1. This appeal by the Revenue for the assessment year 1984-85 is directed against the order of the, Commissioner of Income-tax (Appeals) cancelling penalty of Rs. 1,93,536 levied under section 271(1)(c) of the Income-tax Act.
2. The facts of the case are that the premises of the assessee and her husband Shri Piyush O. Desai was subjected to search operation by the Revenue on 22nd November, 1983 when certain ornaments and jewellery were found. These were seized. In the statement recorded during the course of search, the assessee identified jewellery valuing Rs. 1,53,677 as belonging to her. Shri Piyush O. Desai also made statement that said jewellery was the property of the assessee. The Assessing Officer, however, in his order dated 18-2-1984 passed under section 132(5) of the Income-tax Act, held that the above jewellery belonged to Shri Piyush O. Desai and was acquired by him from undisclosed sources in the period relevant to assessment year 1984-85.
2.1 The assessee in the income-tax return filed after the order under section 132(5), did not include value of jewellery amounting to Rs. 1,53,677 as per note given in Part-III and covering letter dated 29-9-1984. It was stated that the jewellery of value of Rs. 1,53,677 belonged to the assessee but its value was not being included as the same was treated as the income of assessee's husband in order under section 132(5) of the Income-tax Act.
2.2 The Assessing Officer consistent with the view he had taken in order under section 132(5), treated jewellery of value of Rs. 1,53,677 as belonging to assessee's husband and liable to be taxed in his hands as income from undisclosed sources under section 69A of the Income-tax Act. The above amount was assessed in the hands of Shri Piyush O.Desai. As a protective measure, the amount of Rs. 1,53,677 was added in the hands of the assessee as per assessment orders dated 27-3-1987. The Assessing Officer initiated penalty proceedings under section 271(1)(c) both in the hands of the assessee as well as Shri Piyush O. Desai.
2.3 The addition of Rs. 1,53,677 was challenged in appeal and ITAT in the appeal of the Revenue and in the case of the assessee [ITA No.1299/Ahd./ 1989] vide order dated 2-1-1999, held that protective addition be treated as addition on substantive basis. The relevant part of the order is as under:-- "In the revenue's appeal in case of Pannaben the ground taken by the revenue is that the addition of Rs. 1,53,677 made on a protective basis should be restored. This appeal is partly allowed to the extent that the addition in the hands of Smt. Pannaben of an amount of Rs. 1,53,677 is restored on substantive basis and not on protective basis." 2.4 In the light of above order, the Assessing Officer levied penalty on the assessee on the ground that ITAT had converted addition of Rs. 1,53,677 under section 69A and, therefore, assessment order under section 143(3) stands rectified. The decision in the case of CITv.Vinaychand Harilal cited by the assessee was held to be not applicable.
The penalty was directed to be computed at the rate of 200 per cent of the amount of tax sought to be evaded and was calculated at Rs. 1,93,546.
3. The assessee impugned above levy in appeal before the learned CIT (Appeals). It was contended that penalty was initiated under section 271(1)(c) of the Income-tax Act read with Explanation 5 of that section, but the above Explanation was inserted with effect from 1-10-1984 whereas search and seizure proceedings took place in November, 1983. Therefore, the said Explanation was not applicable to the present case. It was further contended that assessee had paid advance-tax of Rs. 67,838 and had admitted in the return filed on 29-9-1984 that income pertaining to the seized ornaments belonged to the assessee, but in view of stand of the Revenue as reflected in order under section 132(5), an appropriate Note was made in Part-Ill of the return. The assessee relied upon decision of Hon'ble Bombay High Court in the case of J. Rasiklal & Co. v. G.K. Mishra [1991] 188 ITR 591 and also on decision of Allahabad Tribunal in the case of Asstt CITv. Smt.
