ORDER
M.A. Bakshi, Vice President
1. The appeal of the assessee for asst. yr. 1987-88 relates to penalty under Section 271(1)(c) of the IT Act of Rs. 33,052 confirmed by the CIT(A)-VI, Ahmedabad, vide his order dt. 13th Dec., 1993.
2. The AO had imposed the penalty of Rs. 50,000. The CIT(A) has upheld the validity of the penalty but has reduced the quantum to 100 per cent of the tax sought to be evaded. Dissatisfied with the decision of the CIT(A), the assessee is in appeal in the Tribunal. The rival contentions have been heard and record perused.
3. The relevant facts in this case are that there was a search carried out in this case and other group cases on 20th Aug., 1987, during which certain incriminating documents, etc. were found and seized. The appellant being one of the directors of the company made a disclosure of Rs. 55 lakhs on the basis of the seized documents in the hands of the company. The assessee had also made disclosure for the year under appeal as under :
Rs.
(i) Unaccounted salary
14,400
(ii) Other receipts indicated in the diary
63,737
78,137
The assessee filed the return of income on 14th Sept., 1987, for the year under appeal declaring income of Rs. 54,060. However, the disclosure made during the course of search vide assessee’s letter dt. 25th Aug., 1987, referred to above was not included in the said data. On 27th July, 1989, the assessee filed a revised return declaring income of Rs. 1,17,810. Assessment was completed on an income of Rs. 1,23,050 and the disclosed amount was assessed to tax. Penalty proceedings under Section 271(1)(c) of the IT Act were initiated. The assessee was given an opportunity of being heard during the penalty proceedings as to why penalty may not be imposed for concealment of income. It seems that the assessee had replied claiming that since the assessee had filed the revised return disclosing the additional income, there was no concealment as envisaged under Section 271(1)(c) of the IT Act. It was further claimed that the assessee was entitled to immunity under Expln. 5 to Section 271(1)(c). The AO did not accept this explanation of the assessee and held that the benefit of the proviso to Expln. 5 to Section 271(1)(c) was not available to the assessee as the conditions were not satisfied. He, accordingly, imposed a penalty of Rs. 50,000 against the minimum chargeable of Rs. 33,052. The CIT(A) confirmed the levy to the extent of Rs. 33,052. Therefore, this appeal.
4. The learned counsel for the assessee contended that when the search took place in this case, the assessee had not filed the return. A disclosure was made by the assessee on behalf of the company of which he was the director to the extent of Rs. 55 lakhs. Out of the said receipts, certain amounts had been, received by the assessee which were also offered for taxation by way of a statement under Section 132(4). Salary received from the company was also disclosed in the aforementioned statement at the time of search. The assessee thereafter filed the return disclosing income of Rs. 54,060 though the income offered for taxation in the statement under Section 132(4) was not included in the first return, perhaps inadvertently. The mistake was rectified by filing a revised return subsequently without the receipt of any notice under Section 148 from the Department. It was further contended that the assessee agreed to show income reflected in the assets and expenditure as per letter dt. 25th Aug., 1987. It was contended by the learned counsel that once the company had paid tax on the additional income, the payment received by the director out of that income was non-taxable in the hands of the recipient. Therefore, the assessee wrongly offered the receipts from the company for taxation in his individual assessment. It was further contended that Expln. 5 to Section 271(1)(c) was not attracted in this case insofar as no assets or valuables were found during the course of search in this case. The income offered for assessment was on account of receipts from the company which was subjected to tax in the hands of the company. When Expln. 5 to Section 271(1)(c) is not applicable, the exceptions provided, thereunder, assuming for the sake of argument not being satisfied, is immaterial. Reliance is placed on the decision of the Kerala High Court in the case of CIT v. Pawan Kumar Dalmia (1987) 168 ITR 1 (Ker) in support of the contention that when no assets are found during the course of search, Expln. 5 to Section 271(1)(c) is not attracted.
5. It was further pointed out by the learned counsel that the assessee had made similar disclosure for asst. yrs. 1986-87 and 1988-89, but no penalty for concealment was imposed. Reliance is placed on the decision of the Ahmedabad Bench of the Tribunal in the case of Ashok Natverlal Patel v. Asstt. CIT (1998) 61 TTJ (AM) 139 : (1998) 67 ITD 82 (Ahd) in support of the contention that the AO has not recorded a finding as to whether the assessee is guilty of concealment of income or furnishing of inaccurate particulars of income at the time of initiation of proceedings. The issue raised before us, it was may be stated at the outset, was not raised before the Revenue authorities. Relying upon the decision of the Delhi High Court in the case of CIT v. Ram Commercial Enterprises Ltd. (2000) 246 ITR 568 (Cal), the learned counsel contended that the AO is duty-bound to record a satisfaction during the course of assessment proceedings as to whether there is concealment of income or furnishing of inaccurate particulars of income. Reliance was also placed on the decision of the Hon’ble Supreme Court in the case of CIT v. Suresh Chandra Mittal (2001) 251 ITR 9 (SC) in support of the contention that where the disclosure is made to buy peace, penalty under Section 271(1)(c) of the IT Act is not attracted. The learned counsel contended that the assessee had made conditional surrender that no penalty would be levied and, therefore, penalty in such circumstances was not warranted. Reliance was also placed on the decision of the Hon’ble Gujarat High Court in the case of National Textiles v. CIT (2001) 249 ITR 125 (Guj). It was, accordingly, pleaded that the penalty imposed may be deleted.
