2025 (7) TMI 28 - AT - Income Tax

Penalty u/s. 271(1)(c) - disclosure of additional income in response to notice u/s. 153C - search and seizure conducted in the case of a third party/Malabar Group of Companies - HELD THAT - On a mere reading of the orders of the authorities below it would be clear that the lower authorities had failed to discuss the evidences found as a result of search and seizure in the case of Malabar Group of companies which led to the unearthing of the undisclosed income in the hands of the appellant. AO also not discussed as to how the seized material led to unearthing of the undisclosed income and how the seized material in the case of Malabar Group of companies has relation to the appellant herein. Merely because the appellant has disclosed additional income in response to notice u/s. 153C it cannot lead to the conclusion that the appellant is guilty of concealing the particular of income or guilty of concealment of income. It is the case of assessment made u/s. 153C of the Act pursuant to the initiation of search and seizure in the case of a third person. In the above circumstances we remit the matter back to the file of the CIT (A) for de novo disposal of the appeal in accordance with law after affording a reasonable opportunity of being heard to the assessee. Appeals filed by the assessee are allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether penalty under section 271(1)(c) of the Income-tax Act, 1961 is leviable on the appellant for concealment of income disclosed during proceedings initiated under section 153C of the Act consequent to search and seizure conducted in the case of a third party (Malabar Group of Companies).

- Whether the disclosure of additional income by the appellant in response to notice issued under section 153C can be treated as concealment of particulars of income attracting penalty under section 271(1)(c).

- The applicability and interpretation of judicial precedents, particularly the Supreme Court decisions in Sir Shadilal Sugar & General Mills Ltd. v. CIT and MAK Data Private Limited v. CIT, in the context of penalty proceedings arising from search and seizure operations involving third parties.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Levy of penalty under section 271(1)(c) for concealment of income disclosed during proceedings under section 153C

Relevant legal framework and precedents: Section 271(1)(c) of the Income-tax Act empowers the tax authorities to impose penalty for concealment of particulars of income or furnishing inaccurate particulars of income. Section 153C provides for assessment of income found during search or seizure in the case of a person other than the searched person. The Supreme Court in Sir Shadilal Sugar & General Mills Ltd. v. CIT has held that mere acceptance of additional income does not necessarily imply concealment. Conversely, MAK Data Private Limited v. CIT held that concealment can be inferred where undisclosed income is unearthed during search and seizure.

Court's interpretation and reasoning: The Tribunal noted that the lower authorities failed to analyze or discuss the incriminating material seized in the case of the Malabar Group of Companies and its direct nexus with the appellant's undisclosed income. The AO and CIT(A) proceeded to levy penalty solely on the basis of the appellant's acceptance of additional income without establishing concealment or deliberate suppression of particulars of income.

Key evidence and findings: The appellant had filed the original return declaring income of Rs. 3,66,650. Subsequently, during search and seizure in a third party's case, incriminating material relating to the appellant was found. The appellant did not file a return in response to the section 153C notice but disclosed additional income which was accepted by the AO. However, the AO did not demonstrate how the seized material directly implicated the appellant or how the appellant concealed particulars of income.

Application of law to facts: The Tribunal emphasized that penalty under section 271(1)(c) requires proof of concealment or furnishing inaccurate particulars. The mere fact of additional income being disclosed after search and seizure in a third party's case does not ipso facto establish concealment by the appellant. The authorities below erred in not examining the evidentiary link between the seized material and the appellant's income and in not affording the appellant a reasonable opportunity to explain the nature of the disclosure.

Treatment of competing arguments: The appellant contended that the disclosure was voluntary and not based on the seized material, thus negating concealment. The AO relied on MAK Data Private Limited to assert concealment. The Tribunal found the AO's reliance misplaced in absence of detailed discussion or evidence connecting the seized material to the appellant's income.

Conclusions: The Tribunal held that the penalty could not be sustained without proper examination of the seized material and its relation to the appellant's income. It remitted the matter for de novo consideration by the CIT(A) after affording the appellant a reasonable opportunity of hearing.

3. SIGNIFICANT HOLDINGS

- "Merely because the appellant has disclosed additional income in response to notice u/s. 153C of the Act, it cannot lead to the conclusion that the appellant is guilty of concealing the particular of income or guilty of concealment of income."

- The authorities below failed to discuss "the evidences found as a result of search and seizure in the case of Malabar Group of companies, which led to the unearthing of the undisclosed income in the hands of the appellant."

- The AO also did not explain "how the seized material led to unearthing of the undisclosed income and how the seized material in the case of Malabar Group of companies has relation to the appellant herein."

- The Tribunal concluded that "it is the case of assessment made u/s. 153C of the Act, pursuant to the initiation of search and seizure in the case of a third person," and therefore, the penalty order was set aside and remitted for fresh adjudication.

- The core principle established is that penalty under section 271(1)(c) cannot be imposed merely on the basis of acceptance of additional income disclosed during proceedings under section 153C without a clear nexus between the seized material and concealment by the assessee, and without proper adjudication after providing opportunity to the assessee.