KIRIT DAHYABHAI PATEL vs. ASSISTANT COMMISSIONER OF INCOME TAX

O/TAXAP/1181/2010 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 1181 of 2010 With TAX APPEAL NO. 1182 of 2010 TO TAX APPEAL NO. 1185 of 2010 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 ? ================================================================ KIRIT DAHYABHAI PATEL....Appellant(s) Versus ASSISTANT COMMISSIONER OF INCOME TAX....Opponent(s) ================================================================ Appearance: MR. SAURABH M SOPARKAR, SENIOR COUNSEL WITH MRS SWATI SOPARKAR, ADVOCATE for the Appellant(s) No. 1 Page 1 of 17

O/TAXAP/1181/2010 JUDGMENT MR. P.G. DESAI, ADVOCATE WITH MR SUDHIR M MEHTA, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Date : 03/12/2014 COMMON ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. As all these arise out of the common order of the Income Tax Appellate Tribunal, they are being disposed of by this common judgment. 2. By   way   of   these   appeals,   the   appellants­ assessees have challenged the common order dated   17. 07.2009, passed by the Income Tax Appellate Tribunal [for short “the Tribunal”] in ITA Nos. 2344, 2345, 2346,   2348   and   2389/Ahd/2007,   whereby   the   appeal preferred by the revenue were partly allowed by the Tribunal. 3. In all these appeals, the facts and question of law are identical, therefore, we discuss only the facts of Tax Appeal No.1181 of 2010 for convenience. 4. The appellant­assessee had filed its return of   income   for   the   Assessment   Year   2002­03   on 07.06.2002, declaring total income at Rs.1,30,900/­. A search under Section 132 of the Income Tax Act, 1961 [for short”the act”] was conducted in the assessee’s residential   and   office   premises   on   04.09.2003.   In Page 2 of 17

O/TAXAP/1181/2010 JUDGMENT response to the notice under Section 153(1)(a) of the Act,   the   assessee­appellant   disclosed   additional income over and above the income which was declared in the   original   return.   Thereafter,   the   assessment proceedings under Section 153(1)(b) of the Act were completed on 20.03.2006 and the return of income in pursuance to the search was accepted. Simultaneously, penalty proceedings were also initiated under Section 271(1)(C)   of   the   Act   as   the   appellant   disclosed additional income in pursuance of the search. However, the Assessing Officer rejected the contention of the appellant and levied penalty @ 100% of the tax sought to be evaded. 4.1. Against the order of the Assessing Officer, the   appellant   preferred   an   appeal   before   the Commissioner   of   Income   Tax   (Appeals).   The   CIT(A) allowed   the   said   appeal   and   deleted   the   penalty imposed by the Assessing Officer. Against the order of the CIT(A), the respondent­revenue preferred an appeal before   the   Income   Tax   Appellate   Tribunal.   However, there   was   a   difference   of   opinion   between   the Accountant   Member   and   the   Judicial   Member   and   both rendered   their   separate   orders   on   24.02.2009. Therefore, the matter was referred to a Third Member, who, after giving his opinion referred the matter to the Division Bench of the Tribunal for passing the final   order.   Thereafter,   the   Division   Bench   of   the Tribunal   passed   the   final   order   and   allowed   the revenue’s appeal by its order dated 17.07.2009. Hence, these   appeals   are   filed   at   the   instance   of   the Page 3 of 17

O/TAXAP/1181/2010 JUDGMENT assessees. 5. While admitting these appeals on 29.08.2011, the   Court   has   formulated   the   following   substantial question of law:­ “Whether in the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in restoring the penalty imposed under Section 271(1)(c) of the Act holding that benefit under explanation 5 to Section   271(1)(c)   of   the   Act   would   be available only for period where due date for filing   the   return   under   Section   139(1)   of the Act had not expired ?” 6. Mr. Soparkar, learned senior counsel for the appellants   has   submitted   that   the   Tribunal   has committed error in restoring the penalty imposed by the Assessing Officer and in setting aside the order of the CIT(A). He further submitted that the Tribunal has failed to appreciate the fact that the penalty under Section 271(1)(c) of the Act could be levied only   if   there   is   no   variation   between   the   income assessed   and   the   income   filed   in   the   return   under Section 153A of the Act. 6.1. Learned counsel for the appellants contended that the Tribunal has failed to appreciate the fact that   the   Assessing   Officer   had   dropped   the   penalty proceedings in the case of another member of the same Page 4 of 17

