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Pr. Commissioner Of Income Tax-19 Vs. Shri Neeraj Jindal
February, 20th 2017
*     IN THE HIGH COURT OF DELHI AT NEW DELHI
                                  Reserved on: 07.12.2016
                                Pronounced on: 09.02.2017

+                   ITA 463/2016 & CM No. 26604/2016
      PR. COMMISSIONER OF INCOME TAX-19                    ..... Appellant

                           Versus

      SHRI NEERAJ JINDAL                                  ..... Respondent

+                   ITA 464/2016 & CM No. 26605/2016
      PR. COMMISSIONER OF INCOME TAX-19                    ..... Appellant

                           Versus

      SHRI NEERAJ JINDAL                                  ..... Respondent

+                          ITA 465/2016
      PR. COMMISSIONER OF INCOME TAX-19                    ..... Appellant

                           Versus

      SHRI ANKUR AGGARWAL                                 ..... Respondent

+                   ITA 466/2016 & CM No. 26606/2016
      PR. COMMISSIONER OF INCOME TAX-19                   ..... Appellant
                     Versus
      SHRI ANKUR AGGARWAL                             ..... Respondent
               Through: Mr. Rahul Chaudhary, Senior Standing
               Counsel for Appellants.
               Mr. Satyen Sethi and Mr. Arta Trana Panda, Advocates
               for Respondents.
      CORAM:
      HON'BLE MR. JUSTICE S. RAVINDRA BHAT
      HON'BLE MR. JUSTICE NAJMI WAZIRI




ITA 463/2016 & CONNECTED CASES                                       Page 1
MR. JUSTICE S. RAVINDRA BHAT
%
1.       These four appeals by the revenue, under Section 260-A of the Income
Tax Act, ("the Act") are directed against four separate orders of the Income
Tax Appellate Tribunal (Delhi Bench) ("ITAT") for AY 2005-06 and 2006-
07. The following common question of law was framed for decision by this
court:
         "Did the ITAT correctly interpret Section 271(1)(c) of the
         Income Tax Act, 1961 read together with Explanation 5 in
         proceeding to delete the penalty imposed by the Assessing
         Officer in the first instance?"

2.       Since the four appeals arise out of a common set of facts and raise
similar questions of law, the brief facts in ITA- 463/2016 are discussed. The
assessee belonged to the M/s. J.M. Estate Developers Pvt. Ltd. group. For
the relevant assessment year 2005-06, it reported its income through a return
under Section 139(1) of the Act, declaring an income of `1,72,799/- on
30.12.2005. A search and seizure operation under Section 132(4) of the Act
was carried out on 11.01.2007 in the premises of the assessee's group
companies and directors of the company. A disclosure of `16 crores was
made by the group under Section 132(4) of the Act on behalf of different
directors and relatives of the directors. During the search, cash amounting to
`5,26,530/- and jewellery worth `l7,85,785/- were found from the premises
and lockers of the assessee. Out of these assets, cash amounting to
`4,06,930/- was seized, whereas no jewellery was seized. Notice under
Section 153A of the Act was issued on 26.02.2008, in response to which the
assessee filed his return of Income on 23.10.2008 declaring an income of
`23,38,731/-, thus showing additional income of `21,65,932/-. The AO




ITA 463/2016 & CONNECTED CASES                                           Page 2
completed the assessment under Section 153A read with Section 143(3) of
the Act on 31.12.2008 after accepting the declared income by observing that,
"After examination of the details filed and discussion with AR of the assessee
the income of the assessee is accepted and assessed at Rs.23,38, 731/-." In
addition, he also initiated penalty proceedings under Section 271(1)(c) of the
Act by observing:
      "From the seized records it is noticed that the assessee group
      had offered a sum of Rs.16 Crores as unaccounted income.
      However, as the disclosure is consequence of the search, I am
      of the view that the assessee has concealed the income. Thus,
      penalty proceedings u/s 271 (l)(c) is being initiated separately."

