ASSTT. CIT, CC-2 BARODA V. NATUBHAI M. MAKWANA

TAXAP/234/2007

AI Insights

The case involves appeals by the Revenue against the ITAT's decision which deleted a penalty imposed on the assessee, Natubhai M. Makwana, for not paying the full tax on undisclosed income revealed during a search and seizure operation. The ITAT had found that the assessee had paid a substantial portion of the tax along with interest, and thus, the imposition of penalty was not justified. The Revenue contended that the ITAT misinterpreted the law, arguing that the penalty should be mandatory for any shortfall in tax payment on undisclosed income. The High Court upheld the ITAT's decision, agreeing that the penalty is discretionary and dependent on the circumstances of each case.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 739837 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 23-12-2014
• Assessment Year: misc
• Other Referred Cases: CIT VS. HARKARAN DAS VED PAL, CIT VS. BECHARBHAI P. PARMAR
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: B S SOPARKAR; SWATI SOPARKAR
• Assessee Lawyers: K M PARIKH
• Keywords: Block assessment; Penalty; Search and seizure; Tax payment; Undisclosed income
• Section: 271(1)(c); 132; 158BC; 158BFA(2)

Judgement Text

"O/TAXAP/232/2007 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 232 of 2007 With TAX APPEAL NO. 234 of 2007 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER =========================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ ASSTT. CIT, CC-2 BARODA....Appellant(s) Versus NATUBHAI M. MAKWANA....Opponent(s) ================================================================ Appearance: MR KM PARIKH, ADVOCATE for the Appellant(s) No. 1 MR BS SOPARKAR, MRS SWATI SOPARKAR, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Date : 23/12/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE K.J.THAKER) 1. Since, the issue involved in both the Page 1 of 13 O/TAXAP/232/2007 JUDGMENT appeals is common, they are heard together and disposed off by this common judgment. 2. By way of these appeals, the appellant- Revenue has felt aggrieved by the order of the ITAT, Ahmedabad Bench ‘A’ (for short, ‘the Tribunal’), Dated : 14.06.2006, rendered in IT(SS)A. Nos. 32 & 15/Ahd/2006 for Block Assessment from 01.04.1996 to 02.07.2002 and by the dismissal of the appeal filed by the Revenue, challenging the order of the learned CIT(A) and allowing the assessee’s appeal. 3. At the time of admission, this Court framed following question of law for consideration in both appeals; “Whether the ITAT was right in law and on facts in deleting the penalty of Rs.12,83,290/imposed u/s.158BFA(2) of the IT Act, 1961 more particularly when the Assessee has failed to pay the tax in its entirety on the undisclosed income?” 4. Before adverting to the provisions of law, it would be relevant to advert to the factual scenario, which emerges as follows; 5. A search and seizure was carried out in the case of assessee under Section 132 of the Income Tax Act, 1961 (‘the Act’, for short) on Page 2 of 13 O/TAXAP/232/2007 JUDGMENT 02.07.2002. Pursuant thereto, the assessee was issued a notice under Section 158BC of the Act on 30.12.2002, requiring him to file block return in respect of undisclosed income. The assessee filed the same on 26.07.2004, declaring total income for the block period at Rs.20,36,971/-. The tax payable on the aforesaid income was worked out at Rs.12,83,293/-. The assessee filed block return with proof of payment of tax to the tune of Rs.7,36,000/-. Since, according to the Revenue, the assessee had failed in making full payment of the tax, penalty proceedings under Section 158BFA(2) came to be initiated against the assessee and the assessee was issued a penalty notice on 30.07.2004. The assessee, hence, approached the CIT(A) by way of an appeal. The CIT(A) allowed the same in part. The Revenue as well as the assessee carried the matter before the Tribunal, wherein, it passed the impugned order, as referred to in Paragraph-1, herein above. 