>>CASH CREDIT, UNEXPLAINED INVESTMENTS, ETC.

PENALTY U/S. 271(1)(C) QUA ADDITION U/SS. 68 TO 69C

Sunil M. Lala
Advocate

Explanation 1 to Section 271(1)(c) raises a rebuttable presumption that any amount treated as income is concealed income. When a cash credit is treated as income u/s 68 on the ground that explanation is not satisfactory, issue arise as to whether in terms of Explanation 1 to section 271(1)(c) penalty is also leviable? This and other issues regarding addition u/ss 68 to 69C and penalty u/s 271(1)(c) have been addressed in the present article.

1. Whether section 68 can be extended to penalty proceedings

As per the provisions of section 68, any sum credited in the books of the assessee for any previous year may be deemed to be the income of the assessee of that previous year if the assessee offers no explanation about the nature and source thereof or the explanation offered is not satisfactory in the opinion of the AO. The issue therefore arises whether deemed income u/s. 68 can be treated as concealed income for the purpose of levy of penalty u/s. 271 (1) (c). In CIT vs. Ganpatrai Gajanand -108 ITR 403 (Orissa), the Tribunal held that penalty could be levied only for concealment of actual income and not for the concealment of an amount which is deemed to be income under section 68 of the Act ; that section 2(24) which defines income does not include that amount deemed to be the income of the assessee under section 68 ; and, therefore , in the absence of cogent evidence on record to show that the amount added in the assessment was in fact the income of the assessee, it could not be said that the assessee was guilty of concealing the particulars of his income. The Orissa High Court reversing the decision of the Tribunal held, that there is no distinction between the income arising on account of section 68 and income earned otherwise because the definition of income is of inclusive type and does not exclude sums of money which may be income on account of the other provisions in the Act. An amount which is deemed to be income by operation of law is also income to which the provisions of section 271 will apply. In CIT vs. Bhuramal Manikchand - 130 ITR 129 (Cal), the Tribunal held that although the cash credits were assessable under s. 68 as income of the previous years relevant to the assessment years in question, s. 68, as such, could not be extended to penalty proceedings and cancelled the order of penalty. The Calcutta High Court upheld the Tribunal order without considering the aforesaid judgment of the Orissa High Court. Both the aforesaid judgments were rendered prior to the insertion of the current Explanation 1 to sec. 271 (1) (c) which now makes it clear that the operation of s. 68 can extend to penalty proceedings. Reference may be made to "New Vijay Agency vs. ACIT – 74 ITD 504 (Mad.) wherein it was held "it is seen that what sections 68, 69, 69A, 69B and 69C deem for the purpose of assessment, the new Explanation 1 injects the deeming for the purpose of penalty also. If the assessee gives no explanation at all or explanation is found to be false, then the addition or disallowance in the assessment arising out of such facts shall be deemed to be concealed income".

2. Mere addition u/s. 68 does justify levy of penalty u/s. 271(1)(c)

In CIT vs. Rudrappan and Company - 205 ITR 147 (Madras), it was held that the mere fact that an addition is made on account of unexplained cash credits would not, on the strength of such an assessment and without more, justify levy of penalty for concealment of income. Similar view has been taken in CIT vs. Sri. Venkateswara Timber Depot – 90 TAXMAN 264 (A.P.), National Textiles vs. CIT – 249 ITR 125 (Guj), S.L. Ganeriwal vs. ITO – 48 ITD 11 (Jp.) Reference may also be made to Anantharam Veerasinghaiah & Co. vs. CIT – 123 ITR 457 (SC) wherein the Apex Court held that the findings recorded in the assessment order constitute good evidence in the penalty proceedings but those findings cannot be regarded as conclusive for the purposes of the penalty proceedings.

3. Surrender of cash credits

1. Mere surrender of cash credits does not imply that the said credits represent concealed income.

   Courts have held that merely because the assessee has surrendered certain cash credits to purchase peace it does not follow that the said credits represent his concealed income. In the absence of any evidence / material brought on record by the Department, to establish that the entries represent concealed income, no penalty can be levied. (CIT vs. Motilal and Co. - 184 ITR 288 (Cal.), CIT vs. Aggarwal Pipe Co.- 240 ITR 880, CIT vs. Gajanand Shyamlal – 111 ITR 816 (Gauhati), CIT vs. Narang & Co.- 98 ITR 462 (Delhi), CIT vs. M. Bhuta & Co.-103 ITR 183 (Bom), CIT vs. Sarof Industries – (1976) CTR 182 (Delhi), Krishan Lal Shiv Chand Rai vs. CIT – 88 ITR 293 (Pun.), Gumaniram Siri Ram vs. CIT – 85 ITR 67 (Punj), Maulik Jasubhai Trust vs. ITO – 60 TTJ (Mum.) 467, ITO vs. B.D. Yadav & Mesharam – 46 TTJ (Nag.) 241 and Shashi Raj Kapoor vs. ITO – 38 ITD 249 (Bom.) (where in the Explanation to s. 271 (1) (c) has also been considered However, if the assessee has surrendered the cash credits in the revised return after the detection of concealment, (B.Tex Corpn. vs. ITO – 46 ITD 61 (Bom) (TM)) or where, in the statement of the case it had been stated that the assessee was willing to have the cash credits treated as its undisclosed income (CIT vs. P.B.Shah & Co. P. Ltd.- 113 ITR 587 (Cal.)) or where the assessee has agreed to surrender the value of the bogus Hundi notes found in the search and seizure operation and no evidence has been adduced to show that the amount agreed to be surrendered did not represent concealed income (Krishna Kumari Chamanlal vs. CIT – 217 ITR 645, 646 (Bom)), penalty would be leviable.

