Whether voluntary disclosure of income for avoiding litigation and opting for amicable settlement can be a sufficient defence to avoid penalty u/s 271(1)(C) - NO: Supreme Court

THE issues before the Bench are - Whether a disclosure of income can be treated as voluntary when the offer of surrender was made in view of detection made by the AO in the search conducted in the sister concern of the assessee; Whether voluntary disclosure can release an assessee from the mischief of penal proceedings; Whether in view of this, voluntary disclosure of income for avoiding litigation and opting for amicable settlement can be a sufficient defence to avoid penalty u/s 271(1)(C), in the absence of any explanation for concealment of particulars of income or furnishing inaccurate particulars of income and Whether the satisfaction to be recorded by the AO for initiation of penalty proceedings is required to be recorded in a particular manner or reduced into writing. And the verdict goes against the assessee.

Facts of the case

The assessee filed his return of income for the AY 2004-05, declaring an income of Rs.16,17,040/- along with Tax Audit Report. The case was selected for scrutiny and notices were issued u/s 143(2) and 142(1). During the course of the assessment proceedings, certain documents comprising of share application forms, bank statements, memorandum of association of companies, affidavits, copies of Income Tax Returns and assessment orders and blank share transfer deeds duly signed had been impounded. These documents had been found in the course of survey proceedings u/s 133A conducted in the premises of one of the sister concerns of the assessee. The AO then proceeded to seek information from the assessee and issued a show-cause notice. In reply to this, the assessee made an offer to surrender a sum of Rs.40.74 lakhs with a view to avoid litigation and buy peace and to make an amicable settlement of the dispute, subject to the condition that there would be no initiation of penalty proceedings and prosecution.

After completing the assessment, the AO initiated the penalty proceedings for concealment of income and not furnishing true particulars of its income u/s 271(1)(C). The assessee contended that penalty proceedings are not maintainable on the ground that the AO had not recorded his satisfaction to the effect that there has been concealment of income/furnishing of inaccurate particulars of income by the assessee and that the surrender of income was a conditional surrender before any investigation in the matter. The AO did not accept those contentions and imposed a penalty which was upheld by the CIT(A). On further appeal, the Tribunal set aside the penalty, only to be again restored by the High Court on the ground that voluntary disclosure did not change the situation and in the absence of any explanation in respect of the surrendered income, the first part of clause (A) of Explanation 1 is attracted.

Aggrieved, the assessee has filed this appeal before the Supreme Court.

Having heard the parties, the Supreme Court held that,

+ we fully concur with the view of the High Court that the Tribunal has not properly understood or appreciated the scope of Explanation 1 to Section 271(1)(c) of the Act. The AO, in our view, shall not be carried away by the plea of the assessee like “voluntary disclosure”, “buy peace”, “avoid litigation”, “amicable settlement”, etc. to explain away its conduct. The question is whether the assessee has offered any explanation for concealment of particulars of income or furnishing inaccurate particulars of income. Explanation to Section 271(1) raises a presumption of concealment, when a difference is noticed by the AO, between reported and assessed income. The burden is then on the assessee to show otherwise, by cogent and reliable evidence. When the initial onus placed by the explanation, has been discharged by him, the onus shifts on the Revenue to show that the amount in question constituted the income and not otherwise;

+ assessee has only stated that he had surrendered the additional sum of Rs.40,74,000/- with a view to avoid litigation, buy peace and to channelize the energy and resources towards productive work and to make amicable settlement with the income tax department. Statute does not recognize those types of defences under the explanation 1 to Section 271(1)(c) of the Act. It is trite law that the voluntary disclosure does not release the Appellant-assessee from the mischief of penal proceedings. The law does not provide that when an assessee makes a voluntary disclosure of his concealed income, he had to be absolved from penalty;

+ we are of the view that the surrender of income in this case is not voluntary in the sense that the offer of surrender was made in view of detection made by the AO in the search conducted in the sister concern of the assessee. In that situation, it cannot be said that the surrender of income was voluntary. It is the statutory duty of the assessee to record all its transactions in the books of account, to explain the source of payments made by it and to declare its true income in the return of income filed by it from year to year. The AO, in our view, has recorded a categorical finding that he was satisfied that the assessee had concealed true particulars of income and is liable for penalty proceedings under Section 271 read with Section 274 of the Income Tax Act, 1961.;

+ the AO has to satisfy whether the penalty proceedings be initiated or not during the course of the assessment proceedings and the AO is not required to record his satisfaction in a particular manner or reduce it into writing. The scope of Section 271(1)(c) has also been elaborately discussed by this Court in Union of India vs. Dharmendra Textile Processors and CIT vs. Atul Mohan Bindal. The principle laid down by this Court, in our view, has been correctly followed by the Revenue and we find no illegality in the department initiating penalty proceedings in the instant case. We, therefore, fully agree with the view of the High Court. Hence, the appeal lacks merit and is dismissed.