IT: Where in course of search, it was found that assessee had earned unrecorded income and, moreover, there was certain expenditure not recorded in regular books of account, Assessing Officer was to be directed to work out penalty under section 271(1)(c) on net of unrecorded expenditure i.e. unrecorded expenditure less unrecorded income
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[2013] 37 taxmann.com 207 (Pune - Trib.)
IN THE ITAT PUNE BENCH 'A'
Assistant Commissioner of Income-tax, Central Circle, Aurangabad
v.
Mulay Constructions (P.) Ltd.*
G.S. PANNU, ACCOUNTANT MEMBER
AND R.S. PADVEKAR, JUDICIAL MEMBER
AND R.S. PADVEKAR, JUDICIAL MEMBER
IT APPEAL NOS. 1644 (PUNE) OF 2011 AND 116 TO 119 (PUNE) OF 2012
C.O. NOS. 7 TO 9 (PUNE) OF 2013
[ASSESSMENT YEARS 2003-04 TO 2006-07]
C.O. NOS. 7 TO 9 (PUNE) OF 2013
[ASSESSMENT YEARS 2003-04 TO 2006-07]
JUNE 25, 2013
Section 271(1)(c), read with section 69C, of the Income-tax Act, 1961 - Penalty - For concealment of income [Computation of] - Assessment years 2003-04 to 2006-07 - In course of search and seizure operation, it was found that assessee had not recorded certain income as well as expenditure in regular books of account - Assessee admitted said position and offered amount covered by expenditure which was found unrecorded in documents seized - However, assessee did not declare income which was detected in consequence of search and seizure operation - Assessing Officer having completed assessment, passed a penalty order under section 271(1)(c) - Commissioner (Appeals) gave set-off of undisclosed income against amount of unrecorded expenditure for determining amount of income for purpose of levying penalty - Whether what is taxed under section 69C is amount covered by unrecorded expenditure and ultimately it is nothing but income applied - Held, yes - Whether since, in instant case, unrecorded income was also found, so to extent of quantum of unrecorded income relating to relevant assessment years assessee had source to incur unrecorded expenditure - Held, yes - Whether, therefore, Assessing Officer was to be directed to work out penalty on net of unrecorded expenditure i.e. unrecorded expenditure less unrecorded income - Held, yes [Paras 21 & 22] [Partly in favour of assessee]
CASES REFERRED TO
Smt. Pramila D. Ashtekar v. ITO [I.T Appeal Nos. 354 to 367 (Pune) of 2010, dated 14-9-2012] (para 11), Sanjay D. Kakade v. ACIT [I.T. Appeal Nos. 12 to 15 (Pune) of 2013, dated 30-4-2013] (para 11), EMIL Webber v. CIT [1993] 200 ITR 483/67 Taxman 532 (SC) (para 11) andChandan K. Shewani v. Dy. CIT [IT Appeal Nos. 235 and 236 (Pune) of 2010, dated 29-8-2012] (para 13).
Hemant Kumar Luava for the Appellant. Sunil Ganoo for the Respondent.
ORDER
R.S. Padvekar, Judicial Member - This batch of five appeals and three Cross Objections are arising out of common order passed by the Ld. CIT(A), Aurangabad dated 19-10-2011 for A.Y. 2003-04, 2004-05, 2005-06 and 2006-07. The Revenue has filed appeals for these four assessment years whereas the assessee has filed an appeal for A.Ys. 2006-07 and Cross Objections [in short C.O.] for A.Ys. 2003-04, 204-05 and 2005-06. All these appeals and Cross Objections are arising out of penalties levied by the A.O. u/s. 271(1)(c) of the Income-tax Act (in short Act).
2. The revenue has taken following grounds in the appeals which are identical save the quantum of penalty mentioned in the A.Ys. 2003-04, 2004-05 and 2005-06.