      Thereafter, the AO passed the penalty order under Section 271(1)(c)
of the Act, by imposing penalty amounting to `1,34,640/- being 100% of the
amount of tax sought to be evaded on the concealed income of `4 Lakhs.
3.    The assessees preferred revisions under Section 264 of the Act dated
06.08.2009 before the Commissioner of Income Tax ("CIT") (Central-II),
New Delhi against the order passed by the A.O. The CIT (Central-II) in its
order dated 10.03.2011 held that since penalty order had been set aside and
the proceedings had been restored back to the A.O. under Section 263 of the
Act, the proceedings under Section 264 had become infructuous and were
accordingly, dismissed.
4.    With respect to the proceedings under Section 263 referred to by the
CIT (Central-II) above, the CIT observed that the A.O. had imposed penalty
on the concealed income of only `4,00,000/-, whereas in the return of
income filed by the assessee in response to notice under Section 153A, the
assessee had declared additional income of `21,65,932/-. Therefore, the CIT









ITA 463/2016 & CONNECTED CASES                                             Page 3
(Central-II) passed the revisional order on 10.03.2011 by holding that the
order passed by the A.O. was erroneous and prejudicial to the interests of the
revenue because the A.O. had, whilst making the penalty order, erroneously
taken the figure of concealed income at `4,00,000/- as against the additional
income of `21,65,932/- declared by the asseessee. Therefore, the CIT
(Central-II) set aside the penalty order and proceedings were restored back to
the A.O. with the direction to dispose the matter in accordance with the
provisions of the Act and judicial pronouncements on the issue, after
affording proper opportunity to the assessee. Pursuant to this development,
the AO made an order under Section 271(1)(c) of the Act on 29.09.2011
imposing penalty of `7,29,100/- being 100% of the amount of tax sought to
be evaded on the concealed income of `21,65,932/-. Aggrieved, the assessee
appealed; the CIT (A) deleted the penalty. The revenue appealed to the
ITAT, which on 19.08.2015, confirmed the order of the CIT (A).
Proceedings and Arguments before the CIT(A) and ITAT
5.    The assessee had contended that the penalty order was untenable
because there was no difference between the income returned pursuant to
notice under Section 153A and the income assessed. The assessee declared
the entire undisclosed income in the return filed in response to the notice
under Section 153A, which was accepted in the assessment order of the AO.
Furthermore said the assessee, no incriminating materials were found during
the course of the search carried out at the premises of M/S JM Estates
Developers Pvt. Ltd. Therefore, the additional income offered in the revised
return would have to be considered as bona fide. The assessee argued that in
the statement recorded during the course of search, voluntary surrender of
`16 crores was made so as to cover various group cases, including that of the




ITA 463/2016 & CONNECTED CASES                                           Page 4
assessee. Such surrender was to buy peace of mind, to co-operate with the
revenue and to avoid protracted litigation with it. The revenue argued that
penalty had to be levied because the return of income was not a voluntarily
disclosure, but was under Section 153A. It was further contended that
incriminating documents were found during the course of the search and
seizure operations, and disclosure made by the appellant u/s 132(4) of the
Act was as a consequence of the search operations. But for the search at the
premises of M/s J M Estate Developers Pvt. Ltd. group, including the
appellant, the appellant would not have disclosed the additional income nor
would he have offered the same for taxation. The CIT (A) relied on the
decision of the learned ITAT (Delhi) in the case of Sh. Prem Arora v. DCIT,
Central Circle-25, New Delhi, 2012-TIOI-262-ITAT-DEL, to hold that the
concept of voluntary return of income may be important in penalty
proceedings initiated in the course of normal assessment proceedings made
u/s 143(3) or section 147, but not under Section 153A. The CIT (A) held that
for the purpose of imposition of penalty, the original return of income filed
u/s 139 cannot be considered. Penalty u/s 271(1)(c) is imposable when there
is variation in assessed and returned income and not otherwise. If there is no
variation, there will be no concealment. When there is no concealment, the
question of levy of penalty would not arise.
6.    Aggrieved by the CIT (A) order, the Revenue filed appeal before the
Income Tax Appellate Tribunal contending that the CIT (A) erred in
ignoring the fact that Explanation-5 to Section 271(1)(c) was applicable to
the facts of this case and hence the levy of penalty was justified. The
Revenue also submitted that if pursuant to a search operation, penalty is not
levied for unearthing of additional income detected during a search, it would




ITA 463/2016 & CONNECTED CASES                                           Page 5
be an open incentive for all to conceal their income till such time as it was
detected by the department.
7.    In its decision, the ITAT also relied upon the decision in Sh. Prem
Arora (supra) and held that Explanation-5 would be applicable in cases
where during any search initiated before 1.6.2007 any money, bullion,
jewellery or other valuable article is found in the possession or under the
control of the assessee. In such cases, even if the assesee declares income
from such assets after the date of the search, he shall be deemed to have
concealed his income. However, in the present case, the search was
conducted on 11.01.2007 and cash of `5,26,530/- was found from the
assessee's possession; so the cash was admittedly not seized during the
relevant assessment years which were in question before the ITAT. The
ITAT rejected the Revenue's contentions. It concluded that while the
assessee had surrendered undisclosed income, the cash was seized during
search in A.Y. 2007-2008, and not in the relevant assessment years under
consideration. Therefore, the ITAT concluded that Explanation 5 to Section
271(1) of the Act could not be invoked in assessment years 2005-06 & 2006-
07, which were the relevant assessment years, on the presumption that the
assessee might have been in possession of the seized cash throughout the
period covered by search assessments.
8.    The present batch of appeals concerns the interpretation and
application of Section 271(1)(c) of the Act and Explanation 5 thereto. Two
broad issues arise for consideration in this regard:
      (i)    Whether under Section 271(1)(c) as it stood prior to the
      insertion of Explanation 5, levy of penalty is automatic if return filed




