Penalty under s 158BFA(2)

If the undisclosed income returned is not accepted by the AO and any addition is made to the income so returned, then the assessee will not be entitled to immunity from penalty on the tax payable on the undisclosed income — however in the present case the penalty order has been modified by refixing the penalty in view of the proved financial difficulty of the assessee — as held by KerHC in CIT v Heera Construction Co Pvt Ltd — In favour of: The Revenue (Partly) ; ITA No. 202 of 2010

CIT v Heera Construction Co Pvt Ltd

High Court of Kerala

ITA No. 202 of 2010

C N Ramachandran Nair and B P Ray, JJ

Decided on: 4 April 2011

Counsel appeared:

Sri Jose Joseph, SC for the appellant

Sri Bhagavathiperumal Kamalahasan for the respondent

Judgment

Per: Ramachandran Nair, J:

Respondent assessee is a Private Limited Company engaged in real estate business i.e. construction

and sale of commercial and residential apartments and buildings. A search was conducted by the

Income Tax Department in the business premises and in the residence of Directors of the Company

under section 132 of the Income Tax Act (hereinafter referred to as the Act for short). Pursuant to the

search, the Assessing Officer proposed to make block assessment under section 158BC of the Act and

as the first step, the assessee was called upon to furnish return of disclosed income in Form No.2B.

Even though assessee filed return disclosing undisclosed income of Rs.79,10,187/- the assessee did

not remit the tax thereon, which was Rs.48,41,034/- prior to or along with filing of returns. The

Assessing Officer proceeded to make assessment by making substantial addition to the returned

income and the total income assessed was Rs.1,32,89,530/-. However, in appeal, the Commissioner

(Appeals) reduced the addition to the returned income to Rs.23,32,026/-. We are informed that

assessment appeal has become final and the addition to the returned income assessed is Rs.23,32,026/-

Besides completing the assessment on the undisclosed income, which comprises the income returned

by the assessee and the addition made thereto by the Officer, the Assessing Officer proceeded to levy

penalty under section 158BFA(2) of the Act. The Assessing Officer noticed that the assessee though

disclosed Rs.79,10,187/- as undisclosed income by filing return in form No.2B pursuant to notice

issued by the Officer under section 158BC(1), the assessee did not pay the tax on the admitted

undisclosed income returned either prior to or along with filing of return as required under the proviso

to section 158BFA (2) to get immunity from payment of penalty at least in respect of tax on such

undisclosed income returned by the assessee. Therefore, penalty was levied at equal amount of tax on

the entire undisclosed income assessed under section 158BC(c) of the Act, which comprises the

undisclosed income returned by the assessee and addition made by the Assessing Officer thereto.

Even though the penalty levied by the Officer with reference to the income originally assessed was

Rs.81,33,192/- being the minimum of penalty leviable on the total income, when the assessee filed

appeal against the penalty order, the CIT (Appeals) held that no penalty could be levied with reference

to the tax payable on the undisclosed income returned by the assessee pursuant to notice issued by the

Officer after search. So far as the penalty on the balance income assessed is concerned, the CIT

(Appeals) held that only minimum penalty is leviable i.e. at equal amount of tax on the additions

sustained by him. Accordingly, he reduced penalty to Rs.13,99,216/-, which is the tax on the addition

sustained by him in the assessment appeal which is Rs.23,32,026/-. The Department challenged the

CIT(Appeals) order before the Tribunal by specifically taking the ground that the assessee is not

entitled to get any immunity from penalty on the tax payable on the undisclosed income returned by it

for the reason that they have not complied with the mandatory condition of payment of admitted tax

along with return filed in Form 2B as required in the first proviso to section 158BFA(2) of the Act.

When the appellant was heard by the two member bench of the Tribunal, the Judicial Member

allowed the Department Appeal by reversing the order of the CIT (Appeals) and by restoring the

minimum penalty levied by the Officer with reference to the tax payable on the total undisclosed

income assessed. However, the Accountant Member disagreed with the order of the Judicial Member

and he dismissed the Department Appeal confirming the order of the CIT (Appeals). When the matter

was referred to the 3rd member, the President of the Tribunal, he concurred with the Accountant

member through separate order, as a result of which, by majority, the Tribunal dismissed the appeal

filed by the Revenue. It is against the majority decision of the Tribunal, the Revenue has filed this

appeal before us.