6. The main contention raised by Mr. Parikh, learned Advocate for the appellant-Revenue in both the appeals, is that the Tribunal’s finding that penalty under Section 271(1)(c) and Section 158BFA(2) of the Act are akin to each other is bad, as the assessee-respondent, herein, failed to pay tax in its entirety on the undisclosed income, which was disclosed during the search and seizure proceedings. It is, further, submitted that as Page 3 of 13 O/TAXAP/232/2007 JUDGMENT the assessee failed to disclose the income fully and truly, CIT(A) as well as the Tribunal both committed an error. The first appellate authority restricted the quantum of penalty to the extent of Rs.5,47,293/-, whereas the Tribunal gave a complete go-bye to the penalty, which, according to Mr. Parikh, is due to misreading of Act that no penalty under Section 158BFA of the Act could be levied. He, further, contended that the Tribunal has misinterpreted the provisions of Section 158BFA of the Act, which is contrary to the provisions of law. He submitted that the Tribunal has erred in law and on facts in deleting the penalty of Rs.12,83,290/- imposed u/s. 158BFA(2) of the Act, more particularly, when the assessee has failed to pay the tax in its entirety on the undisclosed income. It is submitted that the AO had levied penalty of Rs.12,83,290/- u/s. 158BFA(2) of the Act as the assessee had failed to pay the tax on the undisclosed income fully. The assessee had failed to pay the tax on the undisclosed income fully. The assessee had paid tax only of Rs.7,36,000/- as against Rs.12,83,293/- on undisclosed income of Rs.20,36,971/- in the block return. The AO, therefore, levied the penalty of Rs.12,83,290/- u/s.158BFA(2). The first appellate authority has restricted the quantum of penalty to Rs.5,47,290/- allowing the assessee a relief of Rs.7,36,000/- on account of part payment of tax. Against the order Page 4 of 13 O/TAXAP/232/2007 JUDGMENT of the CIT(A), the Revenue as well as the assessee preferred appeal before the Tribunal. The Tribunal held that the assessee had paid the balance tax along with interest after the block assessment voluntarily without agitating by way of further proceedings. Considering the above facts, the Tribunal observed it it was not a case of concealment, and hence, the appeals require to be allowed. 7. In this background, per contra, Mr. Soparkar, learned Advocate for the respondent- assessee in each appeal, submitted that the findings of facts recorded by both the authorities below support the case of the assessee, which also turns out from the factual scenario, as it emerges from Para-11 of the order of the Tribunal, that the assessee paid the tax in its entirety along with interest. 8. Mr. Soparkar, in support of his case, placed reliance on a decision of the Delhi High Court in the case of “CIT VS. HARKARAN DAS VED PAL”, [2011] 336 ITR 8 (Delhi), in that case the Delhi High Court held that the computation of undisclosed income by the AO could not be construed as ‘undisclosed income determined by the AO under clause(c) of section 158BC” and the undisclosed income had been computed merely on the basis of surrender made by the assessee in the Page 5 of 13 O/TAXAP/232/2007 JUDGMENT court of the block assessment proceedings. The Delhi High Court, further, held that de hors the surrender, there was no evidence which could have been said to have been found as a result of search. Therefore the Tribunal was correct in law in canceling the penalty imposed by the AO. 9. Mr. Soparkar also invited our attention to a decision of this Court in “CIT VS. BECHARBHAI P. PARMAR”, [2012] 342 ITR 499 (Guj.), wherein, this Court has held as under in Paragraphs-13, 13.1, 13.2 and 14; “13. We are further of the opinion that the Tribunal deleted penalty on the grounds which were simply not permissible. As already noted, penalty on the grounds of addition of Rs. 7.23 lacs and Rs. 2 lacs was deleted observing that the findings of the Assessing Officer is mere presumption and that nothing incriminating was found which would reveal that the assessee had incurred such an expenditure. We are afraid, such an observation would amount to reopening the question of quantum addition which had attained finality by virtue of the decision of the Tribunal. 13.1 Penalty on the income of Rs. 4.60 lacs was deleted observing that though the assessee had failed to produce supporting evidence, for mere absence of supporting evidence, it cannot be held that such agricultural income did not exist. Such observation again, in our opinion, would amount to reopening the closed issues of addition Page 6 of 13 O/TAXAP/232/2007 JUDGMENT sustained upto the level of the Tribunal. Surely, the Tribunal, while considering the penalty proceedings could not have overruled the previous findings which had attained finality. 