TMI Blog2011 (3) TMI 973X X X X Extracts X X X X X X X X Extracts X X X X ..... It is well settled that the blameworthiness of the assessee with respect to the original return cannot be avoided by filing a fresh return after concealment was detected by the ITO - As the assessee claimed the source for investment made in a year as the income assessed for the earlier assessment year for which no penalty for concealment had been levied, it has fallen within Explanation 2 to section 271(1) - Having carefully perused the assessment orders and the notices issued by the Assessing Officer, we are of the view that it was a typographical error in the penalty notice and the provisions of section 292B of the I.T. Act comes in rescue for the department - Held that: this defect in the notice to be a typographical error in mentioning the assessment year for which the entire penalty proceedings cannot be held to be invalid whether the additional income declared by the assessee during the course of survey conducted before the start of the assessment proceedings can be called to be an addition for invoking the Explanation 2, on claim of the assessee raised in succeeding year to be the source of deposits - Held that: the provisions of Explanation to section 271 can only be i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was claimed as a source of investment for giving site advances to the Kendrapara work site. Therefore, by invoking the Explanation 2 to section 271(1)(c), the Assessing Officer initiated the penalty proceedings under section 271(1)(c) of the Act for the assessment year 2004-05. 4. In response to penalty notice, the assessee contended before the Assessing Officer that originally the advances paid which were in the nature of capital outgo were wrongly booked as revenue expenditure in the books of account. In the course of survey, the assessee rectified the same and offered the income. But the payments being capital in nature, it was always open to the assessee to show it under the correct head i.e., capital expenditure in the books of account. As the books of account of the assessee for the year ending 31-3-2004 had already been closed by the time of survey, the rectification entries could be passed only in the year ending on 31-3-2005 even though the transaction pertained to the year ending 31-3-2004. As no addition was made in the assessment order for the asst. year 2004-05 which was completed under section 143(3) vide order dated 30-3-2006, Explanation 2 to section 271(1)(c) ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Kendrapara work site. 7. It was further contended before the CIT(A) that the Explanation 2 to section 271(1)(c) is applicable only when certain additions are made in the assessment. No additions were made while completing the assessment for the assessment year 2004-05, wherein the income disclosed by the assessee in the revised return was accepted. It was further contended that explanation 2 to section 271(1)(c) is applicable only in case of intangible additions like "application of presumptive rate of gross profit or of yield or on account of estimated disallowance of certain expenses, shortfall, wastage, etc." made by the Assessing Officer in the course of assessment proceedings. But in the instant case, no such additions either intangible or tangible was made while completing the assessment. He has also placed a reliance upon the order of the Tribunal in the case of Asstt. CIT v. Avtar Singh [2004] 1 SOT 534 (Chd.) (SMC). 8. The CIT(A) re-examined the issue in the light of assessee's contentions but he was not convinced with it. While confirming the penalty levied by the Assessing Officer, the CIT(A) has observed that in the statement of the Managing Director of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the penalty proceedings under section 271(1)(c) to the effect that the additional income disclosed for the asst. year 2004-05 was claimed as a source of investment in the asst. year 2005-06. Hence, the Assessing Officer clearly had in mind the provisions contained in Explanation 2 to section 271(1)(c) while initiating the penalty proceedings. Therefore, mentioning of the asst. year as 2005-06 in the penalty notice dated 26-12-2007 is prima facie appears to be a typographical error which was subsequently rectified by the Assessing Officer vide the show cause letter dated 23-6-2008. In this context, the provisions contained in section 292B of the Act are relevant. Section 292B has been enacted to provide against purely technical objections without substance coming in the way of the validity of the assessment proceedings etc. It has been provided that no return of income, assessment, notice, summons or other proceedings shall be invalid merely by reason of any mistake, defect or omission, if the return, assessment, notice, summons or other proceedings is in substance and effect in conformity with or according the intent and purpose of the Act. In the instant case, the intention of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the addition was made would have expired. The penalty could also not be imposed in respect of the year in which the deposit was made, as there was no concealment in that year, the deposit having been explained as out of an earlier year's income. New expln.2 provides that in such cases, the assessee would become liable to penalty for concealment in respect of additions made in the earlier year in which the additions were made." Against the above background, the facts of the appellant's case needs to be examined regarding the applicability of Explanation 2 to section 271(1)(c). It is not disputed that an amount of Rs. 65 lakhs was credited to the profit loss account as income from miscellaneous sources for the asst. year 2005-06. The said income was shown as a source for giving site advance to Kendrapara work site. When confronted about this fact, the appellant admitted that the said income pertain to asst. year 2004-05 which was disclosed in course of the survey and in the revised return filed for that asst. year subsequent to survey. The apparent conclusion from the above transactions recorded in the books of account of the appellant is that the amount of Rs. 65 lakhs was so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of Rs. 65 lakhs which was disclosed in course of survey. While completing the assessment under section 143(3) vide order dated 30-3-2006, the income disclosed in the revised return was accepted. In this context, it is observed that a revised return is possible only where it is bona fide in the sense that the omission should have been due to an inadvertence or mistake