1)(c) can be levied.

[In cases where the search had taken place prior to 01.07.12, no penalty u/s 271(1)(c) of the Act was leviable, in as much as the case comes under the purview of section 271AAA of the Act. Section 271AAA and section 271(1)(c) have different concomitant scopes and are mandated to operate exclusively – ACIT vs. Kailash Courier P. Ltd. (ITA No.1519/Kol/2012), ACIT vs. Prakash Steelage Ltd. [2015] 55 taxmann.com 284 (Mumbai – Trib.) etc.]

B] ANALYSIS:

B.1] To summarize, the penal provisions can be analysed in four different contexts:

Previous year	Penalty leviable
1) Penalty in respect of undisclosed income of previous year in which search was conducted;	Section 271AAB
2) Penalty in respect of undisclosed income of previous year which has just ended before the date of search & due date prescribed u/s 139(1) for such year has not expired and assessee has not furnished the ROI for such year, before date of search;	Section 271AAB [Even if due date u/s 139(1) is not expired and return is also pending, still penalty u/s 271AAB is leviable in respect of income found during search which has not been recorded on or before date of search in the books of accounts or other documents etc.] This provision presumes that, but for the search action the assessee would not have ‘disclosed’ in the return such unndisclosed income. The presumption is neither fair nor proper as in any case it is a rebuttable one. It also runs contrary to the settled legal position that concealment is always vis-à-vis return filed, whether or not the concerned income is recorded in the books of accounts.
3) Penalty in respect of undisclosed income of previous year which has just ended before the date of search in respect of which any of the conditions mentioned in (2) above is not satisfied; and	Section 271(1)(c) r.w. Expln. 5A thereof [In case due date u/s 139(1) has expired before the date of search, the immunity provided by S. 271AAB shall not be available even if return is pending on date of search. In other words, though, it is prerogative of the assessee to offer any income while filing pending return within extended due date u/s 139(4), here, immediately on expiry of due date u/s 139(1), Act presumes that intention of the assessee was to hide the income treated as “undisclosed income” due to search action and penal consequences u/s 271(1)(c) shall follow.
4) Penalty in respect of undisclosed income of the rest of the block period	Section 271(1)(c) r.w. Expln. 5A thereof

Note: ‘Undisclosed Income’ is defined by Explanation (c) to Section 271AAB:

(c)	"undisclosed income" means—
(i)	any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search undersection 132, which has—
(A)	not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or
(B)	otherwise not been disclosed to the  Chief Commissioner/ Commissioner before the date of search; or
(ii)	any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted.

B.2] Under situation (1) and (2) above, penalty shall be levied u/s 271AAB @ 10% / 20% / 30% to 90% of undisclosed income of the specified previous years, depending upon fulfillment of conditions as required by clauses (a), (b), (c) of the section 271AAB(1) as listed in [A.2] above.
For the previous years mentioned at (3) & (4) above [period other than “specified previous years”], immunity provided u/s 271AAB shall not be available and penal consequences shall be as per section 271(1)(c) r.w. Explamnation 5A thereof.

The language of Explanation 5A to section 271(1)(c) of the Act is so harsh, that in case of undisclosed income unearthed during the course of search, deeming fiction created by this explanation shall strictly apply; notwithstanding the fact that assessee has duly disclosed the additional unaccounted income as per his statement u/s 132(4) in his return of income filed u/s 153A of the Act and further, the assessment u/s 153A is completed without any further addition/disallowances. [Rajnish Vohra vs. DCIT, ITA No. 516/Chd./2012, Sarita Singh Chopra Vs. ITO, ITA No. 1562/PUNE/2013 dated 30.10.15]

C] How to come out of the rigours of the section 271AAB(1) and section 271(1)(c) read with Expln. 5A thereof?

C.1] Hurdles in getting the benefit of lower penalty @10% of undisclosed income u/s 271AAB(1)(a): To avail the benefit of lower penalty @10%, S. 271AAB(1)(a), inter alia, requires that assessee must specify and substantiate the mannner in which the undisclosed income was derived. Practically, in many cases, assessees’ struggle to specify and substantiate the mannner in which the unaccounted income admitted in statement recorded u/s 132(4) was derived.