O/TAXAP/1181/2010 JUDGMENT group for the Assessment Years 2003­04 and 2004­05. 6.2. Learned   senior   counsel   for   the   appellants has taken us to the order of CIT (Appeals) as well as the judgment of the Tribunal and contended that the Tribunal   has   relied   upon   the   decision   of   other Tribunals and the decision of the Bombay High Court for   passing   the   impugned   judgment,   however,   it   has ignored the judgments of the Madras High Court and Rajashtan High Court, which squarely govern the issue involved in these appeals. Therefore, learned counsel for the appellant submitted that the decision of the Tribunal is required to be quashed and set aside. 6.3. In support of his contentions, he relied the following judgments:­ (i) Commissioner   of   Income   Tax   Vs.   Chhabra Emporium [264, ITR 249(Delhi)] (ii) Commissioner   of   Income   Tax   Vs.   S.D.V. Chandru [266 ITR 175 (madras)] (iii) Gebilal   Kanbhaialal   (HUF)   Vs.   Assistant Commissioner   of   Income   Tax   [270   ITR   523 (Rajashtan)] (iv) Assistant   Commissioner   of   Income   Tax   Vs. Gebilal Kanhailal HUF [ 348ITR 561 (SC) ] (v) Commissioner of Income Tax Vs. Kanhaiyalal Page 5 of 17

O/TAXAP/1181/2010 JUDGMENT [299 ITR 19 (Rajashtan)] (vi) Commissioner of Income Tax Vs. Radha Kishan Goel [ 278 ITR 454 (Allahabad)] (vii) Commissioner of Income Tax Vs. Abdul Rashid [40 taxman.com 244 (Chattisgarh)] (viii) S.M.J.   Housing   Vs.   Commissioner   of Income Tax, Central­II [ 2013] 38 taxman.com 203 (Madras). (ix) Commissioner of Income Tax, West Bangal Vs. Vegetable Products Ltd.[88 ITR page 192]. 6.4. Learned   senior   counsel   for   the   appellants contended that in view of above submissions and in view   of   the   above   decisions,   the   present   appeals deserve to be allowed. 7. On the other hand, learned advocate for the respondent­revenue   has   supported   the   order   of   the Tribunal and submitted that the order of the Tribunal is just and proper and no interference is required to be called for. He has relied upon the decision of the Delhi High Court in the case of  Shourya Towers (P.) Ltd. Vs. Deputy Commissioner of Income Tax, reported in  [2013]   30   taxmann.com   10,  more   particularly paragraph Nos. 13 and 14, which reads as under:­ “13. From the record, this Court notices Page 6 of 17

O/TAXAP/1181/2010 JUDGMENT that   after   the   search,   and   the  statement recorded   under   Section   132   (4),   the assessee, on being issued with notice under Section 153A did not file any return. The notice under Section 153A was issued on 20­ 7­2006.   It   was   only   when   assessment proceedings were taken up for consideration, did the assessee, by letter dated 14­8­2007, request,   that   its   return,   filed   on   31­10­ 2005,   be   treated   as   its   return   filed   in response to the notice under Section 153A. Much   later,   it   sought   to   revise   its computation, on 14­12­2007. Therefore, this Court   is   of   the   opinion   that   the  “escape route”,   provided   by   Clause   (2)   to Explanation   5   in   this   case,   was   not available   to   the   assessee.   It   has   to   be reiterated   that   the   said   provision   is available, not merely when the assessee, in his statement offers or surrenders, to tax the   amount   in   question   which   is   later assessed, but also complies with the other conditions, of having filed the return. The allusion to Section 139 (1) is significant in   this   regard,   because   a   notice   and consequent   search   assessment   pursuant   to Section 153A stands excluded, altogether, by virtue   of   the  non­obstante  clause   to   the latter (Section 153A) provision. Even if the other view, more favourable to the assessee were to be taken, and for a moment, a return Page 7 of 17

O/TAXAP/1181/2010 JUDGMENT under   Section   153A   were   to,  arguendeo  be assumed to be covered as one under Section 139   (1),   the   fact   remains,   that   in   this case,   the   assessee   did   not   include   it, pursuant to the notice issued, and instead chose   to   merely   reiterate   its   return originally filed on 31­10­2005. 14. This Court is also of the opinion that   a   plain   reading   of   Clause   (2)   to Explanation   5   (to   Section   271   (1)   (c)) altogether excludes its application to cases where   returns   are   filed   under   Section   139 (1).   This   clause,   in   the   opinion   of   the Court,   extends   to   those   cases,   falling   in clause (b) of the excepted part, i.e. where the return of year is yet to be filed, in respect of a previous year, during which the search took place. This is because of the expression  “in his return of income to be furnished   before   the   expiry   of   time specified   in   sub­section   (1)   of   section 139..”.   If   Parliament   had   intended   clause (2) (to Explanation 5) to cover all other categories,   then,   having   regard   to   the structure   and   placement   of   the   main provision,   which   is   specially   intended   to cover   search   assessments,   such   intention would have been manifest if there were no reference   to   Section   139   (1)   and   instead, Section 153 A were to be used. That this is Page 8 of 17