6. The learned Departmental Representative, on the other hand, contended that the return of income in this case was to be filed on 31st July, 1987. A search and seizure proceeding took place in this case on 20th Aug., 1987. On 14th Sept., 1987, the assessee had filed the return declaring income of Rs. 54,050. This return, according to the learned Departmental Representative, was not within the time allowed under Section 139(1) and, therefore, the assessee was not entitled to file a revised return. Moreover, the assessee had not disclosed the additional income in the original return. Even the revised return filed by the assessee was not a voluntary return as the assessee had been confronted with the seized material which showed concealment of income. It was further contended that Expln. 5 to Section 271(1)(c) was applicable in this case, but the proviso was not applicable as the conditions for its non-applicability are not fulfilled in this case. It was, accordingly, urged, that the penalty in this case may be confirmed.
7. I have given my careful consideration to the rival contentions and perused the record. The first issue in this case is as to whether the assessee can be said to have concealed the income for the purpose of Section 271(1)(c). It is well-settled principle of law that whether a person has concealed the income or not is to be judged with reference to the original return and the filing of the revised return before the assessment is made does not exonerate the assessee from the default of concealment committed while filing the original return. It may, however, be clarified that in a given case, it would be open to the assessee to establish that in the original return, there was a genuine mistake in not including some income which was rectified subsequently by filing the revised return. Therefore, whereas the starting point is the filing of the original return, each case has got to be decided on its own facts when a revised return is filed by the assessee without receipt of notice from the Department. In this case, there is no dispute about the fact that the assessee had not filed the return by the time the search took place on 20th Aug., 1987. If the assessee had filed the return thereafter and included the entire income, perhaps no penalty for concealment would have been chargeable without application of Expln. 5 to Section 271(1)(c). In this case the assessee had filed the original return without including the additional income that was admitted to be his income during the course of search by way of letter dt. 25th Aug., 1987. Therefore, when we see the income disclosed by the assessee in his statement under Section 132(4) and reiterated by a revised return subsequently and is compared with the original return filed by the assessee on 14th Sept., 1987, where such income was not disclosed, it is not difficult to conclude that there was omission by the assessee to disclose the additional income in the original return. The issue for consideration still remains as to whether the omission to disclose the additional income in the original return was conscious or due to a bona fide mistake. It is a different matter that the material on the basis of which the income could be assessed to tax was available to the AO. The mere fact that the material was available with the AO and the assessee had agreed to disclose the income may not be sufficient to conclude that the assessee had not concealed the income at the time of filing of the original return. Unless the omission to disclose the income is established to be on account of any bona fide mistake, the conclusion which is irresistible is that the omission was deliberate. It may also be pertinent to mention that the letter dt. 20th Aug., 1987, written by the assessee to the AO was conditional that no penalty be charged on the additional income which was agreed to be disclosed. This offer has not been accepted by the Department. Therefore, the assessee was at liberty not to disclose the said income in the return unless the conditions regarding the non-levy of penalty were accepted. Later on, the assessee filed a return and offered the additional income for taxation. The additional income was declared on the basis of the seized material. The AO made the assessment on the additional income which was not purely based on the statement made by the assessee, but was also supported by the evidence on record by way of the seized material. Therefore, the assessee was liable to penalty under Section 271(1)(c) of the IT Act for concealment of income on the facts and circumstances of this case.
8. The applicability of Expln. 5 of Section 271(1)(c) has been disputed by the assessee. When Expln. 5 to Section 271(1)(c) is not applicable according to the assessee’s own pleading, then the conditions for its exclusion are redundant.
9. The contention on behalf of the assessee that the declaration was voluntary is contrary to the evidence on record. The assessee was confronted with the seized material on the basis of which additional income was worked out for purposes of assessment. Therefore, this contention on behalf of the assessee is not well-founded.
