Where no addition to the income declared by the searched person in the return filed pursuant to search is made it is not open to the revenue to levy penalty by virtue of Explanation 5 to section 271 (of Income Tax Act, 1961).

1. Present penalty appeal has been filed by assessee against order dated 28/08/2019 passed by the Ld.CIT(A)-Belgaum for assessment year 2011-12 on following grounds of appeal.

“1. The order of the learned Commissioner of Income-tax [Appeals] passed under Section 251(1) (of Income Tax Act, 1961) in so far as it is against the Appellant is opposed to law, weight of evidence, probabilities, facts and circumstances of the Appellant's case.

2. The appellant denies herself liable to a penalty of Rs. 38,69,110/- under section 271(1)(c) (of Income Tax Act, 1961) on the facts and circumstances of the case.

3. The notice issued under section 271(1)(c) (of Income Tax Act, 1961) is bad in law on the facts and circumstances of the case.

4. The impugned order of penalty passed under section 271(1)(c) (of Income Tax Act, 1961) is without assumption of proper jurisdiction, as the notice for initiating penalty was erroneous and consequently all actions pursuant to a defective notice was bad in law, on the facts and circumstances of the case.

5. The learned CIT(A) failed to appreciate that the notice issued U/s 271(1)(c) (of Income Tax Act, 1961), was under the limb of "failing to complying with notices issued" and consequently the order passed U/s 271(1)(c) (of Income Tax Act, 1961), is bad in law on the facts and circumstances of the case.

6. The learned CIT(A) failed to appreciate that the Assessing Officer has not recorded satisfaction in the order of assessment either for failing to comply with notices and consequently the notice issued U/s 274 (of Income Tax Act, 1961), is bad in law on the facts and circumstances of the case.

7. The impugned order of penalty passed under section 271 (of Income Tax Act, 1961) [1] [c] of the Income-Tax Act, 1961 is without assumption of proper jurisdiction as no notice U/s 271 (of Income Tax Act, 1961)flXc) of the Act, for initiating penalty, i.e. for furnishing of inaccurate particulars of income or concealment of income, on the facts and circumstances of the case.

8. The order of penalty for concealment is required to be set aside as no notice has been issued, in so far as the limbs of concealment of income or for furnishing inaccurate particulars of income, along with the order of assessment and thus the AO has not assumed jurisdiction to levy penalty on the limb of concealment, on the facts and circumstances of the case.

9. Without prejudice, the authorities below failed to appreciate that the appellant has neither concealed any income nor furnished inaccurate particulars of income to warrant levy of penalty and therefore the penalty levied u/s. 271(1)(c) (of Income Tax Act, 1961) requires to be cancelled on the facts and circumstances of the case.

10. The learned CIT(A) ought to have appreciated that, the penalty was not automatic and that there was a discretion not to levy penalty and the assessing officer ought to have exercised the discretion and the penalty proceedings are not to be resorted to as a matter of procedure, on the facts and circumstance of the case.

11. The learned CIT(A) ought to have noticed that, the assessing officer has further failed to appreciate the fact that the penalty proceedings are independent to that of the assessment proceedings under the facts and circumstances of the case.

12. Without prejudice, the authorities below failed to appreciate that when the returned income is accepted and the AO without making any additions, consequently levy of penalty U/s 271(1)(c) (of Income Tax Act, 1961), is bad in law on the facts and circumstances of the case.

13. Without prejudice to the above, the penalty levied is highly excessive and liable to reduced substantially.

14. The Appellant craves leave to add, alter, substitute and delete any or all of the grounds of appeal urged above.

15. For the above and other grounds to be urged during the hearing of the appeal the Appellant prays that the appeal be allowed in the interest of equity and justice.”

Brief facts of the case are as under:

2. The assessee is a doctor and also partner in the firm M/s Kerudi Hospital and research Centre, Bagalkot. She filed her return of income for year under consideration on 30/10/2011 declaring income of Rs.85,41,850/-. A search under section 132 (of Income Tax Act, 1961) was conducted in case of M/s Kerudi Hospital and Research Centre on 21/11/2012. During the search at residence of assessee, documents pertaining to sale of property at Bagalkot, were found and seized. The Ld.AO noted that the assessee declared Rs.50 Lacs, being 50% of Rs.1 crore as her share of sale consideration in the capital gains computation. The Ld.AO noted that, in the Agreement to Sell seized during search, revealed the true value of sale consideration to be Rs.3.5 crore.

3. When confronted with the incriminating document, the assessee and her husband admitted in statement under section 132(4) (of Income Tax Act, 1961) that, the actual sale consideration received was Rs.3.5 crore and it was agreed that, she and her husband would pay tax on the difference in short term capital gains of Rs.2.5 crore. Consequently, in the return filed under section 153C (of Income Tax Act, 1961) after the search, assessee declared capital gain by showing the sale consideration as Rs.1.75 crore being 50% of her share in the true sale consideration. The Ld.AO held that assessee concealed income that is sale consideration received by her on the sale of land in the original return filed.

4. The Ld.AO also noted that the assessee declared interest on saving bank account amounting to Rs.21,396/- which was again not declared in the original return under section 139(1) (of Income Tax Act, 1961). The Ld.AO while passing order u/s 153C (of Income Tax Act, 1961) r.w.sec. 143(3) (of Income Tax Act, 1961) held that, assessee concealed income being interest earned as unexplained indirect incomes.

5. Consequently, the Ld.AO issued notice under section 274 (of Income Tax Act, 1961) initiating penalty proceedings read with section 271(1) (of Income Tax Act, 1961)(c ) of the Act. The assessee was called upon to file submissions in respect of the penalty notice issued. Representative of the assessee vide submissions dated 03/07/2015 and 17/07/2015 filed explanations submitting that the assessee’s case cannot be brought within the ambit of concealment of income as the Ld.AO has not brought out the same in the assessment order. And that the Ld.AO has initiated penalty mechanically and there has been non application of mind.

