M. VEERABHADRAIAH,BANGALORE vs. ITO, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH ‘ B ’ BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T. A. Nos.345 & 346/Bang/2014 (Assessment Years : 2007-08 & 2008-09) Shri M. Veerabhadraiah, No.390, 6th Main, 3rd Block, 3rd Stage, Basaveswaranagar, Bangalore-560 079 …. Appellant. PAN ACNPR 7423F Vs. Income Tax Officer, Ward 9(2), Bangalore. ….. Respondent. Appellant By : Shri K. Venugopala Raju, Advocate. Respondent By : Dr. P.K. Srihari, Addl. CIT (D.R) Date of Hearing : 23.12.2014. Date of Pronouncement : 30.1.2015. O R D E R Per Shri Jason P. Boaz, A.M. : These appeals by the assessee are directed against the common orders of the Commissioner of Income Tax (Appeals), LTU, Bangalore dt.26.12.2013 for Assessment Years 2007-08 and 2008-09. 2. The facts of the case, briefly, are as under :- 2.1 The assessee is an individual engaged in the business of real estate. The assessee had not filed the returns of income for Assessment Years 2007-08 & 2008-09 on or before the due date of prescribed under Section 139(1) of the Income Tax Act, 1961 (herein after

2 ITA Nos.345 & 346/Bang/2014 referred to as 'the Act'). A survey action under Section 133A of the Act was conducted by the Department at the premises of the assessee on 28.2.2008 in which investments of Rs.1,25,56,560 for Assessment Year 2007-08 and Rs.39,90,000 for Assessment Year 2008- 09, being cash and investments in immovable properties which were admitted by the assessee at his undisclosed income for the relevant period. Subsequently, the assessee filed returns of income for Assessment Years 2007-08 on 31.3.2008 and 2008-09 on 10.2.2010 declaring income of Rs.1,32,06,200 and Rs.38,28,600. The assessments for both Assessment Years 2007-08 & 2008-09 were completed under Section 143(3) of the Act vide orders dt.30.12.2009 and 23.2.2010 accepting the income of Rs.1,32,06,200 and Rs.38,28,600 respectively, as declared by the assessee in the returns of income filed for these two assessment years. While accepting the income returned by the assessee, the Assessing Officer noted in the orders of assessment for Assessment Year 2007-08 & 2008-09, that the undisclosed investments of Rs.1,25,56,560 and Rs.39,90,000 admitted respectively by the assessee in the course of survey under Section 133A of the Act have been disclosed by the assessee in the returns of income filed for these years. Thus, the assessments were completed by accepting the income declared by the assessee in the returns of income for Assessment Year 2007-08 and which included the undisclosed income admitted by the assessee in the course of survey action under Section 133A of the Act. 2.2 While completing the assessments for both Assessment Years 2007-08 & 2008-09, the Assessing Officer initiated penalty proceedings under Section 271(1)(c) of the Act by issue of notices under Section 274 r.w.s. 271 of the Act dt.30.12.2009 and 23.2.2010

3 ITA Nos.345 & 346/Bang/2014 respectively. The Assessing Officer was of the view that, but for the survey under Section 133A of the Act, the assessee would not have filed the returns of income for both Assessment Years 2007-08 & 2008-09. In this view of the matter, the Assessing Officer held that the returns of income filed by the assessee were not voluntary and were only consequent to the detection of the assessee's undisclosed taxable income in the course of survey and proceeded to levy penalty under Section 271(1)(c) of the Act of Rs.43,89,242 and Rs.10,97,580 by orders dt.28.6.2010 for Assessment Years 2007-08 & 2008-09, being 100% of tax on the assessed income. 3. Aggrieved by the separate orders dt.28.6.2010 levying penalty under Section 271(1)(c) of the Act for Assessment Years 2007-08 & 2008-09, in his case, the assessee preferred appeals before the CIT (Appeals) – LTU, Bangalore. The learned CIT(A) vide order dt.26.12.2013 confirmed the orders of the Assessing Officer levying penalty under Section 271(1)(c) of the Act for both the concerned assessment years holding as under at paras 7 & 8 of the impugned order :- “ 7. The only issue to be substantively decided in this matter is whether the returns with the undisclosed income detected through survey operations were voluntary acts of the assessee or whether it was compelled by the already available information with the department. Since in this case the department already had incriminating material from the survey operations, the returns incorporating the details of cash and immovable property investments found through departmental action could not be considered as “voluntary” i.e. without any compulsion. The decision n case of Bairavlal Verma Vs. Union of India 230 ITR 855 (All.) and MN Rajaraman Vs. ACIT 119 ITD 362 (ITAT Chennai) supports this conclusion. In the appellant’s case I am, therefore, convinced that the incomes returned, whether under Section 139(1) or under Section 139(4), following survey operations, resulted from the incriminating evidence already in the possession of the department. These returns, therefore, cannot be considered as ‘voluntary’ in the substantive sense of the word.