13.2 Penalty corresponding to addition of Rs. 17.22 lacs was deleted on the ground that the assessee had demonstrated that there was estimation of additions and that therefore, no penalty could be levied. Here again, we are of the opinion that the Tribunal interfered with the penalty on the ground which was not permissible. Additions made on the basis of estimation may be one of the grounds on which discretion not to impose penalty may be exercised. However, in absence of any requirement to prove concealment or furnishing of inaccurate particulars found in Section 271 [1](c) of the Act cannot form the sole basis to delete penalty imposed by the Assessing Officer and confirmed by Commissioner [Appeals]. 14. We are, therefore, of the opinion that the Tribunal committed a grave error in interfering with the penalties imposed by the Assessing Officer and confirmed by the CIT [A] on the grounds mentioned in the order. In other words, exercise of discretion by the Tribunal cannot be sustained. We are,therefore, inclined to set aside the Tribunal's order and restore it to the Tribunal for fresh consideration and disposal in accordance with law.” 10. Mr. Soparkar, therefore, prayed that the present appeal be dismissed as being without merit. Page 7 of 13 O/TAXAP/232/2007 JUDGMENT 11. Heard, Mr. Parikh, learned Advocate for the appellant, and Mr. Soparkar, learned Advocate for the assessee in each appeal, and also perused the material on record, including the orders of the CIT(A) and the Tribunal. 12. Going through the provisions of Section 158BFA of the Act, it appears that the penalty, which is envisaged and which can be imposed, though, is different from the penalty under Section 271(1)(c) of the Act, under sub-Section (2) of Section 158BFA of the Act, the requirements of Section 271(1)(c) are not to be looked into. The Tribunal while dismissing the appeal of the Revenue, in Paragraph-11 of its order held in favour of the assessee, by interpreting the provisions of Section 158BFA. The findings are as under; “11. Now coming to the appeal filed by the assessee, as pointed out earlier, the facts are not in dispute. It was submitted by assessee before AO that out of total sum of Rs.12,83,293/- (being total tax payable with respect to block period return) a sum of Rs.7,36,000/- was paid being more than 60% of the total demand. It has also been stated that balance demand along with interest was paid in installments as under. (a) 13-13-2004 Rs.1,86,033/- Page 8 of 13 O/TAXAP/232/2007 JUDGMENT (b) 20-01-2005 Rs.3,00,000/- (c) 21-12-2005 Rs.2,00,000/- (d) 28-02-2005 Rs.2,00,000/- Rs.8,86,033/- The above payment include interest @ 1.25% up to the date of completion of assessment. It was informed by the AR that assessee did not contest the block period assessment Order by way of an appeal. Thus admittedly taxes have been paid along with interest levied by the revenue. Analysis of decisions relied upon by the ld. AR shows that levy of penalty under section 158BFA(2) is not mandatory but discretionary. Co- ordinate Bench in the case of Gandhi Service Station (Supra) has held that provision of section 158BFA(2) are not mandatory but discretionary and assessee’s explanation has to be considered. It is further held that penalty under section 158BFA are akin to section 271(1)(c) of the Act and in sum and substance the department has to prove the factum of concealment. It will be relevant to reproduce the following observations of Co-ordinate Bench in the case of Gandhi Service Station (Supra) “6. We have heard rival submission and perused material available on record. We shall up merits of the case first. It emerges from the record that rough casebook found at the residential premises of the said AN was tallied with regular books of account maintained by the Page 9 of 13 O/TAXAP/232/2007 JUDGMENT assessee-firm at the time of search. Subsequently, assessee produced its regular books of account before DDI in which some insertions, corrections were there, apropos which, explanation of the partner is that petrol pump was at village and cash was carried to Surat which was deposited in the bank by the partners together with loans. Accountant was not aware of these loans and wrote books accordingly. When the assessee came to know about these discrepancies, necessary entries were corrected in the cashbook in place of writing new sets of books. One of the reasons may be perhaps, that regular books of accounts were subject matter of search proceedings. Assessee filed, confirmations of all the depositors, which contained names and addresses, in consideration of all these