ITA 463/2016 & CONNECTED CASES                                          Page 6
       by the assessee under Section 153A of the Act discloses higher
       income than in the return filed under Section 139(1)?
       (ii)   What would be the position of law after insertion of Explanation
       5 and whether it is attracted in the facts of this case?
       We will answer each question in turn.
Issue I
9.     Counsel for the revenue submitted that in the original return, the
assessee had not declared the income which came to be detected by the
Department during the course of survey. It is only after the search that the
assessee filed the revised returns, which itself would go to show that amount
offered during the search is concealed income. There is no finding by the
Tribunal that there was cessation of liability of these amounts during the
relevant financial year. Hence, the Revenue contends that the levy of penalty
is required to be sustained. For imposition of penalty mens rea is not a
requirement. Once the conditions mentioned in section 271(1)(c) are held to
have been established, the imposition of penalty is automatic and no
discretion is left in the authorities.
10.    It is moreover contended that the levy of penalty cannot be denied for
the reason that the assessee cannot be given benefit of Explanation 5 to
Section 271(1)(c) of the Act as clause (ii) of Explanation 5 to Section
271(1)(c) exempts only that part of the income from the penal provision,
which is covered by statement under Section 132(4), where the assets have
been acquired by the assessee out of his income which is not disclosed in the
return of income to be furnished before the expiry of the time prescribed in
section 139(1) and the assessee specifies in the statement in the manner in
which such income has been derived. The penalty was levied because the




ITA 463/2016 & CONNECTED CASES                                           Page 7
assessee had not indicated in the return the income which was sought to be
brought to taxation as a result of the search. The disclosure in the return after
the search did not in any way, diminish its responsibility to do so.
11.   Counsel for the assessee argues that the findings of the ITAT are
sound and do not call for interference. It is urged that the appellant disclosed
the amounts seized in respect of which specifics as to the years they were
attributable to, were furnished. Since there was no variation between the
statement made during the search proceeding and the sums disclosed during
the returns (as all the amounts shown in the return under Section 153A
coincided or tallied with the amount found) the revenue's invocation of
Section 271(1)(c) of the Act by relying on Explanation 5, was unfounded.
12.   The first question involves interpretation of Section 271(1)(c) of the
Act. For convenience, the relevant provision of the Act is reproduced below:
      "Section 271
      (1) If the Assessing Officer or the Principal Commissioner or
      Commissioner (Appeals) or the Principal Commissioner or
      Commissioner in the course of any proceedings under this Act,
      is satisfied that any person ­

             xxxxx

      (c) has concealed the particulars of his income or furnished
      inaccurate particulars of such income,


      he may direct that such person shall pay by way of penalty-
             xxxxx
      (iii) in the cases referred to in clause (c) or clause (d), in
      addition to tax, if any, payable by him, a sum which shall not be
      less than, but which shall not exceed three times, the amount of
      tax sought to be evaded by reason of the concealment of




ITA 463/2016 & CONNECTED CASES                                             Page 8
      particulars of his income or fringe benefits or the furnishing of
      inaccurate particulars of such income or fringe benefits."

13.   At the outset, it must be noted that pursuant to the search and seizure
operation conducted under Section 132(4) of the Act, the assessee was given
notice under Section 153A to file fresh return of his income. Thereafter, the
assessee filed revised returns and the return filed by the assessee under
Section 153A was accepted as such by the A.O. However, the A.O. was of
the opinion that inasmuch that the income disclosed by the assessee under
Section 153A was higher than the income in the original return filed under
Section 139(1) and since in his view, such disclosure of income was a
consequence of the search conducted on the assessee, there was concealment
of income which attracted Section 271(1)(c) of the Act. Therefore, the
question that needs to be answered is whether penalty is to be levied
automatically whenever the assessee declares a higher income in his return
filed under Section 153A in comparison to the original return filed under
Section 139(1).
14.   The Supreme Court held, in Shri T. Ashok Pai v. Commissioner of
Income Tax, Bangalore (2007) 7 SCC 162, that penalty under Section
271(1)(c) is not to be mandatorily imposed. In other words, the levy of
penalty under this provision is not automatic. This view has been reiterated
in Union of India v. Rajasthan Spinning and Weaving Mills, (2009) 13
SCC 448 to say that for there to be a levy of penalty under Section
271(1)(c), the conditions laid out therein have to be specifically fulfilled.
Section 271(1)(c) of the Act, being in the nature of a penal provision,
requires a strict construction. While considering the interpretation of this