2. We have heard Senior counsel Shri.P.K.R.Menon appearing for the Revenue and Advocate

Shri.S.Sreedhar along with Advocate Shri.B.Kamalahasan, appearing for the respondent

assessee.

3. Since we have to only consider the scope of section 158BFA(2) of the Act, we extract hereunder

the said provision.

"Levy of interest and penalty in certain cases.

158FBA (1) ----

(2)

(Appeals) in Assessing

The Chapter, may the direct that of a person shall pay by way of course Officer or the

Commissioner any proceedings under this penalty a sum which shall not be less than the

amount of tax leviable but which shall not exceed three times the amount of tax so leviable in

respect of the undisclosed income determined by the Assessing Officer under clause (c) of

section 158BC:

Provided that no order imposing penalty shall be made in respect of a person if -

(i) such person has furnished a return under clause (a) of section 158BC;

(ii) the tax payable on the basis of such return has been paid or, if the assets seized consist of

money, the assessee offers the money so seized to be adjusted against the tax payable;

(iii) evidence of tax paid is furnished along with the return; and

(iv) an appeal is not filed against the assessment of that part of income which is shown in the

return:

Provided further that the provisions of the preceding proviso shall not apply where the

undisclosed income determined by the Assessing Officer is in excess of the income shown in

the return and in such cases the penalty shall be imposed on that portion of undisclosed

income determined which is in excess of the amount of undisclosed income shown in the

return."

4. The main controversy is whether the Tribunal is justified in holding that penalty under the above

provision could not be levied with reference to tax on undisclosed income returned by the assessee,

even if such assessee has not complied with the requirements of clauses (ii) & (iii) of the first proviso

above stated, which requires the assessee to remit tax before filing return and produce proof thereof

along with return. The assessee does not dispute it's liability for penalty on the additional income

assessed i.e. the income assessed over and above the returned income and the minimum penalty

attributable to the tax on such income stands sustained by orders of the CIT(Appeals), which is not

contested by the assessee in further appeal.

5. The contention raised by the Senior Counsel for the Revenue is that the four conditions provided in

the first proviso are mandatory for getting immunity from payment of penalty on the undisclosed

income returned by the assessee. In other words, the Revenue's stand is that filing of return on

undisclosed income does not give any immunity to the assessee from penalty under section

158BFA(2) unless the assessee satisfies all the conditions including payment of tax prior to filing of

return and production of proof of such payment along with the return so filed. Admittedly, the

assessee did not pay tax along with the return filed returning undisclosed income. The assessee did not

even pay the admitted tax for maintainability of the appeal filed against assessment before the first

appellate authority and consequently the first appeal filed got dismissed on account of non-payment of

admitted tax. The assessee however approached the Commissioner of Income Tax on the

administrative side and based on the installment facility obtained by the assessee, the assessee paid

admitted tax in easy installments and only on payment of arrears of tax, the quantum appeal filed

against the assessment itself was entertained by the CIT(Appeals) that too after remand by the

Tribunal.

6. In short the question to be considered is whether assessee forfeits immunity available to it from

penalty on the undisclosed income returned on account of non-payment of admitted tax along with the

return filed declaring undisclosed income. While the Revenue's counsel submitted that satisfaction of

the conditions in the first proviso is mandatory to get immunity from penalty with reference to the

undisclosed income, the learned counsel for the assessee relied on the decision of the Rajasthan High

Court in Commissioner of Income Tax v. Satyendra Kumar Dosi, reported in 315 ITR 172 and

contended that the penalty under section 158BFA(2) itself is discretionary and when the CIT(Appeals)

as well as the Tribunal exercised discretion in favour of the assessee, then there is no scope for

interference by this Court on the reduction granted by CIT(Appeals).

7. Even though learned counsel for both sides relied on several decisions, we do not think there is any

need to consider those decisions which are on general principles applicable to penalty matters and not

on the special provision above referred. Further we have to take note of the fact that the defense of

reasonable cause provided under section 273B of the Act against all other cases of penalty covered by

the Act is not applicable for penalty that could be levied under section 158BFA(2) of the Act.