Mohinder Kaur [1991] 36 ITD 428. It was further submitted that penalty in the case of mother-in-law of assessee Smt. Kashiben O. Desai was cancelled by learned CIT (Appeals) vide order dated 28-8-1992 on almost identical circumstances. The assessee further relied upon decisions of Hon'ble Gujarat High Court in the case of CIT v. Lakhdir Lalji [1972] 85 ITR 77 and in the case of CIT v. Manu Engg. Works [1980] 122 ITR, 306 (Guj.). The assessee also placed reliance on the decision in the case, of KM. Bhatia (Quarry) v. CIT [1992] 193 ITR 379 (Guj.). It was contended that Assessing Officer has held that assessee has both concealed the particulars of income and also furnished inaccurate particulars of such income. Such an order was bad in law in the light of decision of Hon'ble Gujarat High Court. The learned CIT (Appeals) cancelled the penalty with the Mowing observation:-- "4.1 have carefully considered the facts of the case and the arguments advanced by the appellant. There is no dispute about the fact that during the course of the search a seizure operation at the residence of the husband of the appellant, Shri Piyush O. Desai, ornaments/jewellery valuing Rs. 1,53,677 were claimed to be belonging to Smt. Pannaben P. Desai and in the order passed under section 132(5) of the Income-tax Act, these ornaments were held to be as belonging to Shri Piyush O. Desai, the husband of the appellant. Further, the appellant has paid advance-tax in respect of the value of gold ornaments/jewellery on 31-3-1984, i.e. during the accounting period relevant to Assessment Year 1984-85. It is also an accepted fact that the appellant, in letter dated 29-9-1984, filed along with the return of income for the Assessment Year 1984-85, clearly mentioned as to why the income pertaining to the investment in gold ornaments/jewellery is being shown in the Part-in of the return. It is also a fact that Explanation 5 to section 271(1)(c) was made effective w.e.f. 1-1-1984 and in view of Tribunal's decision it has perspective application only. Hence, having regard to these facts, submission made by the appellant and the ratio of various decisions referred to by the appellant, the Assessing Officer was not justified in levying penalty under section 271(1)(c), amounting to Rs. 1,93,536. The penalty levied under section 271(1)(c) is, therefore, cancelled." 4. The Revenue has come up in appeal. I have heard both the parties.
The learned Departmental Representative vehemently contended that penalty was properly initiated as assessee failed to disclose income in respect of ornaments found during the course of search. The ITAT had held that assessment was to be made on substantive basis and it was a fit case attracting application of provisions of section 271(1)(c), read with Explanation 5 of the Income-tax Act. The learned CIT (Appeals) on irrelevant consideration like payment of advance-tax, etc., cancelled the penalty. The assessee had concealed income and was, therefore, liable to be penalised.
4.1 Shri J.P. Shah, the learned counsel for the assessee, strongly supported the order of learned CIT (Appeals). It was contended that almost on similar circumstances, ITAT 'A' Bench, Ahmedabad in the case of Dy. CIT v. Kashiben O. Desai [IT Appeal No. 4435 (And.) of 1992] dated 27-2-1998 upheld the order of learned CIT (Appeals) cancelling penalty. Shri Shah also produced copies of order dated 18-2-1984 passed under section 132(5) of the Income-tax Act and of assessment order passed in the case of assessee and her husband dated 27-3-1987 under section 143(3) for the assessment year 1984-85. He showed that penalty proceedings under section 271(1)(c) were initiated in both the cases with a finding that Shri Piyush O. Desai was the owner of the jewellery and had acquired the same from undisclosed sources. Thus when satisfaction was recorded in such a manner, the initiation of penalty proceedings in the case of the assessee was bad in law.
5. After careful consideration of rival submissions, in the light of material available on record, I am unable to agree with the submission advanced on behalf of the Revenue. It is evident from order of Assessing Officer under section 132(5) as also from regular assessment orders made under section 143(3) on 27-3-1987 that revenue authorities treated the jewellery as that of Shri Piyush O. Desai and not of the assessee. The assessment in the hands of the assessee was made on protective basis. Thus, satisfaction which Assessing Officer must have before valid initiation of penalty proceedings was based on the finding that jewellery was owned by Shri Piyush O. Desai. It was required to be disclosed by him in his return and by not doing so, he concealed his income and was liable to be penalised under section 271(1)(c) of the Income-tax Act. There was no finding at the time of initiation of proceedings that the assessee was the owner of the jewellery and was required to show it in her return and on account of her failure, she was to be charged under section 271(1)(c). The importance of recording a satisfaction by income-tax authorities that the default had been committed by the assessee which would attract provision relating to levy of penalty is required to be reached in the course of the assessment proceedings. This has been emphasised on considering scheme of sections 271, 274 and 275 of the Income-tax Act since case of Jain Bros. v. Union of India [1970] 77 ITR 107 decided by Constitutional Bench of Hon'ble Supreme Court on November 18, 1969. The principle has been reiterated time and again by Hon'ble Supreme Court and by different High Courts. In the case of Smt. Kashiben O. Desai(suprd), the Ahmedabad Bench extracted the following observation of Hon'ble Gujarat High Court in the case of CIT v. Bankim J. Shah [IT Reference 117 of 1979 dated 18-7-1991].