As regards the burden on the part of the assessee to specify in the statement under section 132(4) regarding the manner in which undisclosed income had been derived, it is important to note that, when the statement is being recorded by the authorized officer, it is incumbent upon him to explain the penal provision in its entirety to the assessee concerned and the authorized officer could not stop short at a particular stage so as to permit the revenue to take advantage of such a lapse in the statement.

In the first instance, the statement is being recorded generally in the question and answer form and there would be no occasion for an assessee to state and make averments in the exact format stipulated by the provisions, considering the setting and stressfull conditions in which such statement is being recorded. Secondly, considering the social environment, it is not possible to expect from an assessee, whether literate or illiterate, to be specific and to the point regarding the conditions stipulated by section 271AAB while making statement under section 132(4). Thus, even if the statement does not specify the manner in which the income is derived, if the income is declared, tax thereon is paid and return is filed within specified date, there would be substantial compliance not warranting any further denial of the benefit under section 271AAB.  [Ratio laid down in CIT vs. Mahendra C. Shah (2008) 299 ITR 305 (Guj), while dealing with exception (2) of Expln. 5 to section 271(1)(c) which was precursor to 271AAA / S. 271AAB(1)(a)]

[Followed in ITO vs. Pannalal Banthia, ITA No. 6145/Mum/2010, ITO vs. Shital Banthia, ITA No. 156/PN/2014, etc.]

Similar views:

"We are of the view that as per section 132(4) of the Act unless authorized officer puts a 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 the 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. 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 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." [CIT vs. Radha Kishan Goyal (2006) 152 Taxman 290 (All.), Pramod Kumar Jain v. Dy. CIT [2013] 33 taxmann.com 651 (Cuttak-Trib.)]

Where no question was asked during statement recorded under section 132(4), in respect of manner of earning income surrendered, assessee could not be expected to substantiate same later on; penalty could not be levied under section 271AAA. [Sunil Kumar Bansal vs. DCIT [2015] 70 SOT 137 (Chd.)]

Where during course of search assessee admitted undisclosed income, paid tax together with interest, filed return showing said income as business income and Assessing Officer had accepted same, it could not be said that assessee had not specified manner or could not substantiate manner in which income was derived – Therefore, penalty under section 271AAA was not leviable as assessee’s case fell under sub-section (2) of section 271AAA [ Concrete Developers Vs. ACIT (2013) 34 taxmann.com 62 (Nagpur)] Etc.

Thus, where the Assessing Officer, does not raise any query before the assessee to further specify and substantiate the manner of deriving undisclosed income, it cannot be said that the onus cast on an assessee u/s 271AAB of the Act has not been discharged. Due weightage must be given to the fact that the quantum of undisclosed income declared is generally based on an approximation and estimation, and the income having been derived from undisclosed sources, exact nexus or precise calculations can not be provided with reference thereto.

However, exception (2) of Expln. 5 to section 271(1)(c) [applicable up to 31.05.2007] which was precursor to 271AAA / S. 271AAB(1)(a), required disclosure as to only manner in which undisclosed income was derived. Whereas, current provisions of S. 271AAB(1)(a) requires the assessee to specify as well as substantiate the manner  in which undisclosed income was derived. Therefore, it is always better for the assessee to specify and to the extent possible, substantiate the manner of deriving the income declared in the statement recorded u/s 132(4), voluntarily.
 
C.2] How applicability of section 271(1)(c) r.w. Expln. 5A thereof can be ruled out:

Though, Expln. 5A creates deeming fiction as regards concealment of income for all the previous years falling within the block period and ended before the date of searh, practically the said fiction can only be avoided for the previous years which have ended before the date of search and for which return of income is yet to be filed and time limit for filing return u/s 139(4) has not yet expired. Let’s see how.

The applicability of explanation 5A to S. 271(1)(c) can be ruled out based on the interpretation of the term “ due date for filing the return of income” as used in clause (b) of this explanation.

As per clause (b) of Explanation 5A, in case of previous year which has ended before the date of search and the due date for filing the return of incomefor such previous year has expired but the assessee has not filed the return, then even if the income declared during search is disclosed by the assessee in return of income filed on or after date of search, he shall be deemed to have concealed / furnished inaccurate particulars of such income.