O/TAXAP/1181/2010 JUDGMENT the   correct   position   is   also   evident   from the  non obstante clause under Section 153A, which   was   resorted   to   by   the   AO   in   this case.” 8. We   have   heard   learned   advocates   for   the parties   and   perused   the   material   on   record.   Before dealing with the contentions, it would be relevant to reproduce Explanation 5 to Section 271 (1) (c) of the Income Tax Act, which reads as under:­ “Explanation 5. Wherein 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, wherein   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 Page 9 of 17

O/TAXAP/1181/2010 JUDGMENT 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 sub­section (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 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   of   such   income   is   otherwise disclosed   to   the   [principal   Chief Commissioner   or   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   sub­section   (4)   of Page 10 of 17

O/TAXAP/1181/2010 JUDGMENT section   132   that   any   money,   bullion, jewelery   or   other   valuable   article   of thing   found   in   his   possession   or   under his control, has 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   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.” 9. The   High   Court   of   Madras   in   the   case   of S.D.V.Chandru (supra)  held that in a case where the asseessee had not disclosed his income in the returns filed for the previous year which have ended prior to the date of the search and, in the statement given under Section 132(4) the assessee admitted the receipt of   undisclosed   income   for   those   years   and   also specified the manner in which   such income had been derived   and   thereafter   pays   the   tax   on   that undisclosed   income   with   interest,   then   such undisclosed income would get immunised from the levy of penalty. 10. Looking   to   the   facts   and   circumstances   of the case, it would be relevant to refer the decision relied   upon   by   learned   senior   advocate   for   the appellant in the case of  Gebilal  Kanbhaialal  (HUF) Page 11 of 17

O/TAXAP/1181/2010 JUDGMENT (supra), wherein the Apex Court in paragraph No.6 has observed as under:­ “6. Explanation 5 is a deeming provision. It   provides   that   where,   in   the   course   of search   under   Section   132,   the   assessee   is found to be the owner of unaccounted assets and   the   assessee   claims   that   such   assets have   been   acquired   by   him   by   utilizing, wholly   or   partly,   his   income   for   any previous   Year   which   has   ended   before   the date   of   search   or   which   is   to   end   on   or after the date of search, then, in such a situation, notwithstanding that such income is declared by him in any return of income furnished on or after the date of search, he shall   be   deemed   to   have   concealed   the particulars of his income for the purpose of imposition of penalty under Section 271(1) (C). The only exceptions to such a deeming provision   or   to   such   a   presumption   of concealment are given in sub­clauses (1) and (2) of Explanation 5. In this case, we are concerned with interpretation of clause (2) of   Explanation   5,   which   has   quoted   above. Three conditions have got to be satisfied by the   assessee   for   claiming   immunity   from payment   of   penalty   under   clause   (2)   of Explanation 5 to Section 271(1(C). The first condition was that the assessee must make a statement under Section 132(4) in the course Page 12 of 17

O/TAXAP/1181/2010 JUDGMENT of   search   stating   that   the   unaccounted assets   and   incriminating   documents   found from his possession during the search have been acquired out of his income, which has not been disclosed in the return of income to   be   furnished   before   expiry   of   time specified in Section 139(1).  Such statement was   made   by   the   Karta   during   the   search which concluded on August 1, 1987. It is not in   dispute   that   condition   No.1   was fulfilled. The second condition for availing of the immunity from penalty under Section 271(1)(C)   was   that   the   assessee   should specify,   in   his   statement   under   Section 132(4),   the   manner   in   which   income   stood derived.  Admittedly,   the   second   condition, in   the   present   case   also   stood   satisfied. According   to   the   department,   the   assessee was   not   entitled   to   immunity   under   Clause (2) as he did not satisfy the the condition for   availing   the   benefit   of   waiver   of penalty   under   Section   271(1)(c)   as   the assessee failed to file his return of income on   31st  July,   1987   and   pay   tax   thereon particularly when the assessee concealed on August 1, 1987 that there was concealment of income. The third condition under clause (2) was   that   the   assessee   had   to   pay   the   tax together with interest, if  any, in respect of such undisclosed income. However, no time limit   for   payment   of   such   tax   stood Page 13 of 17