| "1. | On the facts and m the circumstances of the case the learned CIT (A) erred in deleting penalty of Rs. 4,27,614/- levied by the Assessing Officer Under Section 271(l)(c) of the Act. | |
| 2. | On the fact and in the circumstances of the case the learned CIT(A) erred in allowing set-off of undisclosed income against unexplained expenditure and to hold that the expenditure no longer remained unexplained. | |
| 3. | On the facts and in the circumstances of the case the learned CIT(A) erred in holding that penalty is not imposable on unexplained expenditure added under section 69C of the Act, whereas in the Assessment Year 2006-07 the CIT(A) held that penalty is imposable on unexplained expenditure which is contradictory to his finding in Para 10.4 of its order. | |
| 4. | On the facts and in the circumstances of the case the learned CIT (A) erred in holding that; the penalty is imposable only on inadmissible unexplained expenditure." |
3. In the appeal for the A.Y. 2006-07 the revenue has taken the following grounds:
| "1. | On the facts and in the circumstances of the case the learned CIT (A) erred in reducing the amount of unexplained expenditure by amount of undisclosed income for levy of penalty Under Section 271(1) (c) of the Act. | |
| 2. | On the fact and in the circumstances of the case the learned CIT(A) erred in confirming penalty to the extent of excess of unexplained expenditure over undisclosed income, by observing that the assessee had unexplained expenditure more than the undisclosed income. | |
| 3. | On the facts and in the circumstances of the case the learned CIT (A) erred in allowing set-off of undisclosed income against unexplained expenditure and to hold that the expenditure no longer remained unexplained. | |
| 4. | On the facts and in the circumstances of the case the learned CIT (A) erred in holding that the penalty is not imposable on unexplained expenditure added under section69C of the Act." | |
| 5. | On the facts and in the circumstances of the case the learned CIT (A) erred in holding that the penalty is imposable only on inadmissible unexplained expenditure." |
4. The assessee has also filed a Cross appeal for the A.Y. 2006-07 and has taken the following effective ground:
"On the facts and in the circumstances prevailing in the case and as per the provisions of law, the CIT(Appeal) has erred in confirming the penalty order under section 271(1)(c) passed by DCIT central circle Aurangabad to the tune of Rs.604380/-, out of Rs.870879/-. Considering the facts and evidences presented before him and explanation filled by the appellant, the CIT(Appeal) is not justified in confirming the penalty of Rs.604380/-. The aforesaid confirmation of the penalty order partly is not legally sustainable being arbitrary and devoid of merits, the same may please be deleted."
5. The assessee has filed the Cross Objections in A.Ys. 2003-04, 2004-05 and 2005-06 and has taken the following grounds which are common in all the assessment years:
| "1. | In the facts and circumstances of the case and in law, it may please be held that no penalty u/s. 271(1)(c) of the I.T. Act, 1961 can be levied on the different between the income declared in the original return of income and the income declared in the return of income filed in response to notice issue u/s. 153A of the I.T. Act, 1961. | |
| 2. | The order passed by the learned C.I.T.(A) cancelling the impugned penalty levied by the learned Assessing Officer u/s. 271(1)(c) of the I.T. Act, 1961." |
6. The facts which are reveal from the record as under. The assessee-company is engaged in the business of construction. A search and seizure operation u/s 132 of the Act was carried out in the case of the Assessee and it's group concerns on 10-10-2007. Notices u/s 153A of income-tax Act, were issued to the assessee for filing the returns of income and in response to the said notices, the assessee filed returns of income. The assessments have been completed by the A.O u/s 153A of the Act. The A.O also initiated penalty proceedings and levied the penalties. The income offered by the assessee, addition made by the A.O and the amount of penalties levied and quantum of income which is subjected to the penalty can be summarised for all the four assessment years as under:
| A.Y. | Additional income offered to tax (Rs.) | Addition made by the AO (Rs.) | Quantum of Income (Rs.) | Amount of Penalty (Rs.) |
| 2003-04 | 10,48,574 | 1,15,000 | 11,63,574 | 4,27,614 |
| 2004-05 | 7,47,229 | 5,55,000 | 13,02,229 | 4,67,175 |
| 2005-06 | 29,88,724 | 7,38,198 | 37,26,922 | 14,63,562 |
| 2006-07 | 24,14,045 | 1,73,238 | 25,87,283 | 8,70,879 |