and not where there was deliberate concealment. The effect of the revised return becomes relevant for the purposes of levy of penalty. The preponderant view of the Courts as regards its effect on penalty has been that the assessee could not avoid the consequences of a deliberately false and original return by filing revised return after the concealment has been brought home by the Assessing Officer. This view can be taken to be final after the decision of Hon'ble Supreme Court by a Bench of three judges in the case of G.C. Agarwal v. CIT reported in 186 ITR 571. As per the facts of the appellant's case, it is noted that the appellant was obliged to file a revised return because of the deficiencies noted in the accounts which were detected in course of the survey. Not only the deficiencies were detected, they we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counts in proportion to their profit sharing ratio with a narration that these credits represented additional income offered for the earlier asst. year. Therefore, the Assessing Officer initiated penalty proceedings for the earlier asst. year. Therefore, the Assessing Officer initiated penalty proceedings for the earlier asst. year when the additional income was offered and imposed the penalty. The said penalty was confirmed by the first appellate authority and the Tribunal. The said order was confirmed by Hon'ble Kerala High Court by stating that provisions of Explanation 2 was squarely applicable. The Special Leave Petition against the said decision of Hon'ble Kerala High Court was dismissed by Hon'ble Supreme Court as reported in 180 ITR (St) 40. In view of this, and in view of the similarity of the facts, it is concluded that the Assessing Officer is justified in levying the impugned penalty under section 271(1)(c) of the Act for the asst. year 2004-05. As against the minimum penalty leviable of Rs. 23,32,000, the Assessing Officer has imposed a penalty of Rs. 25 lakhs which is reasonable and no interference is called for on the quantum of penalty also." 9. Aggrieved, the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the offered additional income was available with the assessee though not introduced in the books of account and the said additional income was taken as a receipt in the subsequent assessment years and was debited to the Kendrapara site advance. Therefore, the additional income offered by the assessee cannot be called to be the intangible additions. The Ld. Counsel for the assessee has submitted that wherever additions are made on account of unexplained cash credit that addition can be called to be the intangible additions because nothing is available with the assessee to say that that amount of addition can be taken as a receipt in succeeding year. Therefore, the additional income offered in the instant case does not fall within the definition of intangible addition and thus Explanation 2 to section 271(1) cannot be invoked. 12. The Ld. Counsel for the assessee further contended that the Explanation 2 can only be invoked where the source of any receipt, deposit, outgoing or investment is claimed to be an amount which had been added in computing the income or deducted in computing the loss in the assessment for any earlier assessment year. Meaning thereby, this Explanation 2 ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 2005-06. Hence, the Assessing Officer clearly had in mind the provisions contained in the Explanation 2 to section 271(1)(c) while initiating the penalty proceedings. Moreover, in the letter dated 23-6-2008, the correct assessment year was mentioned as 2004-05. Therefore, for this typographical error in the notice, the entire penalty proceedings cannot be held to be invalid. 15. The Ld. D.R. invited our attention to the provisions of Explanation 2 and board Circular No. 204, dated 24-7-1976 in support of his contention that Explanation 2 can be invoked if the assessee takes the benefit of intangible additions made in earlier years and claimed it to be the source of any receipt, deposit, outgoing or investment in succeeding years. The intangible additions are those additions which were made by the Assessing Officer for technical reasons i.e. application of presumptive rates of gross profit or of yield or on account of estimated disallowance of certain expenses, shortfalls, wastage, etc. as has been explained through circular of the CBDT. Therefore, it is not proper to say that intangible additions are only those additions which were made on account of unexplained cash credits. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... go were wrongly booked as revenue expenditure in the books of account. In the course of survey, the assessee rectified the same and offered the income. But the payments being capital in nature, it was always open to the assessee to show it under the correct head i.e. the capital expenditure in the books of account. This argument of the assessee is altogether different plea than that was taken during the course of survey. Our attention was categorically invited to the order of the Assessing Officer in penalty proceedings in which he has reproduced the statement of the assessee recorded during the course of survey. Assessee has categorically accepted the discrepancies in maintenance of vouchers and offered the additional income of Rs. 65 lakhs for the assessment year 2004-05. Question No. 15 and its answer is extracted here under for the sake of reference: "Q.15 For the assessment year 2004-05, I upon verification, it is noticed that the expenditure under the heads 'Labour charges', Machinery maintenance etc., are not supported by proper vouchers/bills and satisfactory proof. Please explain these discrepancies. Ans. I accept that there are certain discrepancies. In view of these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt appears (such earlier assessment year hereafter in this Explanation referred to as the first preceding year) which is sufficient to cover the amount represented by such receipt, deposit or outgoing or value of such investment (such amount or value hereafter in this Explanation referred to as the utilized amount) shall be treated as the income of the assessee, particulars of which had been concealed or inaccurate particulars of which had been furnished for the first preceding year; and where the amount so added or deducted in the first preceding year is not sufficient to cover the utilized amount, that part of the amount so added or deducted in the year immediately preceding the first preceding year which is sufficient to cover such part of the utilized amount as is not so covered shall be treated to be the income of the assessee, particulars of which had been concealed or inaccurate particulars of which had been furnished for the year immediately preceding the first preceding year and so on, until the entire utilized amount is covered by the amounts so added or deducted in such earlier assessment years." 