Here the term used is “Due date” and not “Due date as specified u/s 139(1)” and accordingly, even if assessee files return of income after date of search but within extended due date u/s 139(4) by including the unaccounted income admitted during search in his return of income, deeming fiction of Expln. 5A shall not be attracted.

Wherever legislature intended the “due date” to mean “Due date u/s 139(1)”, it has specifically provided so. E.g. “Specified date” for getting the books audited u/s 44AB, due date for furnishing return of income for the purpose of section 43B, time limit for deposit of amount of capital gain in Capital Gain account scheme for the purpose of section 54 or even “specified date” defined in explanation (a) to section 271AAB etc. Therefore, in absence of specific mention of sub-section of section 139, “Due date” for the purpose of Expln. 5A can be taken mean due date of filing of the return of income u/s 139(4) also.

Mumbai ITAT in case of ITO Vs Mr. Gope M. Rochlani in [2014] 40 taxmann.com 46, (after considering judgments of various High Courts delivered in context of exemption u/s 54 r.w.s. 139 of The Act) :

In our considered opinion, once the legislature has not specified the “due date” as provided in section 139(1) in Explanation 5A, then by implication, it has to be taken as the date extended under section 139(4). In view of the above, we hold that the assessee gets the benefit / immunity under clause (b) of Explanation to section 271(1)(c) because the assessee has filed its return of income within the “due date” and, therefore, the penalty levied by the Assessing Officer cannot be sustained on this ground” [Followed in Rakesh Nain Trivedi (2015) 152 ITD 0869 (Amritsar)]     

C.3] In a situation where case is out of the purview of section 271AAB (which is applicable only to ‘specified previous year’) and further applicability of Explanation 5A is also ruled out as above, case will be dealt with by the main provision of clause (c) of section 271(1) and in the said eventuality, concealment is to be seen qua return filed in response to notice u/s 153A, without referring to original return of income filed u/s 139 before date of search:

There exists a complete detachment of the assessment proceedings u/s 143 or 147 from the search proceedings u/s 153A. When the search assessment as designed by the legislature does not prescribe to take into account the earlier assessment proceedings whether abated or not, it was not proper or justified to refer to returned income u/s 139 for the purpose of the imposition of a penalty u/s 271(1)(c) of the Act. The concealment of income has to be seen with reference to additional income brought to tax over and above that returned by the assessee in response to notice issued under s 153A of the Act. Accordingly for the purpose of the imposition of penalty under s 271(1)(c) resulting as an outcome of search assessments made u/s 153A, the original return of income filed u/s 139 cannot be considered.

Further, in the case of the search initiated after 1 June 2003, a return of income is always filed on the issue of notice under s 153A. The penalty u/s 271(1)(c) is imposable when there is variation in the assessed and returned income. If there is no variation, there will be no concealment. This is a settled position of law. The concept of a voluntary return of income may be important in penalty proceedings initiated in the course of normal assessment proceedings made u/s 143(3) or 147, but not under s 153A. Thus, where returned income filed under s 153A is accepted by the AO, there will be no concealment of income and consequently a penalty under s 271(1)(c) cannot be imposed. [Prem Arora vs. DCIT (2012) 31 CCH 0189 DelTrib., Ajit Kumar vs. ACIT (2014) 39 CCH 0138 KolTrib.]

Once it is established that explanation 5A to section 271(1)(c) is not applicable to the facts of the case, It would be the regular provisions of Section 271(1)(c) of the Act, which would be applicable. Once a notice under section 153A is issued, then the return filed in response to the notice under section 153A would be deemed to be a return furnished under section 139 of the Act. This is as per the provisions of section 153A itself. Once this is a situation then no penalty can be levied in respect of the returned income which has been disclosed in the return filed in response to the notice under section 153A. [Sarat Chandra Sahoo vs. DCIT [2014] 52 taxmann.com 438 (Cuttack)]

C.4] The unwritten mandates for the AO while initiating & levying penalty u/s 271(1)(c):
Even in cases of search, the fundamentals remain the same –

(i) initiation of penalty proceedings is a jurisdictional fact & the same should be discernible from the body of assessment order;

 (ii) Assessment order as well as Notice u/s 274 r.w.s. 271(1)(c) should specifically state grounds mentioned in section 271(1)(c) i.e. whether it is initiated for concealment of income or for furnishing of inaccurate particulars of income [CIT V. Manjunatha Cotton & Ginning Factory (2013) 359 ITR 565 (Kar.), DCIT vs. Nepa Limited, ITA No. 683/Indore/2013, Hafeez Contractor vs. ACIT, ITA No. 6222/2013 (Mumbai), Suvaprasanna B. vs. ACIT, ITA No. 1303/Kol/2010, etc.]