7. The assessee challenged all the penalty orders before Ld. CIT(A). The Ld. CIT(A) gave set off of the unrecorded income found in the course of search which was not declared in the returns filed by the assessee in response to the notices u/s 153A of the Act and that resulted in the partial as well as full deletion of the penalties. The position of the unaccounted income vis-à-vis the unrecorded expenditure can be summarized as under:-
| A.Y. | Unaccounted expenditure (Rs.) | Inadmissible expenditure out of unaccounted expenditure(Rs.) | Admissible expenditure out of unaccounted expenditure(Rs.) | Unaccountedincome (Rs.) | Excess of admissibleexpenditure over unaccountedincome (Rs.) |
| 2003-04 | 10,43,004 | 2,93,978 | 7,49,026 | 6,95,000 | 54,026 |
| 2004-05 | 7,44,304 | 3,13,952 | 4,30,352 | 5,00,165 | -- |
| 2005-06 | 11,00,682 | 3,71,994 | 7,28,688 | 10,93,690 | -- |
| 2006-07 | 23,57,180 | 20,14,601 | 3,42,579 | 1,62,706 | 1,79,873 |
8. While giving set off of the unrecorded income found during the course of search, the Ld. CIT(A) held as under:
"I have carefully considered the facts of the case and rival contentions On perusal of the same, it has been observed that the appellant had declared unrecorded expenditure in the return of income and the AO has also assessed the said unrecorded business expenditure after making some further additions towards unrecorded business expenditure and has levied penalty u/s 271(1)(c) in respect of the said unexplained/unrecorded expenditure. It is undisputed fact that the said unrecorded expenditure is to be added u/s 69C of the Act to the extent the unrecorded expenditure not supported by source out of which the said expenditure has been incurred. In the case under appeal, it is undisputed fact that the appellant has also earned income which has not been recorded in the books of account. The unrecorded expenditure is, therefore, can be sourced out of the said unrecorded business income and hence, to that extent the unrecorded business expenditure does not remain unexplained and hence cannot be assessed as income us 69C of the Act. It is established law that the assessment proceedings and penalty proceedings are totally different. In view of the above facts and discussion, I am of the considered view that the AO is not justified in levying penalty on the unexplained/unrecorded expenditure without giving set off of unexplained/unrecorded income. The AO is, therefore, directed to give the set off of unrecorded income against the unrecorded expenditure as claimed by the appellant while considering amount of income for levying penalty u/s 271(1)(c). Ground No. 2 for all the assessment years under appeal stands allowed."
9. The assessee also contended that what the assessee had offered is the amount of expenditure and hence, explanation 5A to sec. 271(1)(c) of the Act has no application. The Ld. CIT(A) accepted the plea of the assessee that there is no income which is offered by the assessee but it is the only expenditure which is offered by the assessee in the returns of income. The operative part of the findings of the CIT(A) is as under:
"10.4 In view of the above provision, the contention of the appellant that penalty u/s 271(1)(c) in respect of inadmissible business expenditure is not covered by the provisions of Explanation 5A is found to be acceptable as the said Explanation 5A(ii) refers to any income found noted in any documents represents the income of the assessee. In the case under appeal, undisputedly the seized material also contains notings of admissible business expenditure on which the AO has levied penalty u/s 271(1)(c) of the Act. In view of the above facts and discussion, I am of the considered view that the AO is not justified in levying in penalty on admissible unrecorded business expenditure. In respect of assessment years 2003-04, 2004-05 and 2005-06, the unaccounted income of the appellant is more than inadmissible unrecorded expenditure pointed out by the AO and hence, the said expenditure can be out of unaccounted income and hence does not remain unexplained. The penalty u/s 271(1)(c) is therefore not leviable on the unrecorded expenditure for A.Ys. 2003-04, 2004-05 and 2005-06. The AO is directed accordingly Ground Nos. 3 and 4 for A.Ys. 2003-04, 2004-05 and 2005-06 are allowed.
11.5 In respect of A.Y. 2006-07, it has been noticed that the inadmissible unexplained expenditure is much more than unaccounted income of the appellant and hence, the same is certainly the income of the appellant liable to tax and represents income liable to penalty. Therefore, the penalty u/s 271(1)(c) in A.Y. 2006-07 is to be confirmed. The A.O is directed accordingly Ground Nos. 3 and 4 for A.Y. 2006-07 are partly allowed."
