Ita/202/2010 Of The Commissioner Of Income Tax (Central) v. M/S.heera Construction Co.pvt. Ltd

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE B.P.RAY MONDAY, THE 4TH APRIL 2011 / 14TH CHAITHRA 1933 ITA.No. 202 of 2010() --------------------- AGAINST THE ORDER IN ITA.59/COCH/2006 DATED 26/08/2009 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT / APPELLANT ----------------------------- THE COMMISSIONER OF INCOME TAX (CENTRAL), KOCHI. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): / RESPONDENT --------------- M/S. HEERA CONSTRUCTION CO. PVT. LTD. HEERA PARK, M.P.APPAN ROAD, VAZHUTHACAUD, TRIVANDRUM. ADV. SRI.BHAGAVATHIPERUMAL KAMALAHASAN FOR R SRI.J.JULIAN XAVIER FOR R SRI.FIROZ K.ROBIN FOR R MR.S.SREEDHAR THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 04/04/2011, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.R. C.N.RAMACHANDRAN NAIR & BHABANI PRASAD RAY, JJ. ----------------------------------I.T.A.No.202 of 2010 ---------------------------------Dated, this the 4[th] day of April, 2011 J U D G M E N T Ramachandran Nair, J. Respondent assessee is a Private Limited Company engaged inreal estate business i.e. construction and sale of commercial andresidential apartments and buildings. A search was conducted bythe Income Tax Department in the business premises and in theresidence of Directors of the Company under Section 132 of theIncome Tax Act (hereinafter referred to as the Act for short).Pursuant to the search, the Assessing Officer proposed to makeblock assessment under Section 158 BC of the Act and as the firststep, the assessee was called upon to furnish return of disclosedincome in Form No.2B. Even though assessee filed return disclosingundisclosed income of Rs.79,10,187/- the assessee did not remitthe tax thereon, which was Rs.48,41,034/- prior to or along withfiling of returns. The Assessing Officer proceeded to makeassessment by making substantial addition to the returned income ITA No.202/2010 -2- and the total income assessed was Rs.1,32,89,530/-. However, inappeal, the Commissioner (Appeals) reduced the addition to thereturned income to Rs.23,32,026/-. We are informed thatassessment appeal has become final and the addition to thereturned income assessed is Rs.23,32,026/-. Besides completingthe assessment on the undisclosed income, which comprises theincome returned by the assessee and the addition made thereto bythe Officer, the Assessing Officer proceeded to levy penalty underSection 158BFA(2) of the Act. The Assessing Officer noticed that theassessee though disclosed Rs.79,10,187/- as undisclosed incomeby filing return in form No.2B pursuant to notice issued by theOfficer under Section 158BC(1), the assessee did not pay the tax onthe admitted undisclosed income returned either prior to or alongwith filing of return as required under the proviso to Section 158BFA(2) to get immunity from payment of penalty at least in respect oftax on such undisclosed income returned by the assessee.Therefore, penalty was levied at equal amount of tax on the entireundisclosed income assessed under Section 158BC(c) of the Act,which comprises the undisclosed income returned by the assesseeand addition made by the Assessing Officer thereto. Even though ITA No.202/2010 -3- ITA No.202/2010 -3- the penalty levied by the Officer with reference to the incomeoriginally assessed was Rs.81,33,192/- being the minimum ofpenalty leviable on the total income, when the assessee filed appealagainst the penalty order, the CIT (Appeals) held that no penaltycould be levied with reference to the tax payable on the undisclosedincome returned by the assessee pursuant to notice issued by theOfficer after search. So far as the penalty on the balance incomeassessed is concerned, the CIT (Appeals) held that only minimumpenalty is leviable i.e. at equal amount of tax on the additionssustained by him. Accordingly, he reduced penalty toRs.13,99,216/-, which is the tax on the addition sustained by himin the assessment appeal which is Rs.23,32,026/-. The Departmentchallenged the CIT(Appeals) order before the Tribunal by specificallytaking the ground that the assessee is not entitled to get anyimmunity from penalty on the tax payable on the undisclosedincome returned by it for the reason that they have not compliedwith the mandatory condition of payment of admitted tax along withreturn filed in Form 2B as required in the first proviso to Section158BFA(2) of the Act. When the appellant was heard by the twomember bench of the Tribunal, the Judicial Member allowed the ITA No.202/2010 -4- Department Appeal by reversing the order of the CIT (Appeals) andby restoring the minimum penalty levied by the Officer withreference to the tax payable on the total undisclosed incomeassessed. However, the Accountant Member disagreed with theorder of the Judicial Member and he dismissed the DepartmentAppeal confirming the order of the CIT (Appeals). When the matterwas referred to the 3[rd] member, the President of the Tribunal, heconcurred with the Accountant member through separate order, asa result of which, by majority, the Tribunal dismissed the appealfiled by the Revenue. It is against the majority decision of theTribunal, the Revenue has filed this appeal before us. 2.We have heard Senior counsel Shri.P.K.R.Menonappearing for the Revenue and Advocate Shri.S.Sreedhar along withAdvocate Shri.B.Kamalahasan, appearing for the respondentassessee. 