Assistant Commissioner Of Income Tax v. Gebilal Kanhaialal[[1]],Are Fulfilled In The Instant Case. Learned Counsel Further Submits Thata Clear Distinction Needs To Be Maintained Between The Casescover

* THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM + I.T.T.A.No.122 of 2002 %Date: 26.08.2014 M/s.L.Giridharilal and Co. and …appellant. $ Income Tax Officer, Hyderabad. …Respondent ! Counsel for appellant: Sri A.Krishna Koundinya ^ Counsel for Respondent : Sri J.V.Prasad < GIST: > HEAD NOTE: ? Cases referred1. (2012) 348 ITR 561 (SC)2. (2011) 335 ITR 02593. 83 ITR 26 THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM JUDGMENT:(Per the Hon’ble Sri Justice L.Narasimha Reddy) The appellant is a Partnership Firm, undertaking business inbullion and jewellery, and it has been submitting returns under theIncome Tax Act, 1961 (for short ‘the Act’), from time to time. On 26.06.1985, initially a survey was conducted in the businesspremises of the appellant. That, in turn, was converted into a searchunder Section 132 of the Act. It was found that 36 Kgs. of silver andabout 8 Kgs. of gold was not accounted for, in the books. In thecourse of proceedings thereunder, explanation offered by theappellant in respect of 36 Kgs of silver, was accepted. However, theexplanation offered in respect of gold, as to failure to enter in thestock books, was not accepted. Substantial quantity thereof wasseized. In the subsequent proceedings initiated under Section 132of the Act, the value of the seized gold was treated as income. It isstated that on payment of the tax thereon, the gold was released. The appellant filed regular returns for the assessment year1986-87, on 30.09.1986. An order of assessment was passed bytreating the value of the gold as ‘Undisclosed Income’ under Section69A of the Act and the corresponding tax was levied. Though in theappeal preferred by the appellant herein before the Commissioner(Appeals) some relief was granted, the same was nullified in thefurther appeal preferred by the Department. The Assessing Officerinitiated proceedings under Section 271(1)(c) of the Act, proposing tolevy penalty. Explanation submitted by the appellant was found notsatisfactory. An order was passed, on 30.11.2000, levying penalty tothe extent of 200% of the value of seized gold. Aggrieved by that,the appellant approached the Commissioner of Income Tax(Appeals), Hyderabad. Through order, dated 27.12.2001, the Commissioner reduced the penalty to 100%. Further appeal by theappellant to the Income Tax Appellate Tribunal, Hyderabad Bench,was rejected through order, dated 22.05.2002. Hence, this appealunder Section 260A of the Act. Sri A.V.Krishna Koundinya, learned counsel for the appellant,submits that the search was made at a time when the appellant hadstill opportunity to file return and there was no finding at any stage tothe effect that the gold in question was acquired in the earlierassessment year. He contends that in the facts and circumstancesof the case, the appellant was entitled to the benefit of clause (2) ofExplanation 5 to Section 271 of the Act. He submits that all the threeconditions stipulated by the Hon’ble Supreme Court in its decision in Assistant Commissioner of Income Tax v. Gebilal Kanhaialal[[1]],are fulfilled in the instant case. Learned counsel further submits thata clear distinction needs to be maintained between the casescovered by sub-clause (a) of Explanation 5 to Section 271 of the Act, on the onehand, and sub-clause (b) thereof, on the other, in the context oflevying penalty under that Section. He has also placed relianceupon the judgment of the Delhi High Court in Commissioner of Income Tax v. SAS Pharmaceuticals[[2]]and this Court inCommissioner of Income Tax v M/s. Nasa Continental ExportsLimited (I.T.T.A.No.96 of 2001). Assistant Commissioner of Income Tax v. Gebilal Kanhaialal[[1]],are fulfilled in the instant case. Learned counsel further submits thata clear distinction needs to be maintained between the casescovered by sub-clause (a) of Explanation 5 to Section 271 of the Act, on the onehand, and sub-clause (b) thereof, on the other, in the context oflevying penalty under that Section. He has also placed relianceupon the judgment of the Delhi High Court in Commissioner of Income Tax v. SAS Pharmaceuticals[[2]]and this Court inCommissioner of Income Tax v M/s. Nasa Continental ExportsLimited (I.T.T.A.No.96 of 2001). Sri J.V. Prasad, learned counsel for the respondent, on theother hand, submits that the search was conducted in the businesspremises of the appellant and that led to the discovery of asubstantial quantity of gold, that was unaccounted for in the books. He submits that the very fact that the value of the seized gold wastreated as ‘undisclosed income’ and the same stood affirmed by the Tribunal in a