". . . There is no provision in the Act nor is there any decided case which warrant initiation of penalty proceedings as a protective measure. The case before the Punjab and Haryana High Court was with regard to the imposition of penalty as a protective measure and such an order was held to be not warranted by law. For the same reasons we are of the view that the initiation of penalty proceedings as protective measure would also be bad in law...." 5.1 In the present case, after making assessment in the hands of Shri Piyush O. Desai, the Assessing Officer also made addition in the hands of assessee on protective basis. This clearly shows that Assessing Officer was not able to make up his mind whether his finding that Shri Piyush O. Desai was owner of the jewellery and was liable to show income relating to above seizure in his return was correct. Having issued notice in the hands of Shri Piyush O. Desai, he could not legally issue, on the same day, penalty notice in the hands of the assessee. The satisfaction which the Assessing Officer must have for initiation of relevant proceedings was totally lacking. Therefore, the very initiation of penalty proceedings was bad in law and was liable to be quashed as rightly done by the learned CIT (Appeals).
5.2 The Assessing Officer justified the levy on the basis of order of ITAT. He has clearly stated in para 3 as follows :-- "Thus, it is clear that ITAT has finally decided the fact that unexplained jewellery of Rs. 1,53,677 was owned by the assessee during the previous year relevant to assessment year 1984-85." The Assessing Officer further rejected the argument of the assessee that no penalty under section 271(1)(c) was leviable as addition was made on protective basis by saying "in view of the fact that the ITAT has finally decided the fact that addition of Rs. 1,53,677 for unexplained jewellery under section 69A is to be done on substantive basis in the case of the assessee, it is not on protective basis." 5.3 From the above, it is clear that Assessing Officer was levying penalty on the finding displaced by the ITAT. Thus, whereas satisfaction was recorded on the finding that Shri Piyush O. Desai was the owner of the seized jewellery, the penalty has been imposed on the finding that the assessee is the owner of the jewellery seized; a finding not arrived by the Assessing Officer during the course of assessment proceedings but given by ITAT much later. The circumstances taken for the levy of penalty were different from the circumstances on which satisfaction was recorded by the Assessing Officer. The action is clearly unjustified and bad in law.
5.4 The Assessing Officer also justified the levy under section 271 (1)(c) by invoking Explanation 5 to the said section. Such Explanation came into operation on 1-10-1984 whereas the search in the present case had taken place in November, 1983 i.e. much before the introduction of Explanation. It is correct that Explanations are generally procedural in nature and are applicable to all pending cases but on consideration of facts and contents of Explanation 5, it has to be held that it cannot be made applicable to cases where search took place before 1-10-1984. Under the Explanation, valuable assets, etc. found in search under section 132 are treated "deemed concealed income" unless valuable assets recorded in regular books of account or disclosure is made by the assessee within the time prescribed in the Explanation. There is no question of making disclosure as per the Explanation 5 in a case where search took place prior to 1-10-1984. Therefore, having regard to purpose, text and context of Explanation 5, the same is held to be not applicable to the present case.
5.5 Besides the above, I am not inclined to hold that it is a fit case for levy of penalty having regard to totality of facts and circumstances of the case. It is an admitted position that during the course of search, the assessee identified and admitted that jewellery in question belonged to her. She explained that said jewellery was received at the time of marriage and on other ceremonial occasions. As the assessee entertained some doubt that her explanation regarding source of acquisition of jewellery would be accepted, the assessee was ready to pay tax on the value of jewellery in assessment year 1984-85 which is clear from the advance-tax paid by the assessee. The Revenue, however, took up the stand that jewellery was to be added and assessed in the hands of the assessee's husband as was made clear from order passed under section 132(5) of the Income-tax Act. In the light of above order, the assessee could reasonably entertain a belief that no useful purpose would be served by disclosing the jewellery in her return for the assessment year 1984-85. For this reason, the income connected with jewellery was not disclosed in return for assessment year 1984-85 but an appropriate Note to the above effect was made in Part-III of the return. The said claim in Part-III has not been held to be false or untrue and is fully established on record. Part-III throws a protective armour against levy of penalty when it is true and frank relating to income indicated in that part. The assessee on the facts and circumstances of the case included income in Part-III of the return. In such circumstances, protection against penalty is clearly available to the assessee. In other words, it was on account of stand and view taken by the revenue authorities, that value of ornaments was not disclosed in the return although the payment advance-tax and Note in Part-III indicate that the income was intended to be disclosed. In the above background, the default, if any, of the assessee is technical or venial in character. No penalty under section 271(1)(c) is exigible.
5.6 In the light of above discussion, I hold that learned CIT (Appeals) was right in cancelling the penalty levied on the assessee. His action is hereby confirmed.