SHRI YASH BHATIA,KOTA vs. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE, KOTA

During the course of hearing, the ld AR submitted that the assessee derives income from salary and income from other sources. He filed his return of income u/s 139(1) on 30.03.2012 at total income of Rs.5,41,460/-. A search was carried out on 03.03.2016 at his residential premises. In response to notice issued u/s 153A, he filed the return on 27.09.2016 declaring the same income. During the course of assessment proceedings when assessee prepared statement of affairs, it came to his notice that salary of Rs.70,000/- from M/s Ganpati Royal Residency (unit of M/s Bhatia Infrastructure Pvt. Ltd.) which was credited in his account but not actually received was left to be included in the income by mistake. Accordingly, he filed revised computation of total income and offered the same for taxation. The AO added the same to the total income of assessee. On this addition, he initiated penalty proceedings u/s 271(1)(c) of IT Act on account of concealment of the particulars of income. In penalty proceedings, the AO held that it is a case where assessee has suppressed his income by way of not disclosing his correct income in the regular return. Accordingly by referring to Explanation 5A to section 271(1)(c), he imposed penalty on such addition of Rs.70,000/-.

Before Ld. CIT(A), the assessee submitted that since no incriminating material was found during search, addition made by the AO is not sustainable in law. Only because addition has been made to the income would not lead to penalty u/s 271(1)(c). Further omission of salary from income declared in the ROI filed u/s 153A was a bonafide mistake. On such bonafide mistake, no penalty is leviable. The ld. CIT(A) rejected the explanation of assessee by relying on the decision of Hon’ble Kerala High Court in case of E.N. Gopakumar where it was held that assessment proceedings generated by the issuance of notice u/s 153A can be concluded against the interest of assessee including making additions even without any incriminating material being available against the assessee in the search u/s 132. He further held that M/s Bhatia Infrastructure Pvt. Ltd. is a group concern wherein Sh. Prem J. Bhatia and Sh. Ram J. Bhatia are directors. Assessee is the son of Sh. Prem J. Bhaita. The assessee not being aware of salary credited to him by such group company is not a credible explanation. In the immediately preceding year, the assessee has been credited salary by another group concern Bhatia Automobiles Pvt. Ltd. wherein also Sh. Prem J. Bhatia and Sh. Ram J. Bhatia are directors but the salary was not declared by him in the return of income filed u/s 153A. Similarly in case of other group company namely M/s Bhatia Corporation Pvt. Ltd. wherein also Sh. Prem J. Bhatia and Sh. Ram J. Bhatia are directors, the company credited salary to Smt. Shiva Bhatia who is the daughter of Sh. Ram J. Bhatia but the salary was not declared by her in the return of income filed u/s 153A. Thus, the explanation furnished by the assessee as to why salary from M/s Bhatia Infrastructure Pvt. Ltd. was not offered to tax in the return of income filed u/s 153A is not a bonafide explanation. Accordingly, she confirmed the levy of penalty on the salary income of Rs. 70,000/-.

In the aforesaid background, the ld. AR submitted that only dispute in the present case is levy of penalty on the alleged undisclosed salary income of Rs.70,000/- credited to the account of assessee by M/s Ganpati Royal Residency (unit of M/s Bhatia Infrastructure Pvt. Ltd.).It is submitted that assessee filed the original return of income on 30.03.2012. The time limit for service of notice u/s 143(2) was upto 30.09.2012. No notice was issued to the assessee before this date. Thus, the assessment proceedings for the year under consideration were not pending on the date of search. In search, no incriminating material indicating any undisclosed income for the year under consideration was found. The completed assessment can be interfered with by the AO while making assessment u/s 153A only on the basis of the incriminating documents found in search. Thus, when no incriminating documents for the year under consideration were found, addition made by the AO in assessment proceedings u/s 153A is illegal and bad in law. The Hon’ble ITAT, Jaipur Bench in case of Shri Navrattan Kothari Vs. ACIT order dated 13.12.2017 held that assessment or reassessment of income of person other than searched persons based on seized material can be made u/s 153C r.w.s. 153A and has overriding effect on section 147/ 148. In the present case, addition made by the AO is not on the basis of any material seized during the search proceedings. Hence, addition made by the AO in the assessment framed u/s 153A is incorrect. The addition, if any, could have been properly made by invoking the provisions of section 147 of the IT Act. Therefore, when addition made by the AO is itself illegal & bad in law, penalty levied on such addition is also not sustainable. The ld. CIT(A) rejected this explanation of assessee by relying on the decision of Hon’ble Kerala High Court in case of E.N. Gopakumar. However, in various other cases including the decision of Supreme Court, it has been held that invocation of sec. 153A to reopen concluded assessments is not justified in absence of incriminating material found during search. Further, in assessee’s own case also, the Hon’ble ITAT vide order dated 27.09.2019 in ITA No.1034/JP/18 has held that in absence of any incriminating material found or seized during the course of search, addition cannot be made by the AO in the proceedings u/s 153A of the Act when the assessment for the year under consideration was not pending as on the date of search. Thus, where two views are possible, the view favoring the assessee has to be adopted as held by Hon’ble Supreme Court in case of CIT Vs. M/s Vegetable Products Ltd. (1973) 88 ITR 192.