ITA 463/2016 & CONNECTED CASES                                            Page 9
provision, this Court in Commissioner of Income Tax v. SAS
Pharmaceuticals (2011) 335 ITR 259 (Del), stated that:
      "It is to be kept in mind that Section 271(1)(c) of the Act is a
      penal provision and such a provision has to be strictly
      construed. Unless the case falls within the four-corners of the
      said provision, penalty cannot be imposed. Subsection (1) of
      Section 271 stipulates certain contingencies on the happening
      whereof the AO or the Commissioner (Appeals) may direct
      payment of penalty by the Assessee."

      Thus, what is required to be judged is whether there has been a
"concealment" of income in the return filed by the assessee.
15.   Earlier decisions indicated a conflict of opinion as to whether Section
271(1)(c) required the revenue to specifically prove mens rea on the part of
the assessee to conceal his income. In order to remove the element of mens
rea, the Finance Act, 1964 deleted the word "deliberately" that prec eded the
words "concealed the particulars of his income" in Section 271(1)(c).
Nonetheless, even post the amendment, the Apex Court in K.C. Builders v.
Assistant Commissioner of Income Tax, 265 ITR 562 (SC) held that:
      "The word ,,concealment inherently carried with it the element
      of mens rea. Therefore, the mere fact that some figure or some
      particulars have been disclosed by itself, even if takes out the
      case from the purview of non-disclosure, cannot by itself take
      out the case from the purview of furnishing inaccurate
      particulars. Mere omission from the return of an item of receipt
      does neither amount to concealment nor deliberate furnishing
      of inaccurate particulars of income unless and until there is
      some evidence to show or some circumstances found from
      which it can be gathered that the omission was attributable to
      an intention or desire on the part of the assessee to hide or
      conceal the income so as to avoid the imposition of tax thereon.
      In order that a penalty under Section 271(1)(c) may be
      imposed, it has to be proved that the assessee has consciously




ITA 463/2016 & CONNECTED CASES                                           Page 10
      made the concealment or furnished inaccurate particulars of
      his income."

16.   Thus, despite the fact that there is no requirement of proving mens rea
specifically, it is clear that the word "conceal" inherently carries with it the
requirement of establishing that there was a conscious act or omission on the
part of the assessee to hide his true income. This was also the conclusion of
the Supreme Court in the case of Dilip N. Shroff Karta of N.D. Shroff v.
Joint Commissioner of Income Tax, Special Range Mumbai and Anr.,
(2007) 291 ITR 519 (SC). In a later decision in Union of India v.
Dharmendra Textile Processors, (2008) 13 SCC 369, the Supreme Court
overruled its decision in Dilip N. Shroff (supra). Thereafter, in
Commissioner of Income Tax v. Reliance Petroproducts Pvt. Ltd. , (2010)
11 SCC 762 the Court clarified that Dilip N. Shroff (supra) stood overruled
only to the extent that it imposed the requirement of mens rea in Section
271(1)(c); however, no fault was found with the meaning of "conceal" laid
down in Dilip N. Shroff's case. Thus, as the law stands, the word "conceal"
in Section 271(1)(c), would require the A.O. to prove that specifically there
was some conduct on part of the assessee which would show that the
assessee consciously intended to hide his income.
17.   In this case, the A.O. in his order noted that the disclosure of higher
income in the return filed by the assessee was a consequence of the search
conducted and hence, such disclosure cannot be said to be "voluntary".
Hence, in the A.O.'s opinion, the assessee had "concealed" his income.
However, the mere fact that the assessee has filed revised returns disclosing
higher income than in the original return, in the absence of any other