6. The Ld.AO however while passing the penalty order levied penalty at Rs.38,69,110/- being 100% of tax sought to be evaded by holding that assessee furnished inaccurate particulars of the sale consideration and has concealed the particulars of interest income and has not offered any cogent and reliable explanation.

7. Aggrieved by the penalty levied, assessee filed appeal before the Ld.CIT(A), who upheld observations of the Ld.AO by holding as under:

“11.5 From the facts narrated above and after careful analysis I feel that, the AO considered all the submissions made by the assessee during the penalty proceedings. The assessee has filed additional income in the return of income filed against notice u/s 153C (of Income Tax Act, 1961) and paid taxes only after the search operation u/s 132 (of Income Tax Act, 1961). The assessee did not prefer any appeal against the assessment order. In the assessment u/s 153C (of Income Tax Act, 1961), the AG had clearly given a finding of concealment of income for initiating penalty proceedings. The AR appeared before the AG during the penalty proceedings and never raised the issue of validity of notice. The, penalty levied u/s 271(1)(c) (of Income Tax Act, 1961) is based on proper satisfaction of AG in the assessment order and after due consideration of submissions made by the AR. Hence, I feel that the penalty levied by AG is properly initiated and levied. Hence, the penalty order u/s 271(1)(c) (of Income Tax Act, 1961) passed by the AG is in accordance with law. Therefore, I do not find any reason to interfere with the order of the AO.”

8. Aggrieved by the order of the Ld.CIT(A) assessee is in appeal before us now.

9. At the outset, the Ld.AR submitted that, no addition is made by Ld.AO on the income offered or declared in the return of income filed in response to notice issued under section 153C (of Income Tax Act, 1961). It was submitted that, the entire income offered by assessee have been accepted and the addition pertains to certain agricultural income which is again not based on any seized material found during the course of search belonging to the assessee. The Ld.AR submitted that imposition of penalty is not automatic, even if, assessee has not challenged the order of assessment. In the present facts of the case, the Ld.AR submitted that, assessee paid interest on the income declared by assessee in the return filed in response to notice issued under section 153C (of Income Tax Act, 1961). It is also submitted by the Ld.AR that the assessee is entitled to immunity as per Explanation 5 to section 271(1)(c) (of Income Tax Act, 1961), as the income admitted during the search operation was offered by assessee and has also paid tax and interest thereon.

10. On the contrary the Ld.Sr.DR submitted that, had the search not to taken place, assessee would not have disclosed the consideration actually received by her. It has been submitted that, the assessee did not have any intention to declare the true income, and therefore penalty proceedings for concealment initiated by the Ld.AO deserves to be upheld.

11. We have perused submissions advanced by both sides in light of records placed before us.

12. Admittedly, the assessee offered additional income during the search and has paid taxes on the same. It is also noted that no addition has been made by the Ld.AO on such income offered by assessee and has been accepted by the revenue. We note that, while passing the assessment order the Ld.AO recorded satisfaction in respect of concealment towards the additional income offered by assessee based on the seized material. The notice issued under section 274 (of Income Tax Act, 1961) is for both the limbs being filing of inaccurate particulars of income as well as concealment. On a careful perusal of the penalty order passed by the Ld.AO, it is clear that all throughout the submissions made by assessee was in respect of concealment of income regarding the additional sale consideration of land, the Ld.AO levies penalty for furnishing inaccurate particulars of sale consideration of the land. This in our opinion is a clear nonapplication of mind by the Ld.AO.

13. Law the Ld.AR has placed reliance on the decision of Hon’ble Supreme Court in case of DCIT vs Rajkumar Gulab Badgujar reported in (2019) 111 Taxmann.com 257. Hon’ble Supreme Court upheld the observations of Hon’ble Bombay High Court, reported in (2019) 111 Taxmann.com 256, that where no addition to the income declared by the searched person in the return filed pursuant to search is made it is not open to the revenue to levy penalty by virtue of Explanation 5 to section 271 (of Income Tax Act, 1961). Hon’ble Bombay High Court also held that, Explanation 5A to section 271 (of Income Tax Act, 1961) would apply only in case of the searched person.

14. On perusal of the decision by Hon’ble Bombay High Court (supra) we note that penalty was initiated by the Ld.AO therein in assessment order passed pursuant to notice under section 153C (of Income Tax Act, 1961), wherein assessee therein declared additional income in the returns filed in response to notice under section 153C (of Income Tax Act, 1961). We note that facts in the case before Hon’ble Bombay High Court (supra) are similar to the facts before us.

15. Therefore respectfully following the ratio laid down by Hon’ble Bombay High Court (supra), which has been subsequently upheld by Hon’ble Supreme Court (supra), we are of the opinion that no penalty could be levied on an income which has been offered to tax in the returns filed in response to notice under section 153C (of Income Tax Act, 1961) and that no addition has been made by the Ld.AO in respect of the same.

16. We also note that the only addition that has been made by the Ld.AO is in respect of agricultural income disallowed amounting to Rs.2,71,625/- against which the penalty proceedings has not been initiated. Based on the above facts and discussions, we are of the opinion that the penalty levied by the Ld.AO deserves to be deleted.

Accordingly grounds raised by assessee stands allowed.

In the result appeal filed by assessee stands allowed.

Order pronounced in the open court on 10th February, 2021

Sd/- Sd/-

(CHANDRA POOJARI) (BEENA PILLAI)

Accountant Member Judicial Member