22. The scope of explanation was explained in paragraph 61.9 in Circular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessees urge at times that such deposits, etc., have come out of the income represented by the aforesaid additions made hitherto leviable in such cases as the time limit for initiating concealment penalty proceedings in respect of the earlier year in which the addition was made would have expired. The penalty could also not be imposed in respect of the year in which the addition was made, as there was no concealment in that year, the deposit having been explained as out of an earlier year's income. New Explanation 2 provides that in such cases, the assessee would become liable to penalty for concealment in respect of additions made in the earlier year in which the additions were made." 24. The scope of explanation was also examined by the Hon'ble Kerala High Court in the case of Calicut Trading Co. v. CIT [1989] 178 ITR 430/47 Taxman 27 in which their Lordship have held that the assessment order passed by the ITO accepting the revised return not being filed voluntarily before the concealment was deducted could not be treated as revised return filed under section 139(5) and will not absolve the assessee from penal consequences. During the examination of assessee's account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal also found that the entire move of the assessee was to file a revised return disclosing a higher income so that if the ITO accepted the same, the additional amount could be brought in the books of the company without any penal liability for concealment. Therefore, the return filed so, as to include the concealed income, cannot be characterized as a revised return within the meaning of section 139(5) of the IT Act. It cannot be stated that the return was filed when the assessee discovered any omission or any wrong statement in the original return. In short, a return filed so as to include concealed income cannot be treated as a revised return at all. The return, in fact, is an admission of concealed income masquerading as a revised return. The Tribunal also found that the so-called revised return was not filed voluntarily before the concealment was detected. As stated by the Tribunal, the entire move of the assessee was to file a revised return disclosing a higher income so that if the ITO accepted the same, an additional amount could be brought in the books of the company without any penal liability for concealment. It is well settled that the blameworthiness of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if there is any intangible addition. Where intangible additions made in the earlier years are cited by an assessee as the source of his funds in a subsequent year, the said funds would be deemed to represent the assessee's income particulars in respect of which have been concealed within the meaning of clause (c) of sub-section (1) of section 271 of the IT Act. Insofar as there is no intangible addition in the case in question, according to the assessee, Explanation 2 is not attracted. As stated already, all the authorities, as a matter of fact, found that there had been intangible addition of Rs. 2,50,000 and, therefore, we do not find any substance in the said argument. Further, the statement prefacing the recommendation of the Wanchoo Committee also says that: "while we are of the view that penalties should not be draconian, we also strongly feel that those who are tempted to resort to concealment of income should not be allowed to get away with tenuous legal interpretations". That is exactly what the assessee's counsel is attempting to do in this case by relying upon the so-called revised return. We hold that the order of the Tribunal is not defective in law or in fact." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the notice to be a typographical error in mentioning the assessment year for which the entire penalty proceedings cannot be held to be invalid. 27. The next argument of the assessee that the explanation 2 to section 271 can only be invoked where intangible additions i.e. on account of unexplained credits, are made in earlier assessment years and the assessee claims the said amount of addition as a source of any receipt, deposit, outgoing or investment in succeeding year has been answered by clarification by the board through Circular No. 204, dated 24-7-1976. Through this circular, the board has clarified that additions are sometimes made by the ITO for purely technical reasons i.e. application of presumptive rate of gross profits or of yield, or on account of estimated disallowance of certain expenses, shortfalls, wastage, etc., but no penalty for concealment is levied in respect of these additions for want of adequate evidence to establish that these additions represents the assessee's concealed income but in later assessment when called upon to explain certain deposits etc., the assessee urges at time that such deposits etc. have come out of the income represented by the afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be an amount which had been added in computing the income or deducted in computing the loss in assessment of such person for any earlier assessment year or years but in respect of which no penalty under this section had been levied. We have carefully examined this argument of the assessee in the light of provisions of explanation 2, judgment of the Kerala High Court and the Board Circular and we find force in this argument in as much as the emphasis was given in Explanation 2 to the additions made during the course of assessment for any earlier assessment years. Before initiating the assessment, if the assessee has filed the revised return by offering an additional income therein and the Assessing Officer frame the assessment on the basis of the revised return; can the additional income offered in the revised return be called to be an addition made in the assessment? The answer is certainly in the negative. In a common parlance, additions means the additional income assessed by the Assessing Officer when the assessee initially disputes the objections raised by the Assessing Officer The assessment under section 143 is a process for examination/processing the returns filed by the ..... 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