10. In sum and substance, the Ld. CIT(A) gave part relief to the assessee. Against the relief given by the Ld.CIT(A), the Revenue is in appeals before us in all four assessment years. So far as the assessment years, 2003-04, 2004-05 and 2005-06 are concerned, the assessee has filed cross objections and for the A.Y. 2006-07 the assessee has filed the cross appeal
11. The Ld. Counsel for the assessee vehemently argued that the income offered by the assessee pertains to the expenditure found during the course of search and seizure operation. He further argues that the assessee's case is squarely covered by the decision of this Bench in the case of Smt. Pramila D. Ashtekar v. ITO in ITA Nos. 354 to 367/PN/2010 dated 14-9-2012. The Ld. Counsel referred to para Nos. 6 and 7 of the said decision and submits that the Tribunal has categorically held that so far as the Explanation 5A is concerned, which is inserted in the Act w.e.f. 1-6-2007, the said Explanation is applicable from the A.Y. 2007-08. He further argues that so far as the present assessment years are concerned, these are prior to assessment year 2007-08 and hence, in view of the decision in the cases of Smt. Pramila D. Ashtekar (supra) Explanation 5A below sec. 271(1)(c) cannot be applied. He also relied on the decision of ITAT Pune in the case of Sanjay D. Kakade v. ACIT in ITA Nos. 12 to 15/PN/2013, order dated 30-4-2013. He therefore, pleaded that the view taken by the ld CIT(A) is supported by the above two decisions of the Tribunal. He opened another page of his argument and submits that even if Explanation 5A is applicable, but the said Explanation is not applicable so far as the income declared by the assessee in the returns filed in response to notice u/sec. 153A of the Act, as Explanation 5A(ii) contemplates detection of the income. The Ld. Counsel refers to the definition of income as given in sec. 2(24) of the Act and submits that in its wisdom the Parliament has inserted the definition of 'income' but there is no reference of sec/s. 68/69/69A/69C, etc. He, therefore, pleads that income offered by the assessee pertains to the expenditure and hence, no penalty is otherwise also leviable. He also placed reliance on the decision of the Hon'ble Supreme Court in the case of EMIL Webber v. CIT [1993] 200 ITR 483/67 Taxman 532 wherein the definition of "income" u/s 2(24) is explained. He therefore, concludes his argument by submitting that no penalty is leviable at all and the Ld. CIT(A) was not justified in confirming the penalty for A.Y. 2006-07. We have also heard the Ld. DR.
12. We have heard the rival submissions and perused the record. In this case, there are two types of incomes which are subjected to the penal consequences u/s 271(1)(c) of the Act. There was search and seizure operation carried out against the assessee on 10-10-2007. The assessee filed return of income declaring undisclosed income. It is true that in the course of search and seizure operation, it was revealed that the assessee has earned income which was not recorded as well as there was expenditure which was not recorded in the regular books of account. The assessee admitted and offered the amount covered by the expenditure which was found unrecorded in the documents seized. The assessee did not declare the income which was detected in consequence of the search and seizure operation. The details of the unrecorded expenditure are given in this order itself hereinabove.
13. Now the issue before us is whether the income offered by the assessee in the return filed in response to notice u/s 153A of the Act can be subjected to penalty u/s 271(1)(c) of the Act. It is pertinent to note here that the assessee has placed heavy reliance on the decision in the case of Smt. Pramila D. Ashtekar and others (supra). In those cases the search and seizure operation u/s 132(1) of the Act was conducted on 26-10-2005. The A.O levied penalty on the income declared in the returns of income filed in response to notices issued under sec. 153A of the Act. The Tribunal examined the details of the disclosure made by those assessees in the returns filed. The Tribunal noted that there was no disclosure in respect of any money, bullion, jewellery or any valuable assets or things. The Tribunal, therefore, held that so far as the Expl. 5 to sec. 271(1)(c) is concerned, it is not applicable which is a deeming provision which creates legal presumption against the assessee in a situation mention therein that there is concealment of income or filing of inaccurate particulars of income. The Tribunal followed the decision in the case of Chandan K. Shewani v. Dy. CIT ITA Nos. 235 and 236/PN/2010, order dated 29-8-2012. The operative part of the findings of the Tribunal in the case of Smt. Pramila D. Ashtekar (supra) is as under:
'6. We find that the assessee's case is otherwise squarely covered vide the decision of ITAT, Pune in the case of Chandan K. Shewani Vs. DCIT, ITA Nos. 235 & 236/PN/2010. In the said case, the additional income was declared during the course of search to cover up the expenditure as well as deposit in Bank A/cs. The Tribunal considered the Explanations- 3, 5 & 5A to Sec. 271(1)(c ) of the Act and held as under :
8. While deciding assessee's appeal for A.Ys. 1999-2000 and 2001-02, the penalty levied on the income offered towards the personal expenditure of the assessee and his divorcee sister has been deleted. Even though the Parliament has inserted Explanation 5A to Sec. 271(1)(c), said explanation is applicable in respect of the search initiated u/s. 132 on or after 1st June, 2007. Section 5A is introduced to patch out the lacunae in the existing provisions more particularly to overcome the judicial interpretation of Explanation -5. If the search is initiated u/s. 132 on or after 1st June, 2007 then there is a legal presumption that any income based on any entry in the books of account or other documents or transactions, which is claimed as income by the assessee, the same would be treated as deemed concealment of the particulars of income or furnishing inaccurate particulars of income. So far as the present assessee is concerned, the date of search is 15-6-2004 and hence, Explanation 5A to Sec. 271(1)(c) is not applicable. It is well settled rule of interpretation of the penalty provisions that the same should be strictly interpreted and there is no scope for any presumption for levy of the penalty unless statute specifically provides same.