10. The contention on behalf of the assessee that the income offered for taxation by the assessee was not liable to tax and, therefore, the assessee has wrongly been subjected to penalty under Section 271(1)(c) of the IT Act is also misconceived. The assessee has disclosed income from salary received from the company. This item, of income was admitted by the learned counsel for the assessee to be assessable to tax. With regard to the receipt from the company out of the undisclosed income, the contention on behalf of the assessee is also not well-founded. The company is a distinct person and is assessable to tax. If it has earned income and paid tax on that income, its shareholders, as per the law applicable for the assessment year under appeal, were also liable to tax in respect of the income distributed amongst them. Therefore, the distribution of concealed income amongst the shareholders/ directors is nothing but income liable to tax. Their Lordships of the Hon’ble Supreme Court in the case of CIT v. G.R. Karthikeyan (1993) 201 ITR 866 (SC) and in the case of Universal Radiators v. CIT (1993) 201 ITR 800 (SC) have explained the concept of income and accordingly, the income which was offered for taxation out of the income of the company was liable to tax in the hands of the directors to the extent of the amount so received.
11. The decisions cited on behalf of the assessee in support of the contention that penalty for concealment cannot be levied merely on the basis of admission of the assessee are inapplicable to the facts of this case. The income assessed in this case in respect of which penalty has been imposed was, assessed not merely on the basis of the admission of the assessee but supported by the seized material. Therefore, the decisions where the income was assessed merely on the basis of admission, are inapplicable to the facts of this case.
12. However, the issue that remains to be considered is as to whether there has been proper initiation of penalty proceedings in the light of the decision of the Delhi High Court in the case of CIT v. Ram Commercial Enterprises Ltd. (supra). The law in regard to initiation of penalty proceedings before the completion of assessment is well-settled by the decisions of the Hon’ble Supreme Court in the case of CIT v. Angidi Chettiar (1962) 44 ITR 739 (SC) and in the case of D.M. Manasvi v. CIT (1972) 86 ITR 557 (SC). In the case of D.M. Manasvi (supra), their Lordships of the Hon’ble Supreme Court held that it is the satisfaction of the ITO in the course of assessment proceedings regarding the concealment of income which constitutes the basis and foundation of proceedings for levy of penalty. It was further stated that satisfaction in the very nature of things precedes the issue of notice and that it would not be correct to equate the satisfaction of the ITO with the actual issue of notice. By this decision of the Hon’ble Supreme Court, the decision of the Hon’ble Gujarat High Court in the case of D.M. Manasvi v. CIT (1969) 72 ITR 17 (Guj) was affirmed. In that case, the AO in the assessment order has mentioned as follows :
“Issue notice under Section 275 for the proposed penal action under Section 271(1)(c) in respect of concealment or furnishing inaccurate particulars of income from M/s Kohinoor Grain Mills Sales Depot”.
The Hon’ble Gujarat High Court held that the satisfaction of the AO required for purposes of Section 275 was recorded in the assessment order before the issue of notice and, therefore, the proceedings were validly initiated. This decision was affirmed by the Hon’ble Supreme Court. Their Lordships of the Delhi High Court in the case of CIT v. Ram Commercial Enterprises Ltd. (supra) have held on the facts of that case, that necessary satisfaction not having been recorded by the AO during the course of assessment proceedings, penalty under Section 271(1)(c) of the IT Act in that case was not warranted. A careful reading of the aforementioned decisions leads to the following conclusions :
(i) That it is mandatory for the AO to record satisfaction in regard to concealment of income or/and furnishing inaccurate particulars of income during the course of assessment proceedings.
(ii) That the material on record should justify the inference that the AO had recorded the satisfaction required under Section 275 in the assessment proceedings.
(iii) That mere direction by the AO for issue of notice under Section 271(1)(c) of the IT Act without there being any other material to show that satisfaction was arrived at is not sufficient to satisfy the requirement of Section 275.
13. In this case the issue having been raised for the first time and the Revenue not having any opportunity to produce material on the basis of which one could arrive at a conclusion one way or the other I consider it just and reasonable to remit this matter to the file of the CIT(A) for deciding the issue as to whether the AO had recorded the satisfaction in regard to concealment and/or furnishing of inaccurate particulars of income in the course of assessment proceedings. Whether the AO has recorded his satisfaction or not is a question of fact to be determined on the basis of relevant material. In some cases, it may be apparent from the assessment order that the AO has recorded the satisfaction about the assessee having concealed the income or/and having furnished the inaccurate particulars of such income. It may be clarified that it is not necessary that such a satisfaction is recorded in the assessment order itself. If there is any other material such as order-sheet, etc. where the AO has recorded the satisfaction, that would satisfy the conditions under Section 275. However, if no such satisfaction was recorded by the AO, then penalty imposed in this case will be bad in law ab initio. If the satisfaction is found to have been recorded by the AO, then the penalty sustained by the CIT(A) shall stand confirmed.
14. For statistical purposes, the appeal is partly allowed.