ITA 463/2016 & CONNECTED CASES                                           Page 11
incriminating evidence, does not show that the assessee has "concealed" hi s
income for the relevant assessment years. On this point, several High Courts
have also opined that the mere increase in the amount of income shown in
the revised return is not sufficient to justify a levy of penalty.
18.   The Punjab & Haryana High Court in Commissioner of Income Tax
v. Suraj Bhan, (2007) 294 ITR 481 (P & H), held that when an assessee
files a revised return showing higher income, penalty cannot be imposed
merely on account of such higher income filed in the revised return.
Similarly, the Karnataka High Court in the case of Bhadra Advancing Pvt
Limited v. Assistant Commissioner of Income Tax, (2008) 219 CTR 447,
held that merely because the assessee has filed a revised return and
withdrawn some claim of depreciation penalty is not leviable. The additions
in assessment proceedings will not automatically lead to inference of levying
penalty. The Calcutta High Court in the case of Commissioner of Income
Tax v. Suresh Chand Bansal, (2010) 329 ITR 330 (Cal) held that where
there was an offer of additional income in the revised return filed by the
assessee and such offer is in consequence of a search action, then if the
assessment order accepts the offer of the assessee, levy of penalty on such
offer is not justified without detailed discussion of the documents and their
explanation which compelled the offer of additional income. The Madras
High Court in the case of S.M.J. Housing v. Commissioner of Income Tax,
(2013) 357 ITR 698 held that where after a search was conducted, the
assessee filed the return of his income and the Department had accepted such
return, then levy of penalty under Section 271(1)(c) was not justified. From
the above cases it would be clear that when an assessee has filed revised
returns after search has been conducted, and such revised return has been




ITA 463/2016 & CONNECTED CASES                                         Page 12
accepted by the A.O., then merely by virtue of the fact that such return
showed a higher income, penalty under Section 271(1)(c) cannot be
automatically imposed.
19.   The whole matter can be examined from a different perspective as
well. Section 153A provides the procedure for completion of assessment
where a search is initiated under Section 132 or books of account, or other
documents or any assets are requisitioned under Section 132A after
31.05.2003. In such cases, the Assessing Officer shall issue notice to such
person requiring him to furnish, within such period as may be specified in
the notice, return of income in respect of six assessment years immediately
preceding the assessment year relevant to the previous year in which the
search was conducted under Section 132 or requisition was made under
Section 132A. The Assessing Officer shall assess or reassess the total
income of each of these six assessment years. Assessment or reassessment, if
any, relating to any assessment year falling within the period of six
assessment years pending on the date of initiation of the search under
Section 132 or requisition under Section 132A, as the case may be, shall
abate. [Ref to Memorandum accompanying the Finance Bill, 2003] Section
153A opens with a non-obstante clause relating to normal assessment
procedure covered by Sections 139, 147, 148, 149, 151 and 153 in respect of
searches made after May 31, 2003. The sections, so excluded, relate to
returns, assessment and reassessment provisions. However, the provisions
that are saved are those under Section 153B and 153C, so that these three
Sections 153A, 153B and 153C are intended to be a complete code for post-
search assessments. Considering that the non-obstante clause under Section
153A excludes the application of, inter alia, Section 139, it is clear that the




ITA 463/2016 & CONNECTED CASES                                           Page 13
revised return filed under Section 153A takes the place of the original return
under Section 139, for the purposes of all other provisions of the Act. This is
further buttressed by Section 153A (1)(a) which reads:
      "Notwithstanding anything contained in section 139, section
      147, section 148, section 149, section 151 and section 153, in
      the case of a person where a search is initiated under section
      132 or books of account, other documents or any assets are
      requisitioned under section 132A after the 31st day of May,
      2003, the Assessing Officer shall-

      a) issue notice to such person requiring him to furnish within
      such period, as may be specified in the notice, the return of
      income in respect of each assessment year falling within six
      assessment years referred to in clause (b), in the prescribed
      form and verified in the prescribed manner and setting forth
      such other particulars as may be prescribed and the provisions
      of this Act shall, so far as may be, apply accordingly as if such
      return were a return required to be furnished under section
      139.

20.   Therefore, the position that emerges from the above-mentioned
provision is that once the assessee files a revised return under Section 153A,
for all other provisions of the Act, the revised return will be treated as the
original return filed under Section 139. On similar lines, the Gujarat High
Court in the case of Kirit Dahyabhai Patel v. Assistant Commissioner of
Income Tax, (2015) 280 CTR (Guj) 216, held that: "In view of specific
provision of s. 153A of the I.T. Act. the return of income filed in response to
notice under s. 153A of the I.T. Act is to be considered as return filed under
s. 139 of the Act, as the AO has made assessment on the said return and
therefore, the return is to be considered for the purpose of penalty under s.




