{"id":2932,"date":"2016-08-13T12:27:00","date_gmt":"2016-08-13T06:57:00","guid":{"rendered":"http:\/\/www.itatonline.org\/articles_new\/?p=2932"},"modified":"2016-08-13T12:27:00","modified_gmt":"2016-08-13T06:57:00","slug":"guide-to-the-law-on-levy-of-penalty-on-additions-made-in-search-seizure-proceedings","status":"publish","type":"post","link":"https:\/\/itatonline.org\/articles_new\/guide-to-the-law-on-levy-of-penalty-on-additions-made-in-search-seizure-proceedings\/","title":{"rendered":"Guide To The Law On Levy Of Penalty On Additions Made In Search & Seizure Proceedings"},"content":{"rendered":"![\"Vinay-Kawdia\"](\"https:\/\/www.itatonline.org\/articles_new\/wp-content\/uploads\/Vinay-Kawdia.jpg\")
<\/p>\n
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<\/strong> <\/p>\nINTRODUCTION:<\/u><\/em><\/strong><\/p>\nThe provisions relating to search and seizure were introduced in the Income Tax Act, 1961 (hereinafter referred to as "The Act<\/em>") 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.<\/p>\n<\/p>\n
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……..<\/strong><\/em><\/p>\n(A) <\/strong><\/em>LEGISLATIVE BACKGROUND:<\/u><\/em><\/strong><\/span><\/p>\nIn 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. <\/p>\n
Two types of penal provisions are applicable in cases where a search is initiated on or after 1-7-2012:—<\/p>\n
\n- penalty under section 271(1)(c<\/em>) of the Act read with the Explanation <\/em>5A thereof;<\/span><\/li>\n
- penalty under section 271AAB of the Act [Earlier section 271AAA before 01.07.12]<\/strong><\/em><\/strong><\/span><\/li>\n<\/ul>\n
A.1] Penalty u\/s 271(1)(c) read with Explanation 5A thereof<\/em><\/strong> – <\/em>Penalty u\/s 271(1)(c<\/em>) of the Act, is leviable for concealment of income or furnishing inaccurate particulars of such income. Whereas, Explanation <\/em>5A creates a deeming fiction in respect of undisclosed income\/assets declared during the course of search as follows:<\/p>\nWhere undisclosed asset\/income is found during the course of search initiated u\/s 132 on or after <\/em>1-6-2007<\/em> for any previous year <\/em>which has ended before the date of search and,—<\/em><\/p>\n\n\n(a)<\/em><\/td>\nwhere the return of income for such previous year has been furnished before the said date but such income has not been declared therein; or<\/em><\/td>\n<\/tr>\n\n(b)<\/em><\/td>\n| the due date<\/u><\/em> for filing the return of income for such previous year has expired but the assessee has not filed the return,<\/em><\/td>\n<\/tr>\n<\/table>\n 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 <\/u>the particulars of his income or furnished inaccurate particulars of such income.<\/em><\/p>\nA.2] Penalty u\/s 271AAB:<\/em><\/strong>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]<\/em><\/strong><\/p>\n\n\n<\/strong>
\n Section<\/strong><\/td>\n<\/strong>
\n Conditions to be fulfilled<\/strong><\/td>\nQuantum of Penalty as % of Undisclosed income of Specified previous year<\/u><\/strong><\/td>\n<\/tr>\n\n<\/em>
\n 271AAB(1)(a)<\/em><\/td>\n(a) <\/em>Assessee must have admitted the undisclosed income in statement recorded u\/s 132(4)<\/em><\/span>
\n (b) <\/em>Assessee specifies & substantiates<\/u> the manner<\/u> in which such undisclosed income was derived<\/em><\/span>
\n (c) <\/em>Pays Tax & Interest on such undisclosed income before the specified date;<\/em><\/span>
\n (d) <\/em>Files the ROI for specified previous year declaring such undisclosed income therein<\/em><\/span>\n <\/td>\n<\/em>
\n <\/em>
\n <\/em>
\n <\/em>
\n 10%<\/em><\/td>\n<\/tr>\n\n<\/em>
\n 271AAB(1)(b)<\/em><\/td>\n(a) Assessee does not<\/u> admit the undisclosed income in statement recorded u\/s 132(4)<\/em><\/span>
\n (b) <\/em>declares such income in the ROI furnished for the specified previous year on or before the specified date<\/u><\/em><\/span>
\n (c) <\/em>Pays the tax and interest on such undisclosed income before the specified date;<\/u><\/em><\/span><\/td>\n<\/em><\/em>
\n <\/em>