3.Since we have to only consider the scope of Section158BFA(2) of the Act, we extract hereunder the said provision. Since we have to only consider the scope of Section “Levy of interest and penalty in certain cases.-------158FBA(1)(2)The Assessing Officer or the Commissioner(Appeals) in the course of any proceedings under thisChapter, may direct that a person shall pay by way of penalty a sum which shall not be less than the amount oftax leviable but which shall not exceed three times theamount of tax so leviable in respect of the undisclosedincome determined by the Assessing Officer underclause (c) of section 158BC: Provided that no order imposing penalty shall be madein respect of a person if - (i)such person has furnished a return under clause (a)of section 158BC; (ii)the tax payable on the basis of such return hasbeen paid or, if the assets seized consist of money, theassessee offers the money so seized to be adjustedagainst the tax payable; (iii)evidence of tax paid is furnished along with thereturn; and (iv)an appeal is not filed against the assessment ofthat part of income which is shown in the return: Provided further that the provisions of the precedingproviso shall not apply where the undisclosed incomedetermined by the Assessing Officer is in excess of theincome shown in the return and in such cases thepenalty shall be imposed on that portion of undisclosedincome determined which is in excess of the amount ofundisclosed income shown in the return.” 4.The main controversy is whether the Tribunal is justified in holding that penalty under the above provision could not belevied with reference to tax on undisclosed income returned by the (iii)evidence of tax paid is furnished along with thereturn; and (iv)an appeal is not filed against the assessment ofthat part of income which is shown in the return: Provided further that the provisions of the precedingproviso shall not apply where the undisclosed incomedetermined by the Assessing Officer is in excess of theincome shown in the return and in such cases thepenalty shall be imposed on that portion of undisclosedincome determined which is in excess of the amount ofundisclosed income shown in the return.” 4.The main controversy is whether the Tribunal is justified in holding that penalty under the above provision could not belevied with reference to tax on undisclosed income returned by the assessee, even if such assessee has not complied with therequirements of clauses (ii) & (iii) of the first proviso above stated,which requires the assessee to remit tax before filing return and ITA No.202/2010 -6- produce proof thereof along with return. The assessee does notdispute it's liability for penalty on the additional income assessedi.e. the income assessed over and above the returned income andthe minimum penalty attributable to the tax on such income standssustained by orders of the CIT (Appeals), which is not contested bythe assessee in further appeal. 5.The contention raised by the Senior Counsel for theRevenue is that the four conditions provided in the first proviso aremandatory for getting immunity from payment of penalty on theundisclosed income returned by the assessee. In other words, theRevenue's stand is that filing of return on undisclosed income doesnot give any immunity to the assessee from penalty under Section158BFA(2) unless the assessee satisfies all the conditions includingpayment of tax prior to filing of return and production of proof ofsuch payment along with the return so filed. Admittedly, theassessee did not pay tax along with the return filed returningundisclosed income. The assessee did not even pay the admittedtax for maintainability of the appeal filed against assessment beforethe first appellate authority and consequently the first appeal filedgot dismissed on account of non-payment of admitted tax. The ITA No.202/2010 assessee however approached the Commissioner of Income Tax onthe administrative side and based on the installment facilityobtained by the assessee, the assessee paid admitted tax in easyinstallments and only on payment of arrears of tax, the quantumappeal filed against the assessment itself was entertained by the CIT(Appeals) that too after remand by the Tribunal.6.In short the question to be considered is whetherassessee forfeits immunity available to it from penalty on theundisclosed income returned on account of non-payment ofadmitted tax along with the return filed declaring undisclosedincome. While the Revenue's counsel submitted that satisfaction ofthe conditions in the first proviso is mandatory to get immunityfrom penalty with reference to the undisclosed income, the learnedcounsel for the assessee relied on the decision of the RajasthanHigh Court in Commissioner of Income Tax v. Satyendra KumarDosi, reported in 315 ITR 172 and contended that the penalty underSection 158 BFA(2) itself is discretionary and when the CIT (Appeals)as well as the Tribunal exercised discretion in favour of theassessee, then there is no scope for interference by this Court onthe reduction granted by CIT (Appeals). ITA No.202/2010 -8- 7. Even though learned counsel for both sides relied on ITA No.202/2010 -8- 7. Even though learned counsel for both sides relied on several decisions, we do not think there is any need to considerthose decisions which are on general principles applicable topenalty matters and not on the special provision above referred.Further we have to take note of the fact that