9. So far as the Explanation-3 to Sec. 271(1)(c) is concerned, which reads as under :
"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 personal 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."
The said Explanation presumes that there is a concealment of particulars of income or filing of the inaccurate particulars of income in the situation where the assessee did not file return of income u/s. 139 or within the time limit prescribed u/s. 153(1) of the Act but files the return of income in response to notice u/s. 148. The said Explanation is also silent in the situation if the assessee has not filed the return of income for any particular A.Y. but filed the return of income for the first time in response to notice u/s. 153A, then what would be the legal presumption ? In our opinion, Explanation-3 has no application, when the return is filed in response to notice u/s. 153A. We, therefore, hold that as per the facts of this case and law applicable, there is no justification to levy the penalty for the A.Y. 2002-03 in the income declared by the assessee in the return of income in response to notice u/s. 153A even for the said income is based on some entries found in the diaries or other documents or even Bank Account during the course of search. We, accordingly delete the penalty sustained by the Ld CIT(A)."
7. In all the appeals before us, Explanation-3 cannot be applied, as held in the case of Chandan K. Shewani (Supra). So far as Explanation 5A is concerned, it is brought on the Statute Book w.e.f. 1-6-2007 i.e. from the Assessment Year 2007-08 So far as the assessments in all these cases are concerned, no addition is made by the Assessing Officer over and above the income declared in the returns of income filed in response to notice u/s. 153A as the expression "tax sought to be evaded" appearing in clause (c) to Sec. 271(1) is to be understood as a difference between the income declared by the assessee in the return of income and the income finally assessed. After introduction of Sec. 153A w.e.f 1-6-2003, there is no specific penalty provision to deal with the assessments framed in consequence of search and seizure action u/s. 132 of the Act. In the present case, as the returned income and income assessed are the same, otherwise also, no penalty can be levied. We, therefore, hold that in all the appeals before us, the Assessing Officer was not justified in levying the penalty u/s. 271(1)(c ) of the Act. We, accordingly, delete the penalties levied by the Assessing Officer in all the appeals for the above mentioned reasons.'
14. It is noticed that in para 7, the Tribunal has made observation "So far as Explanation 5A is concerned, it is brought on the Statute Book w.e.f. 1.6.2007 i.e. from the Assessment Year 2007-08". The Ld. Counsel submits that the said observation is finding of the Tribunal. With due respect, we are unable to accept the submission of the Ld. Counsel. Admittedly, in a very clear terms, the Tribunal has held that the facts in the cases of Smt. Pramila D. Ashtekar (supra) are clearly covered by the decision in the case of Chandan K. Shewani (supra) and the Tribunal followed the decision of Chandan K. Shewani (supra). While reproducing the observations in the summarized form, it appears that there is a mistake in para No. 7 in the Order of Smt. Pramila D. Ashtekar (supra). Admittedly, no interpretation is made by the Tribunal to make out a different case than Chandan K. Shewani (supra). It is also pertinent to note that though the Constitution of another Bench is different which has rendered those decisions but the Author Member is the same in both those cases. In our opinion, reliance placed by the Ld. Counsel is not helpful as in the case of Chandan K. Shewani (supra) which decision has been followed for deciding the cases of Pramila D. Ashtekar and others (supra), the Tribunal has explained the scope of Expl. 5A below sec. 271(1)(c) which is as under:
"Explanation 5A — Where, in the course of a search initiated under section 132 on or before the 1st day of June, 2007, the assessee is found to be the owner of—
| (i) | Any money, bullion, jeweller or other valuable article or thing (hereinafter in this Explanation referred to as assets) and the assessee claims that such assets have been acquired by him by utilizing (wholly or in part) his income for any previous year; or | |
| (ii) | Any other 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, he deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income."
