2002 (1) TMI 247 - AT - Income Tax

Summary

Issues Involved:
1. Penalty under section 271(1)(c) of the Income Tax Act.
2. Applicability of Explanation 5 to section 271(1)(c).
3. Validity of initiation of penalty proceedings.
4. Assurance given during the search regarding immunity from penalty.
5. Taxability of income received from the company by the managing director.

Detailed Analysis:

1. Penalty under section 271(1)(c) of the Income Tax Act:
The primary issue in this appeal is the imposition of a penalty of Rs. 59,302 under section 271(1)(c) of the Income Tax Act. The appellant had filed a return of income showing Rs. 52,919. A search conducted on 20-8-1987 revealed incriminating documents, leading to a revised return declaring Rs. 2,02,778, including Rs. 1,47,500 as undisclosed income. The Assessing Officer determined the concealed income at Rs. 1,27,500 and initiated penalty proceedings, ultimately imposing a penalty of Rs. 75,000, later reduced to Rs. 59,302 by the CIT(A).

2. Applicability of Explanation 5 to section 271(1)(c):
The appellant argued that the disclosure during the search should grant immunity from penalty under Explanation 5 to section 271(1)(c). However, both the Assessing Officer and CIT(A) rejected this claim, as the original return was filed before the search, making Explanation 5 inapplicable. The CIT(A) noted that the question posed during the search was general and did not constitute a promise of immunity from penalty.

3. Validity of initiation of penalty proceedings:
The appellant contended that the penalty proceedings were not properly initiated, as the Assessing Officer merely directed "issue notice under section 271(1)(c)" without recording proper satisfaction. The learned Departmental Representative argued that the satisfaction of the Assessing Officer need not be recorded in the assessment order itself and could be evident from other materials such as order sheets or ITNS 150. The Tribunal remitted the matter to the CIT(A) to verify if the Assessing Officer recorded the necessary satisfaction during the assessment proceedings.

4. Assurance given during the search regarding immunity from penalty:
The appellant claimed that the department lured her into making a disclosure during the search by assuring no penalty would be imposed. The CIT(A) and the Tribunal found no merit in this argument, noting that any assurance given was contingent on the disclosure being covered under Explanation 5 to section 271(1)(c), which was not the case here. The Tribunal emphasized that there could be no estoppel against the statute.

5. Taxability of income received from the company by the managing director:
The appellant argued that the income received from the company should not be taxed again in her hands, as it was neither dividend nor deemed dividend. The Tribunal rejected this contention, stating that distribution of profits by the company, whether declared as dividend or not, is taxable in the hands of the shareholders. The Tribunal cited various Supreme Court decisions to support the view that even informal distributions of profits are taxable as income.

Conclusion:
The Tribunal upheld the penalty under section 271(1)(c) but remitted the matter to the CIT(A) to verify if the Assessing Officer recorded the necessary satisfaction during the assessment proceedings. The appeal was partly allowed for statistical purposes.