Therefore, we have to consider the nature and scope of penalty strictly in accordance with the

provisions contained in the above specific provisions of the Act.

8. On an analysis of section 158FBA(2) extracted above, what we find is that penalty on undisclosed

income assessed under section 158BC is discretionary and it can be levied by the Assessing Officer as

well as by the Commissioner of Income Tax (Appeals). The power is given to the Commissioner(A)

because if the Assessing Officer does not levy penalty after completion of assessment, the

CIT(Appeals) while considering assessment appeal is always free to consider whether penalty is to be

levied, no matter the Assessing Officer has not levied penalty, the Commissioner (Appeals) can order

levy of penalty under the said clause. While there is discretion in regard to levy of penalty, depending

on facts and circumstances of each case once the authority competent to levy penalty chooses to levy

penalty then the discretion of quantum of penalty ranges from 100% to 300% of the tax, which means

that the minimum penalty leviable is equal to the amount of tax and maximum is at three times of tax.

The discretion in regard to levy of penalty is controlled by two provisos to the said sub Section, which

are discussed below.

9. Subject to the 2nd proviso, the 1st proviso provides complete immunity from penalty on the tax due

in respect of the undisclosed income returned by the assessee based on notice issued by the Assessing

Officer after search or survey. However, the conditions provided in clauses (i) to (iv) of the first

proviso are that the assessee should have filed return pursuant to notice issued by the Officer and tax

due in respect of the undisclosed income returned has to be paid before filing of return and the

evidence of tax payment has to be furnished along with the return filed. However, if cash is seized in

the course of search, the requirement of the proviso is satisfied if instead of making payment assessee

allows the Assessing Officer for adjustment of the seized cash towards tax payment based on return of

undisclosed income filed. Apart from the requirement of payment of tax prior to or along with filing

the return the assessee should also confirm to the Assessing Officer that no appeal will be filed

challenging the assessment on the income voluntarily disclosed by the assessee in the return filed. In

other words, if the assessee files appeal challenging the assessment of undisclosed income returned by

the assessee, the benefit of exemption from penalty will not be available under the 1st proviso to the

said section. The 2nd proviso is a further condition qualifying the 1st proviso which says that if the

assessment under section 158BC(c) of the Act includes income other than the undisclosed income

returned by the assessee then the immunity from the penalty in respect of the undisclosed income

returned by the assessee will be lost to the assessee. In other words, the absolute immunity from

penalty on the tax payable in respect of the undisclosed income is available only if the Assessing

Officer accepts the return filed by the assessee declaring the undisclosed income, which is the

undisclosed income assessed under section 158BC(c) of the Act. In other words, if the undisclosed

income returned is not accepted by the Officer and any addition is made to the income so returned,

then the assessee will not be entitled to immunity from penalty on the tax payable on the undisclosed

income returned as a matter of right. However, the fact that immunity from penalty is not available as

a matter of right does not mean that penalty in respect of undisclosed income returned by the assessee

is automatic. It is still within the discretion of the Assessing Officer to consider penalty with reference

to income returned by the assessee also. The 2nd proviso to the main Section states that penalty is

mandatory in respect of undisclosed income assessed over the undisclosed income returned by the

assessee pursuant to notice issued by the Officer as stated above. In other words, what the section

means is that whatever is the income assessed by way of addition to undisclosed income, the same

shall be treated as income concealed by the assessee and the assessee has no escape from penalty. Of

course, the said section provides that the Assessing Officer has discretion to levy penalty from

minimum to maximum as provided under the main section depending on facts and circumstances of

each case. From the above, we conclude the scope of the said section as follows:-

(1) Where the income finally assessed under section 158BC(c) of the Act is the only undisclosed

income returned by the assessee based on return filed under Sub Clause(a) of Section 158BC and the

assessee has complied with all the conditions of clauses (i) to (iv) of the first proviso, i.e. payment of

tax on the undisclosed income or request to the Officer to adjust full tax against cash if any seized and

held by the Department sufficient to adjust the tax and if the assessee files statement that no appeal

will be filed against the undisclosed income returned and assessed based on return filed, no penalty

could be levied.