O/TAXAP/1181/2010 JUDGMENT prescribed   under   clause(2).   The   only requirement   stipulated   in   the   third condition was for the assessee to “pay tax together   with   interest”.   In   the   present case,   the   third   condition   also   stood fulfilled.   The   assessee   has   paid   tax   with interest upto the date of payment. The only condition which was required to be fulfilled for getting the immunity, after the search proceedings got over, was that the assessee had to pay the tax together   with interest in respect of such undisclosed income upto the   date   of   payment.   Clause(2)   did   not prescribe   the   time   limit   within   which   the assessee should pay tax on income disclosed in the statement under Section 132(4).” 11. Even, the High Court of Chattisgarh in the case of Abdul Rashid(supra) has held that in order to get   the   benefit   of   immunity   under   clause(2)   of explanation­5 to Section 271(1)(c) of the Income Tax Act, it is not necessary to file the return before the due   date   provided   that   the   assessee   had   made   a statement, during the search and explained the manner in which the surrendered amount was derived, and paid tax as well as interest on the surrendered amount. 12. At this stage, it is required to be noted that the Apex Court in the case of  Commissioner of Income   Tax,   West   Banagal­I   Vs.   Vegetable   Products Page 14 of 17

O/TAXAP/1181/2010 JUDGMENT Ltd. (supra),  has held that if the Court finds that the language of a taxing provision is ambiguous or capable of more meaning than one, then the Court has to adopt the interpretation which favours the assesee, more particularly so where the provision relates to the imposition of a penalty. 13. Considering   the   facts   and   circumstances   of the   case   and   also   considering   the   decisions   relied upon by learned senior advocate for the appellant, we are of the considered opinion that the view taken by the   Tribunal   is   erroneous.   The   CIT(A)   rightly   held that it is not relevant whether any return of income was filed by the assessee prior to the date of search and whether any income was undisclosed in that return of income. In view of specific provision of Section 153A of the I.T. Act, the return of income filed in response to notice under Section 153(a) of the I.T. Act is to be considered as return filed under Section 139   of   the   Act,   as   the   Assessing   Officer   has   made assessment   on   the   said   return   and   therefore,   the return is to be considered for the purpose of penalty under   Section   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 Section 153A, if any. 14. Further,   in   the   present   case,   it   appears from the record that the assessees had satisfied all the   conditions   which   are   required   for   claiming immunity from payment of penalty under Section 271(1) Page 15 of 17

O/TAXAP/1181/2010 JUDGMENT of the Act. The provision does not specify any time limit   during   which   the   aforesaid   amount   i.e.   the amount   of   penalty   with   interest   has   to   be   paid. Admittedly   when   the   assessees   herein   have   paid   the entire   amount   with   interest,   the   Assessing   Officer ought to have granted them immunity available under Section 271(1)(C ) of the Income Tax Act. 15. The decision relied upon by learned advocate for the respondent will not apply to the facts of the present case. 16. In view of the aforesaid facts of the case and   also   the   principle   laid   down   in   the   decisions relied   upon   by   the   learned   senior   counsel   for   the appellant more particularly the principle laid down in the case of Assistant Commissioner of Income Tax Vs. Gebilal Kanhailal (supra) and Commissioner of Income Tax   Vs.   Abdul   Rashid   (supra),     we   are   of   the considered   opinion   that   the   penalty   under   Section 271(1)(C) of the Income Tax Act cannot be levied on the income shown in the return filed under Section 153 of the I.T. Act. 17. Considering   the   facts   and   circumstances   of the   case   and   also   considering   the   decision   of   the Madras   High   Court   in   the   case   of   S.D.V.   Chandu (supra), we are of the opinion that the appellant is entitled   to   the   benefit   of   the   provisions   of Explanation 5(2) to Section 271(1)(c) of the Income Tax Act. Page 16 of 17

O/TAXAP/1181/2010 JUDGMENT 18. For   the   foregoing   reasons,   the   present appeals stand allowed. The order of the Tribunal is quashed and set aside. Consequently, the order of the CIT(A) is restored. The question of law involved in this appeals is answered in favour of the assessee and against the revenue. (K.S.JHAVERI, J.) (K.J.THAKER, J)

pawan Page 17 of 17