4 ITA Nos.345 & 346/Bang/2014 8. Even with regard to the explanation given before the Assessing Officer during penalty proceedings, I find that there is no evidence to back up the claim of the accountant resigning / absconding from his job leading to the assessee's difficulties in finalizing the accounts. Before me also no such evidence was made available. In view of the above discussion, I have no hesitation in confirming the Assessing Officer’s order.” 4.1 Aggrieved by the common orders of the CIT (Appeals) – LTU, Bangalore dt.26.12.2013 for Assessment Years 2007-08 & 2008-09, the assessee has preferred these appeals before the Tribunal raising various grounds challenging the levy and confirmation of levy of penalty under Section 271(1)(c) of the Act in his case by the authorities below. 4.2 We have heard the submissions of the learned Authorised Representative of the assessee. The learned Authorised Representative contended that in respect of the income declared by the assessee in the returns of income for both Assessment Years 2007-08 & 2008-09, there cannot be any levy of penalty under Section 271(1)(c) of the Act, as the assessee cannot be said to have concealed particulars of income or furnished inaccurate particulars of income. In this regard, the learned Authorised Representative submitted that the point for initiation of the levy of penalty under Section 271(1)(c) of the Act is the returns of income filed for the relevant assessment years.; In support of this proposition reliance was placed on CIT V Reliance Petroproducts P. Ltd. (2010) 322 ITR 158 (SC). It was also contended that when the income as declared in the returns filed is accepted as the assessed income by the assessing authority, that cannot be ignored and penalty levied. In support of this proposition, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of the Tribunal in the case of Vasavi Shelters V ITO in ITA Nos. 499 & 500 (Bang)/2012 dt.22.2.2013 for Assessment Years 2007-08 & 2008-09.

5 ITA Nos.345 & 346/Bang/2014 The learned Authorised Representative prayed that in view of the above cited judicial pronouncements of the co-ordinate bench (supra) being on similar facts, the appeals may be decided in favour of the assessee and consequently the penalties under Section 271(1)(c) of the Act levied on the assessee for Assessment Years 2007-08 and 2008-09 be cancelled. 4.3 Per contra, the learned Departmental Representative placed strong reliance on the findings in the impugned orders and prayed for upholding the levy of penalty under Section 271(1)(c) of the Act for both the relevant assessment years in the case on hand. 4.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decisions cited and relied on. In the case on hand, the facts are that no returns of income were filed by the assessee for Assessment Years 2007-08 & 2008-09 as per the time provided under Section 139(1) of the Act. It is only pursuant to a survey under Section 133A of the Act, conducted at the assessee's premises on 28.2.2008, that the assessee filed its returns of income for Assessment Year 2007-08 on 31.3.2008 declaring income of Rs.1,32,06,200 and for Assessment Year 2008-09 on 10.2.2009 declaring income of Rs.38,28,600. In the assessments for Assessment Years 2007-08 & 2008-09 completed under Section 143(3) of the Act vide orders dt.30.12.2009 and 23.2.2010 respectively, the Assessing Officer accepted and assessed the income of the assessee at Rs.1,32,06,200 and Rs.38,28,600 as returned by the assessee in the returns of income for the two impugned assessment years. The Assessing Officer levied the said penalty under Section 271(1)(c) of the Act for both Assessment Years 2007-08 and 2008-09 on the assessed income; which was in fact also the identical amount of income declared in the

