Penalty in search cases : Section 271(1)(c) v. section 271AAA

Introduction

1. Over the years, assessment procedure of search cases has undergone change several times. To keep pace, even the penal provisions in search case have been refreshed from time-to-time. The purpose of this article is to chart the changes in format of search assessment and analyse the thought provoking issues arising in the penal provisions under section 271(1)(c) and 271AAA currently applicable to search assessment.

Chapter XIV-B on block assessment in search cases was introduced with effect from 1-7-1995 and it prescribed a block of 10 years. This was amended with effect from 1-6-2001 and block period was reduced to 6 years. These provisions remained in vogue in respect of searches carried out till 31-5-2003.

Thereafter, for substitution of Chapter XIV-B, sections 153A to 153D were introduced in the statute book for assessment in search cases taking place on or after 1-6-2003. This amendment was introduced in order to overcome the various interpretations of the Courts which had led to the search assessment in block assessment scheme becoming a total failure. Whereas under the old provisions, only the 'undisclosed income' was to be assessed, under the new provisions of sections 153A, 153B, 153C and 153D, the total income of the searched person is to be determined, irrespective of whether it is the outcome of search or otherwise.

Consequently, even penal provisions applicable to income assessed as a result of search have undergone a sea change. In the earlier search provisions, i.e., under Chapter XIV-B, penalty proceedings were provided under section 158BFA(2) of the Act which stated that penalty was to be levied only on the difference between the income assessed and the income returned in Block return. No separate penalty under section 271(1)(c) was to be levied for the income assessed under Chapter XIV-B. This was because under Chapter XIV-B only one assessment was required to be made for the six years preceding the year in which search was conducted, i.e., the block period. However, with the introduction of new search procedure it is provided that assessment for each year shall be made separately, thereby inducing a sea change in the penalty provision applicable to assessment of each such year.

New assessment scheme w.e.f. 1-6-2003

2. In the new assessment scheme of search cases w.e.f. 1-6-2003, two separate penal provisions have been introduced. These are as follows :

(a) First, the Explanation 5A was added to section 271(1)(c) with effect from 1-6-2007 and;

(b) Secondly, an entirely new section, i.e., section 271AAA was introduced, also with effect from 1-6-2007.

These changes are tabulated below:

Now the questions vexing our minds are:

(a) What is the rationale for introducing two separate penal provisions, i.e., Explanation 5A to sections 271(1)(c) and 271AAA?

(b) What is the inter-relation between the two ?

(c) Is it mandatory or discretionary for the Assessing Officer to invoke penalty proceedings under both these sections ?

(d) Whether the legislators intended the levy of double penalty on the same income ? Instances have come to notice of the authors that department is levying penalty under both sections for same income for same year.

(e) If not, what are the separate ingredients or circumstances for invocation of penalty under these sections ?

In our endeavour to find a solution to these queries, we at the outset present a chart to explain the difference between the two sections:-

Inter-relation between Explanation 5A to section 271(1)(c) and section 271AAA

On a combined reading of the two Charts above, it can be seen that the provisions of search assessments under section 153A came into force with effect from 1st June 2003, in relation to which penalty was leviable under the Explanation 5 to section 271(1)(c). However, with effect from 1st June 2007 onwards the penalty was leviable under the newly introduced Explanation 5A to section 271(1)(c) and section 271AAA. Now the assessments under section 153A are carried out for a period of six years immediately preceding the year in which the search took place. The year of search itself is assessed under section 143(3). This gives a total period of 7 years (year 1 to year 7). A comparison of the time period provides a clear demarcation between the applicability of both the sections. The rules that emerge can be stated as under:

Rule 1:

(a) So far as the previous year in which search was carried out is concerned ( year 7), it falls squarely within the four corners of section 271AAA. No penalty under section 271(1)(c ) is attracted for this year.

(b) So far as the first 5 years are concerned, Explanation 5A to section 271(1)(c) is applicable and penalty under section 271AAA is not applicable.

Rule 2:

Penalty under section 271(1)(c) is applicable on "concealed income", whereas penalty under section 271AAA is applicable for "undisclosed income". The definition of "undisclosed income" is prescribed in the Explanation (a) to sub-section (4) of section 271AAA.

However, the issue becomes complex in case of the previous year immediately preceding the date of search (i.e., in year 6), as two possibilities exist. Take an example of an individual subjected to tax audit for whom the due date of filing the return under section 139(1) is 30th September. If a search under section 132 takes place on 1st September, i.e., before the expiry of due date and the assessee has not filed his return of income, then the leviability of penalty in this case will be governed by section 271AAA. But if he has filed his return of income concealing some income, then he will be liable for penalty under the Explanation 5A. Taking this example further, if the date of search is after 30th September, then whether he has failed to file the return of income or has filed return concealing his income, he will be liable for penalty under the Explanation 5A only. Thus, for this 6th year, i.e., for the assessment year immediately preceding the year of search, section 271AAA is attracted if and only if the following two conditions are specified:

(i) The due date has not expired; and

(ii) The return of income has not been filed.