15. The Ld. Counsel also relied on the decision in the case of Sanjay D. Kakade (supra) in which, the decision in the case of Smt. Pramila D. Ashtekar (supra) is followed by the Tribunal. There is no independent interpretation on the applicability of Explanation 5A. We would like to make it clear that in the case of Chandan K. Shewani (supra), the searches were prior to 1-6-2007 and hence, the question of applicability of A.Y. 07-08 was never before the Tribunal. We, therefore, reject the argument of the Ld. Counsel that the issue arising in this appeal is clearly covered by the decision ofSmt. Pramila D. Ashtekar (supra) to the extent of the income declared in the return filed in response to notice u/s 153A of the Act.
16. The next limb of argument of the Ld. counsel is that Explanation 5A(ii) contemplates "income" and not the "expenditure". In this case, it is undisputed fact that the assessee came forward and declared "income" which was pertaining to the amount covered by the unrecorded expenditure but the fact remains that the assessee did not declare any 'expenditure' but it is only the income. The Ld. Counsel referred to the definition of the income given in sec. 2(24) of the Act. The scope of the said definition has been explained by the Hon'ble Supreme Court in the case of EMIL Webber (supra) which has been relied upon by the Ld. Counsel. The relevant portion is in para No 7 which reads as under:
"7. The definition of 'income' in clause (24) of Section 2 of the Act is an inclusive definition. It adds several artificial categories to the concept of income but on that account the expression 'income' does not lose its natural connotation. Indeed, it is repeatedly said that it is difficult to define the expression 'income' in precise terms. Anything which can properly be described as income is taxable under the Act unless, of course, it is exempted under one or the other provision of the Act. It is from the said angle that we have to examine whether the amount paid by Ballarpur by way of tax on the salary amount received by the assessee can be treated as the income of the assessee. It cannot be overlooked that the said amount is nothing but a tax upon the salary received by the assessee. By virtue of the obligation undertaken by Ballarpur to pay tax on the salary received by the assessee among others, it paid the said tax. The said payment is, therefore, for and on behalf of the assessee. It is not a gratuitous payment. But for the said agreement and but for the said payment, the said tax amount would have been liable to be paid by the assessee himself. He could not have received the salary which he did but for the said payment of tax. The obligation placed upon Ballarpur by virtue of Section 195 of the Income-tax Act, cannot also be ignored in this context. It would be unrealistic to say that the said payment had no integral connection with the salary received by the assessee. We are, therefore, of the opinion that the High Court and the authorities under the Act were right in holding that the said tax amount is liable to be included in the income of the assessee during the said two assessment years."
17. As per interpretation made by the Hon'ble' Supreme Court of sec. 2(24) of the Act, it is clear that it is an 'inclusive' definition and it covers all income come under charging provisions of the Act. If the argument of the learned counsel is to be accepted then no income can be taxed u/ss 68, 69, 69A, 69B, 69C & 69D.
