Accepted Search Return Without Further Addition Can't Attract Concealment Penalty: Gujarat High Court

The Gujarat High Court on 14 October held that penalty for concealment of income under Section 271(1)(c) of the Income Tax Act cannot be levied where the Assessing Officer accepts additional income disclosed in a return filed in response to a search-related notice without making any further addition, leaving no tax sought to be evaded under Explanation 4(c).

A Bench comprising Justices Bhargav D. Karia and Nirzar S. Desai set aside the Income Tax Appellate Tribunal's order restoring a penalty of Rs. 21.16 lakh on additional income of Rs. 64.54 lakh disclosed by the taxpayer. It observed:

“However, in the facts of the case, when the assessee has disclosed the additional income by way of return of income filed under Section 153A in response to the notice issued under Section 153C of the Act and when the Assessing Officer has accepted such return without any further addition, the provision of Section 271(1)(c) of the Act would not be applicable.”

The case arose from a search conducted at the premises of the taxpayer's son on 11 October 2006. During the search, the son admitted that the taxpayer had undisclosed income of Rs. 64.54 lakh from additional sale proceeds of plots in the Madhuban Green Villas Project.

The taxpayer had not disclosed this income in her original return for Assessment Year 2006-07. After receiving a notice under Section 153C of the Income Tax Act, she filed a return on 23 October 2008, disclosing the additional income and paying the tax due.

The Assessing Officer accepted the returned income without making any further addition but initiated penalty proceedings for concealment and imposed a penalty of Rs. 21,16,092 under Section 271(1)(c).

The Commissioner of Income Tax (Appeals) deleted the penalty, holding that the Assessing Officer had accepted the additional income in its entirety. However, the Income Tax Appellate Tribunal, Rajkot Bench, restored the penalty, reasoning that the taxpayer had failed to disclose the income in her original return despite the search and her son's admission.

Before the High Court, the taxpayer argued that her original return, which had not yet been processed, stood abated following the search-related proceedings. She contended that the return filed in response to the notice under Section 153C was the relevant return for assessment.

Since the Assessing Officer had accepted the returned income and the tax paid without making any further addition, she argued that there was no difference between the tax payable and the tax paid that could constitute tax sought to be evaded.

The Revenue opposed the appeal, arguing that the taxpayer had failed to disclose the income despite having an opportunity to do so after the search and had offered it only after the authorities initiated proceedings under Section 153C.

The Court examined Section 271(1)(c), particularly Explanation 4(c), which provides the basis for calculating the tax sought to be evaded. It held that, since the Assessing Officer had accepted the returned income without any further addition, there was no difference between the tax payable and the tax paid that could constitute tax sought to be evaded. The Bench observed:

“in absence of any further difference in the tax payable and the tax paid, resulting into there is no tax sought to be evaded as per Explanation 4 (c) of Section 271 of the Act, no penalty could have been levied in the facts of the case.”

Accordingly, the High Court allowed the appeal and set aside the Tribunal's order restoring the penalty.

Counsel for Appellant: B. S. Soparkar, Advocate

Counsel for Respondent: Maunil G. Yajnik, Senior Standing Counsel