the defense ofreasonable cause provided under Section 273B of the Act against allother cases of penalty covered by the Act is not applicable forpenalty that could be levied under Section 158BFA(2) of the Act.Therefore, we have to consider the nature and scope of penaltystrictly in accordance with the provisions contained in the abovespecific provisions of the Act. 8.On an analysis of Section 158FBA(2) extracted above,what we find is that penalty on undisclosed income assessed underSection 158BC is discretionary and it can be levied by the AssessingOfficer as well as by the Commissioner of Income Tax (Appeals).The power is given to the Commissioner (A) because if theAssessing Officer does not levy penalty after completion ofassessment, the CIT (Appeals) while considering assessment appealis always free to consider whether penalty is to be levied, no matterthe Assessing Officer has not levied penalty, the Commissioner On an analysis of Section 158FBA(2) extracted above, ITA No.202/2010 (Appeals) can order levy of penalty under the said clause. Whilethere is discretion in regard to levy of penalty, depending on factsand circumstances of each case once the authority competent tolevy penalty chooses to levy penalty then the discretion of quantumof penalty ranges from 100% to 300% of the tax, which means thatthe minimum penalty leviable is equal to the amount of tax andmaximum is at three times of tax. The discretion in regard to levyof penalty is controlled by two provisos to the said sub Section,which are discussed below. 9.Subject to the 2[nd] proviso, the 1[st] proviso providescomplete immunity from penalty on the tax due in respect of theundisclosed income returned by the assessee based on noticeissued by the Assessing Officer after search or survey. However, theconditions provided in clauses (i) to (iv) of the first proviso are thatthe assessee should have filed return pursuant to notice issued bythe Officer and tax due in respect of the undisclosed incomereturned has to be paid before filing of return and the evidence oftax payment has to be furnished along with the return filed.However, if cash is seized in the course of search, the requirementof the provisio is satisfied if instead of making payment assessee ITA No.202/2010 -10- allows the Assessing Officer for adjustment of the seized cashtowards tax payment based on return of undisclosed income filed.Apart from the requirement of payment of tax prior to or along withfiling the return the assessee should also confirm to the AssessingOfficer that no appeal will be filed challenging the assessment onthe income voluntarily disclosed by the assessee in the return filed.In other words, if the assessee files appeal challenging theassessment of undisclosed income returned by the assessee, thebenefit of exemption from penalty will not be available under the 1[st]proviso to the said Section. The 2[nd] proviso is a further conditionqualifying the 1[st] proviso which says that if the assessment underSection 158BC(c) of the Act includes income other than theundisclosed income returned by the assessee then the immunityfrom the penalty in respect of the undisclosed income returned bythe assessee will be lost to the assessee. In other words, theabsolute immunity from penalty on the tax payable in respect of theundisclosed income is available only if the Assessing Officer acceptsthe return filed by the assessee declaring the undisclosed income,which is the undisclosed income assessed under Section 158BC(c)of the Act. In other words, if the undisclosed income returned is not ITA No.202/2010 -11- ITA No.202/2010 -11- accepted by the Officer and any addition is made to the income soreturned, then the assessee will not be entitled to immunity frompenalty on the tax payable on the undisclosed income returned as amatter of right. However, the fact that immunity from penalty is notavailable as a matter of right does not mean that penalty in respectof undisclosed income returned by the assessee is automatic. It isstill within the discretion of the Assessing Officer to considerpenalty with reference to income returned by the assessee also. The2[nd] proviso to the main Section states that penalty is mandatory inrespect of undisclosed income assessed over the undisclosedincome returned by the assessee pursuant to notice issued by theOfficer as stated above. In other words, what the Section means isthat whatever is the income assessed by way of addition toundisclosed income, the same shall be treated as income concealedby the assessee and the assessee has no escape from penalty. Ofcourse, the said Section provides that the Assessing Officer hasdiscretion to levy penalty from minimum to maximum as providedunder the main Section depending on facts and circumstances ofeach case. From the above, we conclude the scope of the saidSection as follows:- ITA No.202/2010 -12- (1)Where the income finally assessed under Section 158BC(c) ofthe Act is the only undisclosed income returned by the assesseebased on return filed under Sub Clause(a) of Section 158BC and theassessee has complied with all the conditions of clauses (i) to (iv) ofthe first proviso, i.e. payment of tax on the undisclosed income orrequest to the Officer to adjust full tax against cash if any seizedand held by the Department sufficient to adjust the tax and if theassessee files statement that no appeal will be filed against theundisclosed income returned and assessed