18. It is necessary to refer to Explanation 5A which reads as under:
"Explanation 5A — Where, in the course of a search initiated under section 132 on or before the 1st day of June, 2007, the assessee is found to be the owner of—
| (i) | Any money, bullion, jeweller or other valuable article or thing (hereinafter in this Explanation referred to as assets) and the assessee claims that such assets have been acquired by him by utilizing (wholly or in part) his income for any previous year; or | |
| (ii) | Any other 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, he deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income." |
19. So far as the present assessee is concerned, clause (ii) to Explanation 5A is applicable. Admittedly, the expenditure which was not recorded has been found by way of entries in the seized documents. While explaining the scope of Explanation 5A in the case of Chandan K. Shewani (supra) the Tribunal has held that to patch out the lacuna due to the judicial interpretation of Expl. 5 of Sec. 271(1)(c) which was on the statute book upto 31-5-2007, Explanation 5A has been substituted for Expl. 5 by the Finance Act, 2007 w.e.f 1-6-2007. The said explanation was further amended by the Finance(No.2) Act, 2009 with retrospective effect from 01-07-2007 which is reproduced hereinabove. The Ld. Counsel has raised an important legal question whether the income declared by the assessee which is pertaining to the unrecorded expenditure can said to be the income which is contemplated in Explanation 5A(ii)? The answer to this question is in sec. 69-C which reads as under:—
"Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the [Assessing] Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year;"
20. So far as the Expl. - 5 which was on the statute book, the Courts have taken a view that it was having a limited application only to the extend of the money, bullion, jewellery or any valuable assets or things which were found during the course of seach and seizer operation and owned by the assessee. But the other income which was found recorded by any entry in the document seized or otherwise was not covered. It is pertinent to note that sec. 69C provides that if any unrecorded expenditure is found and the assessee fails to explain the source of the said expenditure or explanation of the assessee is not satisfactory, then to the extent of the amount covered by such expenditure is treated as income. Ultimately what is taxed under Sec. 69 C of the Act is not the expenditure but it is basically the undisclosed income which has been applied for incurring the unrecorded expenditure. In our view, there is no merit in the argument of the Ld. Counsel that the assessee has only declared the amount expenditure. We therefore, hold that to the extent of the income offered by the assessee pertaining to the expenditure in the returns filed in response to notice u/s 153A, Explanation-5A is applicable and as there is a legal presumption against the assessee in respect of the said income detected during the course of search and seizure operation, the assessee case is squarely covered by Explanation-5(ii) as the assessee himself has admitted the said undisclosed income.
21. Another limb of the argument of the Ld. Counsel is that undisclosed income is also detected and hence, the Ld. CIT(A) is justified in giving the set off of the said undisclosed income against the amount of expenditure for determining the amount of income for the purpose of levying the penalty. We find that the Ld. CIT(A) has made the classification of the expenditure in two parts (i) inadmissible unrecorded expenditure and (ii) admissible recorded expenditure. The classification made by the Ld. CIT(A) is reproduced in para No. 4 of this order. The Ld. CIT(A) has observed that some expenditure was admissible as business expenditure only and the Assessing Officer is not justified in levying the penalty u/s. 271(1)(c) of the Act on said explanation. He has also noted that there was unrecorded income which was also detected from the seized material. The Ld. CIT(A) allowed the set off of the unrecorded income against the admissible unrecorded business expenditure in the A.Ys. 2003-04, 2004-05 and 2005-06. In the A.Y. 2006-07, the unaccounted income of the assessee was found to be more than inadmissible unrecorded expenditure as pointed out by Ld. CIT(A) and hence, the same was held to be liable for the penalty u/s. 271(1)(c). In respect of unrecorded admissible expenditure the Ld. CIT(A) held that the same cannot be subjected to penalty u/s. 271(1)(c). In our opinion the logic applied by the Ld. CIT(A) is not correct. So far as Sec. 269(C) is concerned, it prohibits the deduction in respect of the unrecorded expenditure under any head of the income. What is taxed u/s. 269C is the amount covered by the unrecorded expenditure and ultimately it is nothing but income applied. Admittedly, unrecorded income was also found, so in our opinion, to the extent of the quantum of unrecorded income relating to these four assessment years the assessee has source to incur the unrecorded expenditure and hence, without making any classification of unaccounted expenditure found during the course of search, the set off of the unaccounted income has to be given as under:
| A.Y. | Total Unaccounted Expenditure | Total Unaccounted Income | Excess of Unaccounted Expenditure over Unaccounted Income |
| 2003-04 | Rs.10,43,004/- | Rs.6,95,000/- | Rs.348004/- |
| 2004-05 | Rs.7,44,304/- | Rs.5,00,165/- | Rs.244139/- |
| 2005-06 | Rs.11,00,682/- | Rs.10,93,690/- | Rs.6992/- |
| 2006-07 | Rs.23,57,180/- | Rs.1,62,706/- | Rs.2194474/- |
22. We, therefore, direct the Assessing Officer to work out the penalty on the net of the unrecorded expenditure (Unrecorded Expenditure - Unrecorded Income) as shown above for all the assessment years.
23. In the result, all the four appeals filed by the revenue for A.Ys. 2003-04 to 2006-07 are partly allowed, the assessee's appeal for the A.Y. 2006-07 is dismissed and all the Cross Objections of the assessee are also dismissed.
Regards
Prarthana Jalan
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