2007 (8) TMI 234 - HC - Income Tax

Challenged the order of tribunal - Deletion of penalty imposable u/s 271(1)(c) - Voluntariness and timing of the revised return filed by the assessee - concealment of income - mercantile system of accountancy - ill-motive having mens rea - Word concealment - HELD THAT - From a bare reading of section 139(5) and section 271(1)(c) of the Act it is manifestly clear that both the aforesaid sections meet two different situations. Section 139(5) proceeds on the basis of omission or wrong statement which had crept into the original return being inadvertent and unintentional whereas section 271(1) (c) of the Act proceeds on the basis of concealment being deliberate and the furnishing of inaccurate particulars being wilful and intentional. In the instant case the Income-tax Appellate Tribunal while allowing the appeal by setting aside the order of penalty proceeded on the basis that the assessee disclosed the aforesaid additional amount voluntarily in call of amnesty scheme and for that such disclosure of income and offering the same for tax may be for various reasons. Such voluntary disclosure cannot be said to be concealed income of the assessee. The Tribunal further proceeded on the basis that the Revenue has to prove mens rea on the part of the assessee by adducing evidence. In my view the Tribunal has totally misconstrued the provisions of the Act and the finding is wholly perverse in law. The Tribunal has not considered the effect of Explanation 5 to section 271(1)(c) of the Act. In my considered opinion the assessee did not act voluntarily and bonafidely in filing the revised return and offering the additional income. Admittedly the revised return was not filed within the financial year or even before search and seizure was conducted and incriminating documents were recovered showing undisclosed income of the assessee. Explanation 5 has added in section 271(1)(c) of the Act in order to meet such situations. The Assessing Officer was therefore fully justified in initiating penalty proceedings and levying penalty under section 271(1)(c) of the Act. The finding of the Appellate Tribunal is wholly perverse and cannot be sustained in law. Thus this reference is answered in favour of the Revenue and against the assessee.

Issues Involved:
1. Justification of the Tribunal in deleting the penalty of Rs. 2,97,631.
2. Voluntariness and timing of the revised return filed by the assessee.
3. Applicability of Section 271(1)(c) and Explanation 5 of the Income-tax Act, 1961.
4. Requirement of mens rea for penalty under Section 271(1)(c).

Issue-wise Detailed Analysis:

1. Justification of the Tribunal in Deleting the Penalty:
The Tribunal deleted the penalty on the basis that the Revenue failed to prove that the disputed amount represented the income of the assessee. The Tribunal also stated that there was no evidence of mens rea, or ill-intent, on the part of the assessee to infract the provisions of Section 271(1)(c) of the Act. The Tribunal concluded that the revised return was filed voluntarily under the amnesty scheme for peace of mind, and therefore, no penalty should be imposed.

2. Voluntariness and Timing of the Revised Return:
The assessee filed a revised return disclosing additional income after a search and seizure operation conducted by the Department. The Assessing Officer noted that the revised return was not voluntary but was prompted by the incriminating documents found during the search. The Assistant Commissioner of Income-tax and the Commissioner of Income-tax (Appeals) both held that the revised return was not voluntary and imposed penalties under Section 271(1)(c). The Tribunal, however, found that the revised return was voluntary and for peace of mind, which the High Court later found to be a misconstruction of the provisions of the Act.

3. Applicability of Section 271(1)(c) and Explanation 5:
Section 271(1)(c) deals with the concealment of income and furnishing inaccurate particulars. Explanation 5 to Section 271(1)(c) was inserted to address situations where assets found during a search are claimed to have been acquired by income from previous years. The Explanation deems such income as concealed unless it is recorded in the books of account before the date of the search. The High Court noted that the Tribunal did not consider the effect of Explanation 5 and held that the finding of the Tribunal was wholly perverse in law.

4. Requirement of Mens Rea for Penalty under Section 271(1)(c):
The Tribunal's decision was based on the absence of mens rea. However, the High Court referred to the Supreme Court's decisions, including K.C. Builders v. Asst. CIT and K.P. Madhusudhanan v. CIT, which clarified that the element of mens rea is inherent in the word "concealment." The High Court emphasized that the Explanation to Section 271(1)(c) casts a burden on the assessee to prove that the failure to return the correct income was not due to fraud or neglect. The High Court concluded that the Tribunal's reliance on the absence of mens rea was misplaced and that the penalty was justified under the circumstances.

Conclusion:
The High Court held that the assessee did not act voluntarily and bona fidely in filing the revised return and offering additional income. The revised return was filed after the search and seizure, and the incriminating documents showed undisclosed income. The Assessing Officer was justified in initiating penalty proceedings and levying penalty under Section 271(1)(c). The Tribunal's decision to delete the penalty was found to be perverse and unsustainable in law. The reference was answered in favor of the Revenue and against the assessee.

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