based on return filed, nopenalty could be levied. (2)Penalty will be leviable in all cases where undisclosed incomefinally assessed under sub Section (c) of Section 158BC is in excessof the undisclosed income returned by the assessee in the returnfiled under clause (a) of Section 158BC. In such cases, there is nocomplete immunity from penalty on the tax payable on theundisclosed income returned by the assessee even though theassessee has complied with all the conditions of clauses (i) to (iv) ofthe 1[st] proviso as stated above. This is because the assessee insuch a case will be treated as partly dishonest and partly honest andtherefore the penalty will certainly in the discretion of the Assessing ITA No.202/2010 -13- Officer. Of course if the addition made when compared to theundisclosed income returned by the assessee is relatively small andif the assessee had complied with the conditions of the proviso onthe undisclosed income returned by the assessee then certainly theofficer will not be justified in levying penalty with reference to thetax payable on the total income assessed under sub Section (c),which includes tax on undisclosed income returned by the assessee.On the other hand, if on final assessment under sub Section (c) ofSection 158BC it is found that the addition made to the undisclosedincome returned by the assessee is very high, i.e. substantial eitherin absolute terms or in relation to the income returned by theassesee, then the Officer should consider penalty on the totalincome assessed including undisclosed income returned by theassessee, no matter the assessee has complied with the conditionsof the first proviso above referred in respect of the undisclosedincome returned by the assessee. In other words, the assessee'sdishonesty outweighs the little honesty shown by him and so muchso, penalty should be levied with reference to the tax payable on theentire income assessed. So far as range of penalty between 100% to300% of tax is concerned it will depend upon the nature of ITA No.202/2010 ITA No.202/2010 concealment, conduct of the assessee etc. which will have to beconsidered while fixing quantum of penalty. 10.Applying the above principle to the facts of this case, wenotice that the addition made to the returned undisclosed income isaround to 25% of the disclosed income. Therefore, it is not a caseof minor addition to the disclosed income or a case of substantialaddition to the income disclosed by the assessee. Therefore, we donot think it is a case of levy of maximum penalty. However, theassessee's contention regarding the immunity from penalty on thetax payable on the undisclosed income returned by them isconcerned, we are unable to agree with the findings of the Tribunalbecause of the payment of tax in instalments under orders issuedby the Commissioner of Income Tax is not in compliance with therequirement of clauses (ii) and (iii) of the first proviso to the saidSection, which requires payment of full tax on the undisclosedincome returned either prior to or along with filing of return andproduction of proof of payment of tax along with the return so filed.The assessee's financial difficulty which found acceptance by theCommissioner in granting instalment facility for payment of tax andthe compliance of the said direction of the Commissioner, is no ITA No.202/2010 -15- substitute for the mandatory requirements of clauses (ii)and (iii) of the 1[st] proviso above stated. Probably these are matterswhich the Assessing Officer has to consider i.e. whether penaltyshould be levied with reference to the undisclosed income returnedby the assessee without payment of tax along with the return filedby it, or the assessee forfeits the right of immunity from penalty,which in any case will not be available to the assessee because ofthe 2[nd] proviso by which the benefits of the first proviso will not beavailable to the assessee as a matter of right, if the undisclosedincome assessed is more than the undisclosed income returned bythe assessee. 11.We therefore, hold that in view of the application of the2[nd] proviso, the assessee is not entitled to complete immunity frompayment of penalty on the undisclosed income returned by themunder clause (a) of Section 158BC, not only because of their failureto comply with the provisions of clauses (i) to (iv) of the 1[st] provisobut by virtue of the addition made in the assessment of substantialamount of undisclosed income by which the assessee forfeits thebenefit of the 1[st] proviso in regard to immunity from penalty on thetax payable on undisclosed income returned. In view of our above ITA No.202/2010 -16- findings, we have to necessarily allow the appeal by vacating theorders of the Tribunal and that of the first appellate authority, andtherefore we do so. In the normal course we should remand the matter to theAssessing Officer to reconsider the penalty. However, in view of theproved financial difficulty of the assessee and in view of thedischarge of tax liability in instalments granted by theCommissioner, we feel the penalty order could be modified byexcluding tax on undisclosed income returned by the assessee butby refixing the penalty on the tax payable on the additional incomeassessed at twice the amount of tax as against one time fixed by theCIT (Appeals) and confirmed by the Tribunal. This I.T.Appeal is allowed in part as stated above. (C.N.RAMACHANDRAN NAIR, JUDGE) (BHABANI PRASAD RAY, JUDGE) jg