material, assessee furnished explanation in respect to corrections, insertions and cash credits. Assessee volunteered to produce creditors but only one day’s time was given. Be that as it may, additions are now confirmed and we are concerned with imposition of penalty under s. 158BFA. Assessee relied on Tribunal judgment in the case of Nemichand Vs. Asst.CIT(Inv.) (Supra), and Smt. Mala Dayanidhi Vs. Dy.CIT(Supra). Tribunal has taken a view that s.158BFA is not mandatory but discretionary and the assessee’s explanation has to be considered. We find merit in the contentions of the learned Page 10 of 13 O/TAXAP/232/2007 JUDGMENT counsel that this penalty proceeding is akin to s.271(1)(c) proceedings, main clause and in sum and substance Department has to prove factum of concealment. Quantum and penalty proceedings are distinct and separate and while deciding the issue of penalty, facts can be reconsidered. In the given facts and circumstances, assessee’s explanation to confirmations, etc. have been rejected on assumptions drawing adverse inference based on probabilities, i.e., existence of insertions and corrections and probability of accountant knowing facts of cash credit. Since we hold that it was burden of the Department, AO should have separately investigated matter in penalty proceedings by calling these parties and accountant IO discharge burden. In the given facts and circumstances, assessee has discharged its burden of giving explanations as well as supporting the same by filing confirmations. Our views are supported by Hon’ble Supreme Court judgment in the case of Orissa Corporation (Supra). Department would have discharged its burden by proving that assessee’s explanation was false based on only finding of facts and not on assumptions. Our views are further fortified by the decision of Hon’ble Supreme Court in the case of CIT vs. Smt. P.K. Noorjahan(1999)155 CTR (SC)509: (1999) 237 ITR 570 (SC) wherein it has been held that the word “may” in s.69 cannot be interpreted to Page 11 of 13 O/TAXAP/232/2007 JUDGMENT be “shall”. The same word appears in some context in s.68 dealing with case credit, which is applicable to assessee’s case. In view thereof, we delete penalty. Since we have deleted penalty on merits, we need; not address to the technical issue about applicability of provisions of s.158BA(1). The other case laws relied upon by ld.AR also supports the above conclusion of Co-ordinate Bench. In the aforementioned decision, one of us (i.e. A.M.) is a party. Therefore, following the above decision, we find that it is not a case where department has proved the factum of concealment. Therefore, we hold that penalty cannot be levied under the facts of present case. We may mention here that there is no force in the arguments of ld. DR that as that as taxes were not paid in their entirety, the present case should be considered on different footing from the cases relied upon by ld.AR for the reason that in view of peculiar circumstances of present case the taxes have been paid by the assessee along with interest voluntarily without agitating the same by way of further proceedings. Therefore, we accept the appeal filed by the appeal filed by the assessee and delete the penalty in its entirety.” ” 13. From the record, it is clear that in the present case, the assessee had paid Rs.7,36,000/- Page 12 of 13 O/TAXAP/232/2007 JUDGMENT earlier, which was nearly 60 per cent of the total demand, i.e. Rs.12,83,293/-, made by the Revenue, whereas, later on the assessee paid Rs.8,86,033/- in installments, which included the balance demand amount as well as the interest accrued, thereon. We are, therefore, of the opinion that Mr. Soparkar rightly submitted that the Tribunal was justified in allowing the appeal of the assessee, since, even if the provisions of Section 158BFA of the Act are seen in the light of the decision of the “CIT VS. SMT. P.K. NOORJAHAN”(Supra), the provisions of law uses the word ‘May’ and not the word ‘Shall’, which is the interpretation put forward by the Tribunal and the same does not call for any interference at the hands of this Court. 14. In the result, both the appeals fail and are DISMISSED. We hold that the ITAT was right in law and on facts in deleting the penalty of Rs.12,83,290/imposed u/s.158BFA(2) of the IT Act, 1961. The question framed in this appeal is answered in FAVOUR of the respondent-assessee and AGAINST the appellant-Revenue, accordingly. (K.S.JHAVERI, J.) (K.J.THAKER, J) UMESH Page 13 of 13 "