ITA 463/2016 & CONNECTED CASES                                            Page 14
271(1)(c) of the I.T. Act and the penalty is to be levied on the income
assessed over and above the income returned under s. 153A, if any."
21.   Thus, it is clear that when the A.O. has accepted the revised return
filed by the assessee under Section 153A, no occasion arises to refer to the
previous return filed under Section 139 of the Act. For all purposes,
including for the purpose of levying penalty under Section 271(1)(c) of the
Act, the return that has to be looked at is the one filed under Section 153A.
In fact, the second proviso to Section 153A(1) provides that "assessment or
reassessment, if any, relating to any assessment year falling within the
period of six assessment years referred to in this sub-section pending on the
date of initiation of the search under Section 132 or making of requisition
under Section 132A, as the case may be, shall abate." What is clear from this
is that Section 153A is in the nature of a second chance given to the assessee,
which incidentally gives him an opportunity to make good omission, if any,
in the original return. Once the A.O. accepts the revised return filed under
Section 153A, the original return under Section 139 abates and becomes
non-est. Now, it is trite to say that the "concealment" has to be seen with
reference to the return that it is filed by the assessee. Thus, for the purpose of
levying penalty under Section 271(1)(c), what has to be seen is whether there
is any concealment in the return filed by the assessee under Section 153A,
and not vis-a vis the original return under Section 139.
Issue II
22.   The second question concerns the interpretation and application of
Explanation-5 to Section 271(1)(c) and whether it is attracted in the facts of
this case. For convenience, Explanation-5 is reproduced below:




ITA 463/2016 & CONNECTED CASES                                             Page 15
      "Explanation 5: Where in the course of a search initiated
      under section 132 before the 1st day of June, 2007, 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 sub-section (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 Principal Chief Commissioner or Chief
                  Commissioner or Principal Commissioner or
                  Commissioner before the said date ; or
           (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









ITA 463/2016 & CONNECTED CASES                                            Page 16
             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.

23.   Explanation-5 to Section 271(1) was inserted by the Taxation Laws
(Amendment) Act, 1984, with effect from 1 October, 1984. The Explanation
is applicable to cases where in the course of a search under Section 132 of
the Act, the assessee is found to be the owner of any money, bullion,
jewellery or other valuable article or thing. In such cases, if the assessee
claims that these assets have been acquired by him by utilizing (wholly or in
part) his income 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 in the return, or such previous year is to
end on or after the date of the search, the assessee shall, for the purposes of
imposition of penalty under Section 271(1)(c) of the Act, be deemed to have
concealed the particulars of his income. This Explanation has been inserted
to address situations where consequent to a search, assets and valuables are
discovered to be in the possession of the assessee, and thereafter the assessee
files return of income after the date of search. In such cases, even if the
assessee includes the amounts utilized by him in acquiring the assets found
in his possession during the search operations as his income in the return
filed after the search, the assessee would be deemed to have concealed his
income. Thus, Parliament has created a deeming fiction by virtue of which in
such cases, even if the assessee includes such income (which represents the
value of the assets found in his possession during the search) in his return




ITA 463/2016 & CONNECTED CASES                                            Page 17
filed after the search, it will be deemed that such return disclosing higher
income was filed only because the assets were found in his possession during
the search. Put differently, if not for the search, the Legislature deems that
the assessee would not have disclosed such income in the return filed
subsequently. Explanation-5 also contains two exceptions, where the
assessee would not be deemed to have concealed his income and would gain
immunity from levy of penalty- first, if such income is or the transactions
resulting in such income are recorded in the books of account maintained by
the assessee for any source of income or such income was otherwise
disclosed to the Principal Chief Commissioner or Chief Commissioner or
Principal Commissioner or Commissioner before the date of the search;
second, in the course of the search, the assessee makes a statement under
Section 132(4) that the assets found in his possession have 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 Section 139(1), 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.
24.   The purpose of inserting Explanation-5 in the statute books was
explained by the Supreme Court in K.P. Madhusudan v. Commissioner of
Income Tax, (2001 251 ITR 99, wherein the Court held-
      "Learned Counsel for the assessee then drew our attention to
      the judgement of this Court in Sir Shadilal Sugar and General
      Mills Ltd. v. CIT (1987) 168 ITR 705. He submitted that the
      assessee had agreed to the additions to his income referred to
      hereinabove to buy peace and it did not follow therefrom that
      the amount that was agreed to he added was concealed income.
      That it did not follow that the amount agreed to be added was




ITA 463/2016 & CONNECTED CASES                                          Page 18
      concealed income is undoubtedly what was laid down by this
      Court in the case of Sir Shadilal Sugar and General Mills Ltd.
      (1987) 168 ITR 705 and that therefore, the Revenue was
      required to prove the mens rea of a quasi-criminal offence. But
      it was because of the view taken in this and other judgments
      that the Explanation to Section 271 was added."

25.   This shows that Explanation-5 was specifically inserted to deal with
the situation where higher income was disclosed in the return filed
consequent to a search operation, and the assessee claimed that such addition
of income did not imply that there was concealment. In other words, but for
the insertion of Explanation-5, it would be open to the assessee to contend
that additions made to his income in the return filed after the search
operation, were only to buy peace and did not tantamount to concealment.
This also flows from the language of Explanation-5 itself, wherein the words
used by the Legislature are "be deemed to have concealed the particulars of
his income", which shows that there is a deeming fiction by virtue of which
such additional income is considered as concealment. If such additions in the
income in the return filed consequent to a search, were to automatically
evidence concealment under Section 271(1)(c), there would be no need for
Parliament to enact a deeming fiction in the form of Explanation-5; such a
reading would render Explanation-5 otiose and without any purpose. This is
also consonant with the view arrived at in the earlier part of this decision, i.e.
mere increase of income in the return filed pursuant to Section 153A would
not be sufficient to show concealment under Section 271(1)(c).
26.   Now for the Revenue to invoke Explanation-5, it would have to prove
that its requirements are clearly fulfilled in the present case. In order for
Explanation-5 to apply, it is necessary that there must be certain assets (such




ITA 463/2016 & CONNECTED CASES                                             Page 19
as money, bullion etc.) found in the possession of the assessee during the
search, and that the assessee must claim that such assets have been acquired
by him by utilising (wholly or in part) his income. Moreover, such income
must be in relation to a particular previous year that has either ended before
the date of the search or is to end on or after the date of the search and such
income is declared subsequently in the return of income filed after the
search. Therefore, it is only when assets are found during the search which
the assessee claims have been acquired by him by utilizing (wholly or in
part) his income for any particular previous year, and then declares such
income (which he utilized in acquiring the assets found) in a subsequent
return filed after the date of search, would it be deemed that the assesee has
concealed his income. In other words, the assets seized during the search
must relate to the income of the particular assessment year whose return is
filed after the date of the search. Such a conclusion is only logical,
considering that assessment under the Act is with respect to a particular
assessment year and the penalty imposed under Section 271(1)(c) would also
be for concealing income in that particular assessment year, which
concealment was revealed by the discovery of certain assets in the assessee's
possession during the search conducted under Section 132. Here, it would be
beneficial to reproduce the dictum of the Rajasthan High Court in
Commissioner of Income Tax v. Kanhaiyalal, (2008) 299 ITR 19 (Raj),
where it held that-
      "We may consider the things from yet another aspect, viz., that
      under the set up of IT Act, in whatever eventuality the
      assessment may have to be made, i.e. whether a regular
      assessment, or assessment consequent upon escapement of
      income, or assessment of a block period, but in either case, the




ITA 463/2016 & CONNECTED CASES                                           Page 20
      assessment has to be, with respect to the particular assessment
      year, relating to the concerned previous year, and the income
      derived, or found by the Department to have been derived, or
      earned, by the assessee, during particular previous year, has to
      be assessed during the relevant assessment year only, and
      assessment of such income cannot be shifted to any other past
      or future years, so much so that there may be cases, where the
      right of the Department to assessment may have been lost on
      account of passage of limitation also."

Thus, it is clear that the Revenue has to establish that the assets seized during
the search conducted on the assessee, related to the income of the assessee
for the relevant assessment years i.e. AY 2005-06 and AY 2006-07.
27.   On this question, the decision of the ITAT in Sh. Prem Arora (supra)
must be noted. In that case, the ITAT held:
      "From above discussion it is clear that the provisions of
      Explanation 5 are applicable in the cases where during the
      course of search initiated on or before 1.6.2007 any money,
      bullion, jewellery or other valuable article or thing is found in
      the possession or under control of the assessee. In the case of
      the assessee the search was conducted on 22.11.2006 and cash
      of Rs. 1,11,45,350/- was found from the possession of the
      assessee. The assessee had undisclosed commission income as
      well as purchases and sales as seen from the statement of
      affairs made by the assessee based on seized material. The
      assessee had drawn cash flow statement for the entire period of
      six years in order to determine undisclosed income based on
      seized material for each of six assessment years. Explanation 5
      to section 271(1) of the Act cannot be invoked in assessment
      year 2004-05 merely on presumption that the assessee might
      have been in possession of cash throughout the period covered
      by search assessments. The income offered to tax u/s 153A for
      assessment year 2004-05 is based on entries recorded in the
      seized material. Unlike provisions of Explanation 5A, the
      provisions of Explanation 5 cannot be invoked in assessment