(iii) In the order levying penalty there should be clear finding & satisfaction as to whether penalty is levied for “Concealment of Income” or for “Furnishing inaccurate particulars of income”. [CIT v. Jyoti Ltd. [2013] 34 taxmann.com 65, DCIT v. B.J.D. Paper products [2012] 17 taxmann.com 11 (Luck.), etc.]

 (iv) Initiating the penalty proceedings for one limb of the section and levying the penalty by finding assessee guilty for another limb is bad in law.

In the above context, observations of Hon’ble ITAT Pune in case of Sanjog T. Lodha Vs. ITO, ITA No. 688/PN/2014 are worth reader’s attention:

Facts of the case:

A search u/s. 132 was conducted at the premises of the assessee on 21-05-2009. Consequent to search action, a notice u/s. 153A was issued to the assessee for the impugned assessment years. In response to the notice, assessee filed returns of income by showing undisclosed income declared during the search. The returns filed by the assessee u/s. 153A were accepted by the AO without making any further addition. Penalty proceedings u/s. 271(1)(c) were initiated against the assessee. Penalty was levied u/s. 271(1)(c) vide separate orders. The CIT (Appeals) invoked the provisions of Explanation 5A to section 271(1)(c) of the Act and upheld the findings of AO in levy of penalty u/s. 271(1)(c) of the Act.

Finding of the ITAT:

• The assessee has placed on record notices issued u/s. 271(1)(c) r.w.s. 274 of the Act for levy of penalty in the assessment years 2007-08 and 2008-09. A perusal of notices shows that they are stereo type notices (printed proformas), with blank spaces. Specific reasons for levy of penalty u/s. 271(1)(c), whether it is for concealment of particulars or for furnishing inaccurate particulars or for both, have not been specified.

• A perusal of the order passed u/s. 271(1)(c) dated 28-06-2012 levying penalty shows, that in para 2 the AO has specifically mentioned that penal proceedings u/s. 271(1)(c) are initiated for concealing the income. In the concluding paragraph of the order, the AO has observed that the penalty is levied for furnishing of inaccurate particulars of income and concealing income.

• Furnishing of inaccurate particulars of income and concealing of income are two different expressions having different connotations. For initiating penalty proceedings, the Assessing Officer has to be very specific for the reasons of levying penalty, whether it is for furnishing of inaccurate particulars of income or concealing of income or for both.

• A bare perusal of the order levying penalty would show that the Assessing Officer is not clear whether the penalty is levied for concealment of income or furnishing of inaccurate particulars of income or both.

• Thus, in the facts of the case and documents on record, we are of the considered view that the notice issued u/s. 271(1)(c) r.w.s. 274 is invalid and thus, the subsequent penalty proceedings arising there from are also invalid.

D] Other immunities available under the Act from penalty even in case of search:

For the assessee’s who fully co-operate with the revenue and make full and true disclosure of undisclosed income and further specify the manner in which such income was earned, there are immunity provisions under the Act – section 245H (by settlement Commission), and Section 273AA (By Commissioner) subject to satisfaction of conditions mentioned in the respective sections.

CONCLUSION:

There are somewhat irritating & frequent changes in provisions relating to search and seizure in last 10-15 years. Penal consequences after search depends on careful analysis of various factors such as the date of initiation of search proceedings, manner of statement given u/s 132(4), whether search was conducted before expiry of due date u/s 139(1) (for the previous year just ended before the date of search), return of income filed in response to notice u/s 153A vis-à-vis declaration given u/s 132(4) etc. Newly inserted section 270A/270AA [Penalty for underreporting and misreporting of income] w.e.f. 01.04.17 is a further game changer in the coming times. All the above factors coupled with judicial precedents on the subject matter need to be considered before fastening the assessee with penalty under The Act.

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