6 ITA Nos.345 & 346/Bang/2014 returns of income. In this context, the Hon'ble Apex Court in the case of Reliance Petroproducts P. Ltd. (2010) 322 ITR 158, at page 164 thereof has held that the starting point for levy of penalty for concealment has to be with reference to the income declared in the returns of income filed by the assessee. In this case, it is seen that this direction of the Hon'ble Apex Court (supra) has not been followed by the authorities below; both when levying and upholding the levy of penalty under Section 271(1)(c) of the Act. The impugned penalties have been levied on the returned income. 4.4.2 Similar facts, as in the case on hand, were before a co-ordinate bench of this Tribunal for consideration in the case of Vasavi Shelters V ITO (2013) 32 Taxmann.Com 26 (Bang) dt.22.2.2013 for Assessment Years 2007-08 & 2008-09 and it was therein held that there can be no justification for levy of penalty under Section 271(1)(c) of the Act for concealment of income or furnishing of inaccurate particulars of income by the assessee on the income offered in the return of income for the concerned assessment years, because there cannot be any penalty on income which is declared in the returns of income, more so when the returned income is accepted as the assessed income. The operative portion of the order at paras 9 to 15 thereof the bench held as under : “ 9. We have considered the rival submissions. We have to deal with the justification of imposition of penalty by bifurcating the income on which tax sought to be evaded was computed by the AO into two parts. The first part would be the income offered in the return of income by the Assessee for both the A.Ys. The second part would be the difference between the income declared in the return of income and the income which was actually determined by the AO in the assessment proceedings. 10. As far as the first part is concerned, viz., the justification of imposition of penalty on the income offered in the return of income by the assessee for both the A.Ys., we are of the view that there cannot be any penalty on income which is declared in a return of income, on the facts and circumstances of the present case. Penalty u/s.271(1)(c) of the Act is imposed for “concealing particulars of income or furnishing inaccurate particulars of income” When an income which is ultimately brought to tax is

7 ITA Nos.345 & 346/Bang/2014 declared in a return of income, there can be no question of treating the Assessee as having “concealed particulars of income or furnished inaccurate particulars of income”. The starting point of determining concealment for imposing penalty is the return of income. If the return of income declares income which is ultimately brought to tax there can be no complaint by the revenue that the Assessee is guilty of “concealing particulars of income or furnishing inaccurate particulars of income”. This legal position would be implicit if one reads Sec.271(1)( c) of the Act together with Explns. 3, 5 and 5A of the Act, which carves out exception for the legal position as stated above. “Sec.271(1)(c): Failure to furnish returns, comply with notices, concealment of income, etc. (1) If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person (a) to (b)** ** ** (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. (d) (i) to (ii)** ** ** (iii) in the eases 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 particulars of his income or fringe benefits or the furnishing of inaccurate particulars of such income or fringe benefits: Explanation 1 : Where in respect of any facts material to the computation of the total income of any person under this Act, (A) such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or (B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section be deemed to represent the income in respect of which particulars have been concealed. Explanation 3 : Where any person, fails, without reasonable cause, to furnish within the period specified in sub-section (1) of section 153 a return of his income which he is required to furnish under section 139 in respect of any assessment year commencing on or after the 1st day of April, 1989, and, until the expiry of the period aforesaid, no notice has been issued to him under clause (i) of sub-section (1) of section 142 or section 148 and the Assessing Officer or the Commissioner (Appeals) is satisfied that in respect of such assessment year such person has taxable income, then, such person shall, for the purposes of clause (c) of this sub- section, be deemed to have concealed the particulars of his income in respect of such assessment year, notwithstanding that such person furnishes a return of his income at any time after the expiry of the period aforesaid in pursuance of a notice under section 148. 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, —

8 ITA Nos.345 & 346/Bang/2014 (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 alter 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 Chief 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 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. Explanation 5A : Where, in the course of a search initiated under section 132 on or after the 1st day of June, 2007, the assessee is found to be the owner of— (i) 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 for any previous year; or (ii) any income based on any entry in any books of account or other documents or transactions and he claims that such entry in the books of account or other documents or transactions represents his income (wholly or in part) for any previous year, which has ended before the date of search and, — (a) where the return of income for such previous year has been furnished before the said date but such income has not been declared therein; or (b) the due date for filing the return of income for such previous year has expired but the assessee has not filed the return, then, notwithstanding that such income is declared by him in any return of income furnished on or after the date of 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.” 11.Explanation 3 is an exception to the rule that when an income which is ultimately brought to tax is declared in a return of income, there can be no question of treating the Assessee as having “concealed particulars of income or furnished inaccurate particulars of income” Explan. 4(b) to Sec.271(1) of the Act makes this clear Expln.-4 to Sec.271(1) of the Act lays down what is “the amount of tax sought to be evaded” on which penalty can be imposed and clause (b) lays down in any case to which Explanation 3 applies, means the tax on the total income assessed as reduced by the amount of advance tax, tax deducted at source, tax collected at source and self assessment tax paid before the issue of notice under section