different set of proceedings, reveals that there was aclear concealment on the part of the appellant. He further submitsthat the case of the appellant does not fit into any of the exceptions toExplanation 5 of Section 271 of the Act, and that the Tribunal hastaken correct view of the matter. The noticing of gold in the possession of the appellant, thatwas entered into books of account, has resulted in two sets ofproceedings. The first is that in the returns submitted for theassessment year 1986-87, the value of the seized gold was treatedas ‘undisclosed income’ and the tax was levied accordingly. Thataspect assumed finality. The second set of proceedings are initiated under Section271(1)(c) of the Act, proposing to levy penalty. On more occasionsthan one, the Supreme Court and High Courts held that everydisclosure of an item of income over and above what is mentioned inthe return of an assessee, cannot, by itself, be treated as an act ofconcealment, attracting action under Section 271 of the Act. It is onlywhen an element, similar to mens rea exists, that the occasion tolevy penalty would arise. The reason is that the proceedings underSection 271(d) of the Act are treated as quasi criminal in nature. Inthis context, reference may be made to the judgment of the Supreme Court in Hindusthan Steel Limited v. State of Orissa[[3]] The Assessing Officer invoked Section 271(1)(c) of the Act,alleging that the appellant has concealed details of income andfurnished inaccurate particulars. Obviously because theconsequences that flow from the proceedings initiated under Section271(1)(c) of the Act are drastic, the Parliament made an effort tobalance the interest of the State, on the one hand, and the interest ofthe assessee, on the other by incorporating certain safeguards. In this context, Explanation 5 of Section 271 of the Act, becomesrelevant and significant. It reads: “Explanation 5: Where in the course of a searchunder Section 132, the assessee is found to be the ownerof any money, bullion, jewellery or other valuable articleor thing (hereafter in this Explanation referred to asassets) and the assessee claims that such assets havebeen acquired by him by utilising (wholly or in part) hisincome, -of any money, bullion, jewellery or other valuable articleor thing (hereafter in this Explanation referred to asassets) and the assessee claims that such assets havebeen acquired by him by utilising (wholly or in part) hisincome, - this context, Explanation 5 of Section 271 of the Act, becomesrelevant and significant. It reads: “Explanation 5: Where in the course of a searchunder Section 132, the assessee is found to be the ownerof any money, bullion, jewellery or other valuable articleor thing (hereafter in this Explanation referred to asassets) and the assessee claims that such assets havebeen acquired by him by utilising (wholly or in part) hisincome, -of any money, bullion, jewellery or other valuable articleor thing (hereafter in this Explanation referred to asassets) and the assessee claims that such assets havebeen acquired by him by utilising (wholly or in part) hisincome, - (a)for any previous year which has endedbefore the date of the search, but the return ofincome for such year has not been furnishedbefore the said date or where such return hasbeen furnished before the said date, suchincome has not been declared therein; or(b)for any previous year which is to end on orafter the date of the search, then,notwithstanding that such income is declaredby him in any return of income furnished on orafter the date of the search, he shall, for thepurposes of imposition of a penalty underclause (c) of sub-section (1) of this section, bedeemed to have concealed the particulars ofhis income or furnished inaccurate particularsof such income, unless, - (1)such income is, or the transactions resultingin such income are recorded, -in such income are recorded, - (i)in a case falling under clause (a),before the date of the search; andbefore the date of the search; and(ii)in a case falling under clause (b), onor before such date,or before such date, in the books of account, if any, maintained by him for any source of income or such income is otherwise disclosed to the Chief Commissioner or Commissioner before the said date; or (2)he, in the course of the search, makes astatement under sub-section (4) of Section132 that any money, bullion, jewellery or othervaluable article or thing found in hispossession or under his control, has beenacquired out of his income which has notbeen disclosed so far in his return of incometo be furnished before the expiry of timespecified in sub-section (1) of Section 139,statement under sub-section (4) of Section132 that any money, bullion, jewellery or othervaluable article or thing found in hispossession or under his control, has