(2) Penalty will be leviable in all cases where undisclosed income finally assessed under sub Section

(c) of Section 158BC is in excess of the undisclosed income returned by the assessee in the return

filed under clause (a) of Section 158BC. In such cases, there is no complete immunity from penalty on

the tax payable on the undisclosed income returned by the assessee even though the assessee has

complied with all the conditions of clauses (i) to (iv) of the 1st proviso as stated above. This is

because the assessee in such a case will be treated as partly dishonest and partly honest and therefore

the penalty will certainly in the discretion of the Assessing Officer. Of course if the addition made

when compared to the undisclosed income returned by the assessee is relatively small and if the

assessee had complied with the conditions of the proviso on the undisclosed income returned by the

assessee then certainly the officer will not be justified in levying penalty with reference to the tax

payable on the total income assessed under sub Section (c), which includes tax on undisclosed income

returned by the assessee. On the other hand, if on final assessment under sub Section (c) of Section

158BC it is found that the addition made to the undisclosed income returned by the assessee is very

high, i.e. substantial either in absolute terms or in relation to the income returned by the assesee, then

the Officer should consider penalty on the total income assessed including undisclosed income

returned by the assessee, no matter the assessee has complied with the conditions of the first proviso

above referred in respect of the undisclosed income returned by the assessee. In other words, the

assessee's dishonesty outweighs the little honesty shown by him and so much so, penalty should be

levied with reference to the tax payable on the entire income assessed. So far as range of penalty

between 100% to 300% of tax is concerned it will depend upon the nature of concealment, conduct of

the assessee etc. which will have to be considered while fixing quantum of penalty.

10. Applying the above principle to the facts of this case, we notice that the addition made to the

returned undisclosed income is around to 25% of the disclosed income. Therefore, it is not a case of

minor addition to the disclosed income or a case of substantial addition to the income disclosed by the

assessee. Therefore, we do not think it is a case of levy of maximum penalty. However, the assessee's

contention regarding the immunity from penalty on the tax payable on the undisclosed income

returned by them is concerned, we are unable to agree with the findings of the Tribunal because of the

payment of tax in instalments under orders issued by the Commissioner of Income Tax is not in

compliance with the requirement of clauses (ii) and (iii) of the first proviso to the said Section, which

requires payment of full tax on the undisclosed income returned either prior to or along with filing of

return and production of proof of payment of tax along with the return so filed. The assessee's

financial difficulty which found acceptance by the Commissioner in granting instalment facility for

payment of tax and the compliance of the said direction of the Commissioner, is no substitute for the

mandatory requirements of clauses (ii) and (iii) of the 1st proviso above stated. Probably these are

matters which the Assessing Officer has to consider i.e. whether penalty should be levied with

reference to the undisclosed income returned by the assessee without payment of tax along with the

return filed by it, or the assessee forfeits the right of immunity from penalty, which in any case will

not be available to the assessee because of the 2nd proviso by which the benefits of the first proviso

will not be available to the assessee as a matter of right, if the undisclosed income assessed is more

than the undisclosed income returned by the assessee.

11. We therefore, hold that in view of the application of the 2nd proviso, the assessee is not entitled to

complete immunity from payment of penalty on the undisclosed income returned by them under

clause (a) of section 158BC, not only because of their failure to comply with the provisions of clauses

(i) to (iv) of the 1st proviso but by virtue of the addition made in the assessment of substantial amount

of undisclosed income by which the assessee forfeits the benefit of the 1st proviso in regard to

immunity from penalty on the tax payable on undisclosed income returned. In view of our above

findings, we have to necessarily allow the appeal by vacating the orders of the Tribunal and that of the

first appellate authority, and therefore we do so. In the normal course we should remand the matter to

the Assessing Officer to reconsider the penalty. However, in view of the proved financial difficulty of

the assessee and in view of the discharge of tax liability in instalments granted by the Commissioner,

we feel the penalty order could be modified by excluding tax on undisclosed income returned by the

assessee but by refixing the penalty on the tax payable on the additional income assessed at twice the

amount of tax as against one time fixed by the CIT (Appeals) and confirmed by the Tribunal. This

I.T.Appeal is allowed in part as stated above.