It was further submitted by the ld AR that during the course of assessment proceedings u/s 153A when the assessee prepared his statement of affairs, it came to his notice that salary of Rs.70,000/- from M/s Ganpati Royal Residency (unit of M/s Bhatia Infrastructure Pvt. Ltd.) which was credited in his account but not actually received was left to be included in the income by mistake. Accordingly, he filed revised computation of total income and offered the same for taxation. Thus, the omission of salary from income declared in the ROI filed u/s 153A is a bonafide mistake. On such bonafide mistake, no penalty is leviable. For this reliance is placed on the decision of Hon’ble Supreme Court in case of Price Waterhouse Coopers (P.) Ltd. Vs. CIT (2012) 348 ITR 306. In this case the assessee firm filed its return of income along with tax audit report. In its tax audit report it was indicated that provision towards payment of gratuity was not allowable but it failed to add provision for gratuity to its total income. It was held that it was a bona fide and inadvertent error. The same can only be described as a human error which we all are prone to make. The assessee could not be held guilty of either furnishing inaccurate particulars or attempting to conceal its income. Therefore, imposition of penalty was unjustified.

It was further submitted that the Ld. CIT(A) did not accept the explanation of assessee by holding that in immediately preceding year, the assessee has been credited salary by another group concern Bhatia Automobiles Pvt. Ltd. but the salary was not declared by him in the return of income filed u/s 153A. Similarly in case of other group company namely M/s Bhatia Corporation Pvt. Ltd., the company credited salary to Smt. Shiva Bhatia but the salary was not declared by her in the return of income filed u/s 153A. It is submitted that in these cases also, salary was credited in their accounts but was not actually received by them and therefore, it was left to be included in the income by mistake but when such mistake was noticed while preparing the statement of affair, the same was included in the income. Hence, for this reason, it cannot be inferred that the assessee has intentionally not declared the salary income in the return of income. In view of above, penalty levied by AO and confirmed by Ld. CIT(A) be directed to be deleted.

Per contra, the ld. DR is heard who has relied on the finding of the lower authorities and submitted that during the course of assessment proceedings, the Assessing officer observed that the assessee has received salary income of Rs 70,000 from M/s Ganpati Royal Residency and which has not been disclosed by the assessee in his return of income filed u/s 139 as well as under section 153A of the Act and which was brought to tax. It was accordingly submitted that it is a clear case of concealment of particulars of income and the Assessing officer has rightly levied the penalty u/s 271(1)(C) read with explanation 5A of the Act.

We have heard the rival contentions and perused the material available on record. The limited point of dispute is whether addition towards salary income made by the Assessing officer during the course of proceedings u/s 153A r/w 143(3) can form the basis for levy of penalty by invoking provisions of explanation 5A to section 271(1)(c) of the Act which reads as under:

It is a settled legal proposition that penal provisions must be strictly construed and only on satisfaction of conditions specified therein, the penalty can be levied. In the instant case, the assessee has not been found to be recipient of salary income during the course of search. The assessee is an individual deriving salary and interest income and not required to maintain books of accounts. There is nothing on record that any documents/material/information was found during the course of search which remotely indicate that the assessee is recipient of salary income. It is only during the course of proceedings u/s 153A that the Assessing officer noticed that the assessee is in receipt of salary income and which has not been disclosed by the assessee in his return and the same was accordingly brought to tax. The dispute is not that the salary income was not offered to tax by assessee in his return of income which is an admitted position but the question is whether such salary income has been found during the course of search and the answer to that in not in affirmative. In the present case, we therefore find that none of the conditions specified in explanation 5A to section 271(1)(c) is satisfied in the instant case and therefore, levy of penalty is hereby directed to be deleted.