The Gujarat High Court has quashed an income tax penalty of ₹21.16 lakh, holding that, in the facts of the case, concealment penalty could not survive when the assessee disclosed additional income in a return filed pursuant to a notice under Section 153C and the Assessing Officer accepted that return without making any further addition.

The Bench of Justices Bhargav D. Karia and Nirzar S. Desai has observed that the earlier returns, which were yet to be processed, had abated. Consequently, those returns could not form the basis for sustaining the penalty when there was no difference between the tax payable on the income accepted in assessment and the tax paid. 

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The central issue was whether the Tribunal was justified in confirming the concealment penalty where the assessment under Section 153A, read with Section 153C, resulted in no addition to the income declared in the return filed in response to the search-related notice.

The dispute required the court to examine the effect of the later return on the earlier return and the computation of “tax sought to be evaded” under Explanation 4(c) to Section 271.

The proceedings originated from a search conducted on October 11, 2006, in the case of the assessee’s son, Sanjay R. Sorathia. During the search, his statement was recorded under Section 132(4), in which he admitted undisclosed income of approximately ₹64.54 lakh attributable to the assessee.

The income related to extra sale proceeds from a property known as Madhuban Green Villas.

By a letter dated August 14, 2008, the assessee informed the Assessing Officer that these additional sale proceeds were yet to be recorded in the books of account. She also explained why the amount had not been offered to tax in the earlier return filed on March 31, 2007.

Following a notice under Section 153C, the assessee filed a return on October 23, 2008, declaring total income of ₹64,28,970. The High Court recorded that tax on the income disclosed in the search-related return had been paid.

The Assessing Officer accepted the returned income without making any further addition. Nevertheless, penalty proceedings were initiated on the ground that the additional income had not been disclosed in the earlier return. A penalty of ₹21,16,092 was subsequently imposed under Section 271(1)(c). 

The Commissioner of Income Tax (Appeals) deleted the penalty, relying on the Rajkot Tribunal’s decision in Deputy Commissioner of Income Tax v. Balaji Multiflex Private Limited.

The appellate authority considered that the additional income had been accepted in its entirety and that the Assessing Officer had not established the charge of concealment on the material relied upon.

It also rejected the suggestion that the required taxes had not been paid. The appellate order recorded that the department’s failure to adjust seized cash against the tax liability, despite a written request, could not be treated as non-payment by the assessee.

The Revenue challenged that decision before the Tribunal, which restored the penalty.

The Tribunal emphasised that the earlier return had been filed after the search but had still omitted the income admitted during the search proceedings. According to the Tribunal’s account, that return declared a business loss of ₹2,30,089, and the additional sale proceeds were brought to tax only after proceedings under Section 153C began.

The assessee then approached the High Court under Section 260A.

The High Court examined the statutory framework governing assessments under Sections 153A and 153C.

Applying those provisions to the case, the Bench held that the earlier return could no longer be treated as the operative return for framing the assessment once it had abated. The relevant return was the one furnished under Section 153A in response to the Section 153C notice.

The court noted that the assessee had disclosed the additional income in that return, paid the tax and obtained an assessment accepting the returned income without any further addition.

It therefore held that the Tribunal was not justified in relying on the earlier return to conclude that the assessee had failed to come forward with clean hands despite having an opportunity to disclose the income.

The Bench’s reasoning centred on Section 271(1)(iii), read with Explanation 4(c), which concerns the tax sought to be evaded for the purpose of computing concealment penalty.

The court found that there was no further difference between the tax payable and the tax paid on the income accepted in the assessment. In those circumstances, the statutory basis for imposing the penalty was absent.

The Bench expressly held that where the additional income was disclosed in the return filed pursuant to the Section 153C notice and that return was accepted without any further addition, Section 271(1)(c) did not apply on the facts before it. 

The High Court also distinguished the question of immunity under Explanation 5 from the ground on which it ultimately granted relief.

It agreed with the Tribunal that Explanation 5 was not applicable in the circumstances. The Bench explained that the provision concerns a searched person found to own money, bullion, jewellery or other specified valuables, subject to the statutory conditions.

Although the Commissioner (Appeals) had reached the correct conclusion in deleting the penalty, the High Court held that the reasoning adopted was not in accordance with law.

The penalty was instead unsustainable because of the abatement of the earlier pending returns and the absence of tax sought to be evaded under Explanation 4(c).

The Bench relied on Principal Commissioner of Income Tax v. JSW Steel Limited, in which the Bombay High Court examined the overriding operation of Section 153A and the effect of abatement on pending assessment proceedings.

That decision explained that returns furnished pursuant to Section 153A are treated as returns under Section 139 and that pending assessments or reassessments covered by the statutory provision abate.

The Gujarat High Court concluded that the Tribunal could not sustain the penalty by relying on earlier returns that had abated.

The High Court set aside the Tribunal’s order restoring the penalty. It answered the substantial question of law in favour of the assessee and against the Revenue.

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