\n 20%<\/em><\/td>\n<\/tr>\n\n<\/em>271AAB(1)(c)<\/em>\n <\/td>\n<\/em>Undisclosed income of specified previous year not covered in clause (a) and (b) of section 271AAB(1).<\/em>\n <\/td>\n| <\/em>30% to 90% – (Flat 60% w.e.f. 01.04.17)<\/strong><\/em>\n <\/td>\n<\/tr>\n<\/table>\n Note: <\/u><\/em><\/strong><\/p>\n(1)<\/em><\/u>“Specified previous year” means previous year –<\/em><\/span><\/p>\n(i) which has ended before the date of search, but the date of furnishing the return of income u\/s 139(1)\u00a0for 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<\/p>\n (ii) in which search was conducted;<\/p>\n (2) "specified date" means the due date of furnishing of return of income u\/s 139(1)<\/u> 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;<\/em><\/span>\n<\/p>\nA.3] Both the penalties are mutually exclusive<\/em><\/strong>: 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<\/em><\/strong>.<\/em><\/p>\n[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. <\/em>Section 271AAA and section 271(1)(c) have different concomitant scopes and are mandated to operate exclusively<\/em> – ACIT vs. Kailash Courier P. Ltd. (<\/em><\/strong>ITA No.1519\/Kol\/2012<\/em><\/strong>)<\/em>, ACIT vs. Prakash Steelage Ltd.<\/strong> <\/em>[2015] 55 taxmann.com 284 (Mumbai – Trib.) etc.<\/em><\/strong>]<\/em> <\/p>\n B] ANALYSIS:<\/u><\/em><\/strong>\n <\/p>\nB.1] To summarize, the penal provisions can be analysed in four different contexts:<\/p>\n \n\nPrevious year<\/strong> <\/td>\nPenalty leviable<\/strong><\/td>\n<\/tr>\n\n| 1) Penalty in respect of undisclosed income of previous year in which search was conducted;<\/td>\n | <\/strong>Section 271AAB<\/strong>\n <\/td>\n<\/tr>\n\n2) 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)<\/u> for such year has not expired and assessee has not furnished the ROI for such year, before date of search<\/strong>; <\/td>\nSection 271AAB<\/strong>
\n [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.] <\/em>
\n 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.<\/em><\/strong>\n <\/td>\n<\/tr>\n\n| 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<\/td>\n | Section 271(1)(c) r.w. Expln. 5A thereof<\/strong>
\n [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<\/u>. <\/em>
\n 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. <\/em> <\/td>\n<\/tr>\n\n| 4) Penalty in respect of undisclosed income of the rest of the block period<\/td>\n | Section 271(1)(c) r.w. Expln. 5A thereof<\/strong>\n <\/td>\n<\/tr>\n<\/table>\n Note<\/u><\/strong>: ‘Undisclosed Income’ is defined by Explanation (c) to Section 271AAB:<\/strong>\n <\/p>\n\n\n(c)<\/em> <\/td>\n| \n "undisclosed income" means—<\/em><\/p>\n<\/td>\n<\/tr>\n\n| \n (i)<\/em><\/p>\n<\/td>\n| \n 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 under<\/em>section 132<\/em><\/a>, which has—<\/em><\/p>\n<\/td>\n<\/tr>\n\n| \n (A)<\/em><\/p>\n<\/td>\n| \n 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<\/em><\/p>\n<\/td>\n<\/tr>\n\n| \n (B)<\/em><\/p>\n<\/td>\n| \n otherwise not been disclosed to the Chief Commissioner\/ Commissioner before the date of search; or<\/em><\/p>\n<\/td>\n<\/tr>\n\n| \n (ii)<\/em><\/p>\n<\/td>\n| \n 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.<\/em><\/p>\n<\/td>\n<\/tr>\n<\/table>\nB.2] Under situation (1) and (2) above, penalty shall be levied u\/s 271AAB @ 10% \/ 20% \/ 30% to 90% of undisclosed income<\/em> of the specified previous years<\/em>, depending upon fulfillment of conditions as required by clauses (a), (b), (c) of the section 271AAB(1) as listed in [A.2]<\/strong> above.
\n For the previous years mentioned at (3) & (4) above [period other than “specified previous years”]<\/em>, 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.\n <\/p>\nThe language of Explanation 5A to section 271(1)(c) of the Act is so harsh, that in case of undisclosed income<\/em> 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. <\/em><\/strong>ITO, ITA No. 1562\/PUNE\/2013 dated 30.10.15]<\/em><\/strong><\/p>\nC] How to come out of the rigours of the section 271AAB(1) and section 271(1)(c) read with Expln. 5A thereof?<\/em><\/strong><\/p>\nC.1] Hurdles in getting the benefit of lower penalty @10% of undisclosed income u\/s 271AAB(1)(a):<\/em><\/strong> To avail the benefit of lower penalty @10%, S. 271AAB(1)(a), inter alia, <\/em>requires that assessee must specify and substantiate<\/u> the mannner in which the undisclosed income was derived. Practically, in many cases, assessees’ struggle to specify and substantiate<\/u> the mannner in which the unaccounted income admitted in statement recorded u\/s 132(4) was derived.<\/strong><\/p>\nAs 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. <\/p>\n 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 <\/em>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)]<\/em><\/strong><\/p>\n | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |