Monday, April 22, 2013

SURRENDER OF INCOME WITHOUT EXPLANATION IS NOT A VOLUNTARY DISCLOSURE

SURRENDER OF INCOME WITHOUT EXPLANATION IS NOT A VOLUNTARY DISCLOSURE

In `Commissioner of Income Tax V. Mak Data Limited' – 2013 (1) TMI 574 - DELHI HIGH COURT there was a survey under Section 133A on 16.12.2003, in the course of which some documents pertaining to the assessee were found and impounded. The said documents consisted of blank transfer deeds for shares duly signed, affidavits, share application forms, copies of bank accounts, income tax returns and assessment orders of certain other companies. The assessee was called for to explain the contents of the documents and the genuineness of the transactions represented by them. In response to the notice it was replied that the company had received share application money from different entities aggregating to a sum of Rs.239 lakhs during the years 2003-03 to 2004-05.

The company with a view to avoid litigation and buy peace and to channelize the energy and resources towards the productive work and to make amicable settlement with the Income Tax Department offers to surrender a sum of Rs.56.49 lakhs as income from other sources. Shri V.K. Aggarwal, promoter director of the company, had offered a sum of Rs.182.51 lakhs for taxation as `income from other sources' in the hands of the partnership firm, M/s Marketing Services. He further stated that the assessee company has utilized this amount of Rs.182.51 lakhs for inducting funds into the books of the assessee company as share application money. The additional fund flow to the extent of Rs.56.49 lakhs which remain unexplained is now being offered for taxation by the company as the income from other sources.

The assessee filed an application before the Additional Commissioner of Income Tax under Section 144A soliciting directions for expediting the assessment proceedings and therein it indicated its willingness to be assessed on an amount of Rs.56.49 lakhs as its income under the head `income from other sources'. Before the Additional Commissioner the assessee scaled down the offer from Rs.56.49 lakhs to Rs.40.74 lakhs on the ground that the peak investment should be taken as Rs.219.5 lakhs instead of Rs.239 lakhs as calculated earlier.

The Assessing Officer, on the basis of the directions of the Additional Commissioner called upon the assessee to furnish the relevant documents and information regarding the fresh offer of Rs.40.74 lakhs. After verification this amount was added as `income from other sources'. There was no appeal against this order by the assessee and therefore the said order became final. Subsequently the Assessing Office initiated penalty proceedings for furnishing inaccurate information of the income under Section 271(1) (c). The assessee replied that the amount was offered as income only to buy peace and avoid protracted litigation and with the condition that no penalty or prosecution proceedings would be launched. The offer was made before any investigation was carried out into the matter and therefore, was voluntary. The Assessing Officer rejected the contention of the assessee and imposed the minimum penalty of Rs. 14,16,600/- for furnishing inaccurate particulars of the income to the tune of Rs. 40,74,000/- The reasons for rejection of the reply of the assessee are as below:

In the return filed by the assessee the assessee has not offered the amount of Rs.40.74 lakhs for taxation voluntarily;
The assessee has surrendered Rs.40.74 lakhs during course of assessment proceeding when the impounded material to the assessee which was impounded during course of survey at the business premise of marketing services;
The assessee has furnished inaccurate particulars of its income in the return of income filed on 27.10.2004 for the year under consideration;
The satisfaction was recorded at the time of completing assessment proceedings under Section 143(3) of the Act;
The assessee has itself surrendered for tax, the addition sum of Rs.40.74 lakhs which it was expected to explain the source of share application money. Moreover, admitted facts need not to be proved by the Assessing Officer, as in this case, the assessee itself admitted the concealing of income to the extent of Rs.40.74 lakhs by offering the amount for tax.
An appeal was preferred to the Commissioner of Income Tax (Appeals) who rejected the appeal and confirmed the penalty. The assessee filed further appeal before the Tribunal. The Tribunal cancelled the penalty imposed on the assessee recording the following findings:

It was only after the directions of the Additional Commissioner of Income Tax based under Section 144A that the assessee's offer was accepted and the assessment was finalized;
There was no material against the assessee to show any concealment and this fact has been admitted by the Assessing Officer himself; there is not even any indicated in the penalty order as to the particular credit in respect of which the penalty was being imposed;
The fact that the assessee surrendered the income only when it was confronted with the documents found in the survey does not adversely affect its case;
The assessee did not admit that it had concealed the income to the extent of Rs.40.74 lakhs; it has made it clear in the letter dated 22.11.2006 that the surrender was made without any admission of concealment or intention to conceal;
The offer was made in a spirit of settlement of the dispute with the Revenue and no investigation was carried out by the Assessing Officer to prove the concealment.
The Revenue, being aggrieved by the order of the Tribunal filed the present appeal before the High Court. The Revenue contended that the Tribunal failed to appreciate the provisions of Explanation 1 to Section 271(1) (c) of the Act, which reads as below:

Explanation 1.- Where in respect of any facts material to the computation of the total income of any person under this Act.-

(A) Such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false; or

(B) Such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then the amount added or disallowed in computing the total number of such person as a result thereof shall, for the purpose of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed.

The High Court held that the Revenue is right in contending that there was absolutely no explanation from the assessee in respect of the amount of Rs.40.74 lakhs; when the Assessing Officer called upon the assessee to produce the evidence as to the nature and source of the amount received as share capital, the creditworthiness of the applicants and the genuineness of the transactions the assessee simply folded up and surrendered a sum of Rs.56.49 lakhs in its hands initially, which was later scaled down to Rs.40.74 lakhs. The assessee merely stated that with a view to avoid litigation and buy peace and to channelize the energy and resources towards productive work and to make amicable settlement with the Income Tax Department, it surrendered the income under the head `income from other sources'. In the absence of any explanation in respect of the surrendered income, the first part of clause (A) of Explanation 1 is attracted. It cannot be denied that the nature and source of the amount surrendered are facts material to computation of the total income of the Revenue.

The High Court further held that the Revenue is entitled to know the same and if the nature of the source of the amount is not explained, it is entitled to draw the inference that the amount represents the assessee's table income. Though this principle was originally confined to the assessment proceedings, the Explanation has extended it to penalty proceedings also, presumably on the assumption that the furnishing of an explanation regarding the nature and source would have compromised the assessee's position. It is the assessee who has received the monies and is in the knowledge of all the facts relevant and material in relation to the receipt. Therefore it should be in a position to offer an explanation and disclose the material facts regarding the same. The High Court set aside the order of the
Tribunal and confirmed the findings of lower authorities below.

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