9 ITA Nos.345 & 346/Bang/2014 148. This means that the income declared in the return of income can be ignored and penalty can be imposed even in respect of such income. Explanation 3 of section 271(1)(c)(iii) applies also in the case of assessees, who have not been assessed as yet. According to this section, if a person fails, without reasonable cause, to furnish a return of his income voluntarily under section 139 within the period specified under section 153(1), i.e., within two years from the end of the assessment year in which the income was first assessable, he shall be deemed to have concealed the particulars of his income in respect of such assessment year if he has taxable income for that year. But this is subject to two limitations – firstly, it applies to assessment year 1989-90 and subsequent years and secondly, no notice under section 142(1) or 148 was issued within the said period of two years. In other words, Explanation 3 shall have no application if a notice under section 142(1) or 148 was issued within two years. But if an assessee files a return of his income after the period of two years in response to a notice under section 148, he would be caught within the mischief of this Explanation. 12. In the present case, Expln.-3 to sec.271(1) of the Act will not apply because, as we have seen the Assessee filed return of income on 31.3.2010 for both the assessment years which is within a period of 2 years from the end of AY 07-08 and 08-09. Moreover the notice u/s.148 had been issued in the present case on 22.2.2010 within two years from the end of AYs 07-08 & 08-09. Therefore Explanation 3 will not apply to the present case. 13. There can be no concealment or non-disclosure, as the assessee had made a complete disclosure in the IT return and offered the surrendered amount for the purposes of tax and therefore no penalty under s. 271(1)(c) could be levied. The words ‘in the course of any proceedings under this Act’ in Sec. 271(1)(c ) of the Act are prefaced by the satisfaction of the AO or the CIT(A). When a survey is conducted by a survey team, the question of satisfaction of AO or the CIT(A) or the CIT does not arise. One has to keep in mind that it is the AO who initiates penalty proceedings and directs the payment of penalty. He cannot record any satisfaction during the course of survey. Decision to initiate penalty proceedings is taken while making assessment order. It is, thus, obvious that the expression ‘in the course of any proceedings under this Act’ cannot have the reference to survey proceedings. It necessarily follows that concealment of particulars of income or furnishing of inaccurate particular of income by the assessee has to be in the IT return filed by it. The assessee can furnish the particulars of income in his return and everything would depend upon the IT return filed by the assessee. This view gets supported by Explanations 4 as well as 5 and 5A of s. 271. Obviously, no penalty can be imposed unless the conditions stipulated in the said provisions are duly and unambiguously satisfied. Since the assessee was exposed during survey, may be, it would have not disclosed the income but for the said survey. However, there cannot be any penalty only on surmises, conjectures and possibilities. Sec. 271(1)(c) has to be construed strictly. Unless it is found that there is actually a concealment or non- disclosure of the particulars of income penalty cannot be imposed. There is no such concealment or non-disclosure as the assessee had made a complete disclosure in the IT return and offered the surrendered amount for the purposes of tax. 14.Explns. 5 and 5A are also an exception to the rule that when an income which is ultimately brought to tax is declared in a return of income, there can be no question of treating the Assessee as having “concealed particulars of income or furnished inaccurate

10 ITA Nos.345 & 346/Bang/2014 particulars of income” Those Explanations will also not apply in the present case because those Explanations are applicable only when there is a search u/s.132 of the Act and to a case of Survey u/s. 133A of the Act. 15. For the reasons given above we hold that there can be no justification for imposition of penalty on the income offered in the return of income by the Assessee for both the A.Ys., because there cannot be any penalty on income which is declared in a return of income, on the facts and circumstances of the present case.”

4.4.3 Following the ratio and findings of fact rendered by the co-ordinate bench in the case of Vasavi Shelters (supra), which is similar to the factual matrix of the case on hand, we hold that there can be no justification for the action of the authorities below to levy and uphold the levy of penalty under Section 271(1)(c) of the Act on the income of Rs.1,32,06,200 and Rs.38,28,600 respectively declared in the returns of income for assessment years 2007-08 & 2008-09, because there cannot be any penalty on income which is declared in the returns of income. More so, when the returned income is accepted as such and determined as the assessee's income for both assessment years involved. In view of the facts and circumstances of the case on the issue of levy of penalty under Section 271(1)(c) of the Act as discussed in paras 4.1 to 4.6.3 of this order, we cancel the penalty of Rs.43,89,242 and Rs.10,97,580 levied under Section 271(1)(c) of the Act respectively for Assessment Years 2007-08 & 2008-09. 5. In the result, the assessee's appeals for A.Ys 2007-08 & 2008-09 are allowed. Order pronounced in the open court on 30th Jan., 2015. Sd/- Sd/- (P. MADHAVI DEVI) (JASON P BOAZ) Judicial Member Accountant Member *Reddy gp