ITA 463/2016 & CONNECTED CASES                                            Page 21
      year 2004-05 in respect of entries recorded in seized material.
      Thus invoking of Explanation 5 in assessment year 2004-05 is
      based on presumptions, surmises and conjectures. It is settled
      law that suspicion howsoever strong, it cannot take place of
      actual evidence and hence the contention of the Revenue that
      assessee was in possession of cash throughout the period of six
      assessment years has to be rejected. In view of above discussion
      we are of the considered opinion that even the amended
      provisions of Explanation 5 cannot be applied in assessment
      year 2004-05. Consequently penalty u/s 271(c) cannot be
      imposed by invoking Explanation 5 of the Act in assessment
      year 2004-05 in respect of cash found in previous year relevant
      to assessment year 2007-08."

28.   Basing its reasoning on this decision, the ITAT in the present case
held that in the case of the assessee, the search was conducted on 11.01.2007
and cash of `5,26,530/- was recovered from the possession of the assessee;
and so the cash was admittedly, not seized during the relevant assessment
years in consideration before the Tribunal. In other words, while the assessee
had surrendered undisclosed income, the cash was seized during search in
A.Y 2007-2008, and not in the relevant assessment years. However, in the
relevant assessment year under consideration in the instant case, the assessee
made an addition of `21,65,932/- in the return filed pursuant to notice under
section 153A. The ITAT held that Explanation 5 to section 271(1) of the Act
could not be invoked in assessment years 2005-06 & 2006-07, which are
under consideration in this case, merely on the presumption that the assessee
might have been in possession of the seized cash throughout the period
covered by the search assessments. The learned ITAT also held-
      "The income offered to tax u/s 153A for assessment years 2005-
      06 and 2006-07 cannot be said to be based on assets seized,
      because from the assessment order, it is clear that search was




ITA 463/2016 & CONNECTED CASES                                           Page 22
      on 11.01.2007 (i.e AY 2007-08), the cash seized during search
      was only to the tune of Rs.5,26,530/- and it is not emerging
      from the records that the assessee has claimed during search
      that the cash seized (on 11.0 1.2007), belonged to him and that
      was owned by him in the relevant assessment years i.e. AYs
      2005-06 and 2006-07. Unless there is a clear finding in this
      respect, Explanation 5 of Section 271 (1)(c) cannot be of any
      help to the department. As rightly pointed out by the Coordinate
      Bench in Prem Arora (supra), the provisions of Explanation 5
      cannot be invoked in assessment years 2005-06 and 2006-07 in
      respect of entries recorded in seized material. Thus invoking of
      Explanation 5 in assessment year 2005-06 & 2006-07 is based
      on assumptions and presumptions. It is settled law that
      suspicion howsoever strong, cannot take the place of evidence
      and hence the contention of the Revenue that assessee was in
      possession of cash throughout the period of assessment years
      under consideration has to be rejected."

      It is difficult to see any infirmity in the decision of the learned ITAT
in the present case. Levy of penalty under Section 271(1)(c) cannot be on the
basis of surmises and conjectures. Thus, Explanation-5 cannot assist the
claim of the revenue in the present case for the relevant assessment years
under consideration before this Court for the simple reason that for the
relevant assessment years, 2005-06 & 2006-07, no material was recovered
during the search. Rather, the assessee added ` 21,65,932/- in the return filed
pursuant to notice under section 153A. That amount was not relatable to any
sum recovered or article seized. Therefore, the question of adding or not
adding amounts after the search and falling within the mischief of
Explanation 5 to Section 271 (1) (c) cannot arise in the facts and
circumstances of this case.




ITA 463/2016 & CONNECTED CASES                                           Page 23
29.   Based on the above discussion, this Court is of the opinion that
Explanation-5 cannot be relied upon by the Revenue in the relevant
assessment years under consideration before this Court, and in the absence of
recourse to Explanation-5, there is no incriminating evidence to show that
the assessee has concealed the particulars of his income, within the meaning
of Section 271(1)(c) of the Act. In conclusion, this Court is of the view that
there is no illegality in the order of the learned ITAT in the present case. In
all four appeals, the question of law involved is thus answered in favour of
the assessee. The revenue's appeals are therefore dismissed.


                                                      S. RAVINDRA BHAT
                                                                (JUDGE)



                                                            NAJMI WAZIRI
                                                                 (JUDGE)
FEBRUARY 09, 2017




ITA 463/2016 & CONNECTED CASES                                          Page 24

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