If any of these two conditions are not satisfied, then the Explanation 5A comes into play. Thus, it is clear that the Legislature in its wisdom has clearly demarcated the years of applicability of these two penal provisions. Thus, in the opinion of the authors, double penalty for the 6th year cannot be levied by invoking penalty under both the sections as it is the misadventure carried by some of the Assessing Officers.

Apart from clear distinction regarding the assessment years under both of these sections, the Legislature has also stated so expressly under sub-section (3) of section 271AAA that no penalty shall be leviable on undisclosed income under section 271(1)(c) if penalty has been levied under section 271AAA.

Determination of quantum of penalty

3. Once the selection of correct penal provision for each assessment year falling in the group of these 7 assessment years has been made, the next step for levy of penalty is to calculate the quantum of undisclosed/ concealed income on which penalty is to be levied. In respect of section 271AAA, the item of income can be assessed as undisclosed income in case it is represented either wholly or partly by any asset being in the nature of money, bullion, jewellery or other article or any thing which was not recorded before the date of search in the regular books of account or otherwise not disclosed to the Commissioner or the Chief Commissioner before the date of search in respect of the year of search or the one immediately preceding it. The phrase 'undisclosed income' as stated in section 271AAA(4) Explanation(a) also includes any entry in the books of account or documents found in course of search but which was not so recorded in the books of account on or before the date of search. This is clearly a case of poor draftsmanship. One wonders, how can an entry in books of account found during search be not recorded in books of account??? The penalty under section 271AAA is also leviable in respect of expense recorded in the regular books of account for the 'specified previous year', provided this expense is found to be false in the course of search.

However, the subject matter under the Explantion 5A, is slightly different. It also covers in its ambit income represented by an asset in respect of which either return of income has been filed without disclosing the same or return of income has not been filed even after the expiry of due date under section 139(1). It also includes the income based upon the entry which is either not included in the return of income filed or for which no return has been filed, provided the assessee claims that such an entry represents his income. It follows, in our humble opinion, that in case he does not claim such an entry as his income, the same cannot be added as his concealed income subjected to penalty under the Explanation 5A. This requirement of a self admission by the appellant is a novel introduction, which may not, it is hoped, undermine the efficacy of the provision.

Further, in contrast to section 271AAA, no penalty under the Explanation 5A can be levied in respect of any expense recorded in the books of account. Thereafter, the amount of penalty under the Explanation 5A levied is equal to or up to 3 times the amount of tax sought to be evaded. There is no definition of concealed income in the Act, unlike the definition of "undisclosed income" provided for in section 271AAA. Hence, in appropriate matters help will be required from decided judicial pronouncements on the issue, whether the item of addition is "concealment" or not?

So far as the question of discretion of the Assessing Officers in levying of penalty is concerned, in our opinion, the provisions of section 271(1)(c) are attracted when the Assessing Officer is satisfied that a person has concealed particulars of his income or has furnished the inaccurate particulars of income. This means that there is scope for the assessee to persuade the Assessing Officer that full and true particulars of his income have been furnished in its return of income, because of which no income can be said to have been concealed. He can also take the help of the existing judgments on this issue to prove his bona fide. In respect of income based upon the entry in the books of account, no penalty can be levied if the assessee does not claim that such an entry represents his income. This section does not permit the levy of penalty upon any recorded expenses on the logical basis that such expenses cannot be said to be concealed items as they already stand disclosed to the department.

So far as section 271AAA is concerned, the situation is more factual. As per a possible interpretation of the provisions, in case an asset or an entry was not recorded in the books or disclosed before the CIT till the date of search, but was later on incorporated in the books of account while filing the return of income for that year, the same squarely falls within the ambit of undisclosed income. Here the decision to levy penalty at the end of the Assessing Officer is discretionary. However, this discretion is to be exercised in favour of the assessee only if he admits the undisclosed income in the statement under section 132(4) during the course of search, explains and substantiates the manner in which this income was derived and also pays the tax and interest thereon.

Conclusion

4. To conclude, the two penal provisions have been introduced to cover the period of 7 years which is required to be assessed under section 153A/143(3) as a result of search under section 132 with effect from 1-6-2007 till date and the scope of undisclosed/concealed income and assessment years in respect of which penalty can be levied is also clearly demarcated between the two. However, since there is just a fine line of distinction between undisclosed and concealed income, an overzealous Assessing Officer may very well blur between the two. Then it shall be up to the practitioners to submit and the Courts to draw out the correct base on which the relevant penalty ought to be levied.