beenacquired out of his income which has notbeen disclosed so far in his return of incometo be furnished before the expiry of timespecified in sub-section (1) of Section 139, and also specifies in the statement themanner in which such income has beenderived and pays the tax, together withinterest, if any, in respect of such income.” The provision is in two parts. The first is about thecircumstances under which the penalty becomes leviable, coveringsub-clauses (a) and (b). The second is the exceptions carved out toit in the form of clauses (1) and (2). Sub-clauses (a) and (b) covertwo substantially different situations. The first one is where theassessee failed to furnish the details of the income that was foundduring search, in the returns filed for the assessment year. It meansthat there was a clear failure or suppression on the part of theassessee, to mention in the returns filed by him. Sub-clause (b)covers a situation where the assessee had still time to file thereturns, wherein he could have disclosed the income or otherparticulars that came to be noticed in the search. The fact that theParliament maintained such a dichotomy, needs to be noticed. Thecase on hand falls into sub-clause (b). The reason is that by the timethe search was undertaken, the appellant had time to file returns,and as a matter of fact, the returns were filed on 30.09.1986, whereinthe income through which the seized gold was acquired, was alsodisclosed. It is a different matter that the plea was not accepted bythe Assessing Officer. Coming to the exceptions, the second one becomes relevant,in the facts of the present case. I n Gebilal Kanhaialal’s case (1supra), the Supreme Court held that three conditions must be fulfilledby an assessee, before claiming the immunity under clause (2) ofExplanation 5 to Section 271 of the Act. They are, (1) the assessee must make a statement under Section 132(4)of the Act, in the course of search to the effect that the unaccounted assets and incriminating documents found in his possession duringsearch have been acquired out of his income that has not beendisclosed in the return of income to be furnished before the expiry oftime specified in Section 139(1) of the Act; (2) the assessee has specified in a statement under Section132(4) of the Act, the manner in which the income stood derived; and (3) the assessee had paid tax together with interest, if any, inrespect of such undisclosed income. When these requirements are fitted into the case on hand, thefirst condition needs slight adjustment, since the appellant had timeto file the return for the particular assessment year. To be precise,the search was made on 26.06.1985, and the returns were filedwithin time, on 30.09.1986. There was no finding at any stage of theproceedings that the acquisition of the seized gold was during anyearlier assessment year. Therefore, the first condition can bedeemed to have been complied with by the appellant. So far as the second condition is concerned, a statement wasrecorded from the appellant under Section 132(4) of the Act. As amatter of fact, the Assessing Officer made a specific reference to thatstatement. However, he took the view that the explanation offered bythe appellant, is not satisfactory. What is required in the context ofclause (2) of Explanation 5 to Section 271 of the Act is making of astatement by the assessee and not the acceptability or otherwise ofit. Since the appellant made the statement, condition No.2 iscomplied with. Coming to condition No.3, the record clearly discloses that thevalue of the seized gold was treated as income of the appellant andhe paid thereon. With this, the case fits into clause (2) ofExplanation 5, which in turn, would bring about immunity to the appellant vis-à-vis Section 271 of the Act. Though the Commissioner was convinced to certain extentabout the cause pleaded by the appellant, has limited the relief to theone of restricting the penalty to 100%. The Tribunal proceeded onhyper-technicalities and acted as though every seizure must entailinitiation of proceedings under Section 271 of the Act. Such anapproach cannot be countenanced. We hold that the case of theappellant is covered by clause (2) of Explanation 5 of Section 271 ofthe Act. We, therefore, allow the appeal and set aside the orderpassed by the Tribunal as well as the Commissioner. The appealpreferred by the appellant before the Commissioner alone shallstand in its entirety and the penalty imposed by the Assessing Officeris set aside. There shall be no order as to costs. The miscellaneous petition filed in this appeal shall alsostand disposed of. ____________________ L.NARASIMHA REDDY, J. _____________________ CHALLA KODANDA RAM, J. Date:26.08.2014 L.R. copy to be marked. GJ [1](2012) 348 ITR 561 (SC) [2](2011) 335 ITR 0259 [3]83 ITR 26