2. Surrender in response to notice u/s. 148 may amount to admission of concealment

   In ACIT vs. Bhartiya Bhandar - 122 ITR 622 (M.P.), the assessee offered certain cash credits in response to notice u/s. 148 which was issued after the completion of the assessment when the AO noticed that certain cash credits entries were not properly examined. The MP High Court held that the inclusion of the cash credits in the return filed in answer to the notice under s. 148, as its income without any qualification, amounted to an admission by the assessee that those credits constituted its income and that admission constituted evidence of concealment. As, apart from its explanation, the assessee had offered no material to prove that it had not concealed particulars of its income, the IAC was right in acting upon the unequivocal admission in the return and in holding that the disputed amounts was the assessee’s income. Also, as the cash credits were not disclosed in the original return but were shown in the books of account as cash credit items pertaining to different persons, the charge of concealment of particulars of income was fully established, and penalty could be imposed. The MP High Court further observed "It cannot be held as an inflexible rule that when after an initial dispute the assessee agrees to the inclusion of some items for assessment, the items constitute his income. The question whether the surrender of the items constitutes an admission will depend upon the facts and circumstances of each case. If the assessee, confronted with the entries, offers no explanation and admits that it was his concealed income and agrees to surrender the particular items for inclusion in his income, the surrender will amount to admission. But when a surrender is made to purchase peace or for similar reason, the surrender cannot amount to an admission."

3. Conditional surrender

   In CIT vs. Saran Khandsari Sugar Works - 246 ITR 216 (All.), the assessee had agreed to a higher assessment on the condition that no penalty would be imposed. However, penalty was levied by applying the Explanation. It was held that penalty could not be levied merely on the basis of surrender when, in fact, no concealment had been established. In ITO vs. Manjit Singh Baldev Singh Commission Agents - 69 ITD 197 (ASR.), the assessee surrendered peak credit only to avoid any further litigation and harassment and such surrender was made subject to the condition that no penalty would be levied. The AO however levied penalty. The Tribunal deleting the penalty held that the surrender letter was loud and clear that the assessee was agreeable to surrender the peak credit only if same surrender was subject to no penalty for concealment. The AO should have either accepted the total offer or he should have written and informed the appellant that his surrender was not accepted and investigated the matter as was called for under the facts and circumstances of the case. Similar view has been taken is V. Rajasekharan Nair vs. ITO – 40 ITD 125 (Coch.), wherein the Tribunal while deleting the penalty observed that as the assessee has not appealed against the additions made, it was difficult to say that the additions made in the assessment were not agreed additions. Also, the Delhi Tribunal has taken a similar view in ACIT vs. Smita Commercial Investment (P) Ltd. – 90 Taxman (Mag.) 275 (Delhi) wherein despite the conditional offer, penalty was levied by the AO on the ground that the assessee surrendered the cash credits only when concealment was detected by the Department. The Tribunal deleted the penalty on the ground that mere initiation of enquiries could not be equated with prima facie detection of existence of concealment. Similar view has also been taken in Pradeep Bankers vs. ITO – 70 TTJ (Del) 10.

4. Conditional surrender – but assessee not appearing before AO in penalty proceedings.

   In Diwan Enterprises vs. CIT – 246 ITR 571 (Del), despite the conditional surrender, penalty was levied. The Delhi High Court observed that contention of the assessee that the amount was surrendered on the condition that penalty would not be levied was liable to be rejected solely for the reason that assessee did not appear before the AO in penalty proceedings. However, despite the above observation, the penalty was deleted on the ground that the AO had nowhere recorded his satisfaction that the assessee had concealed the particulars of his income or furnished inaccurate particulars of income.

4. Admission by appellant that the credit entry represents his income

It is obvious that penalty would be imposable in a case, where the assessee admits that the credit entry shown as loan in fact represented his own income (Durga Timber Works vs. CIT – 79 ITR 63 (Delhi), Banaras Chemical Factory vs. CIT – 108 ITR 96 (All), Ayyasami Nadar & Bros. vs. CIT – 30 ITR 565 (Mad.), India Sea Foods vs. CIT – 114 ITR 124 (Ker), H.V. Venugopal Chettiar vs. CIT – 153 ITR 376 (Mad.), Western Auto Mobile (India) vs. CIT – 112 ITR 1048, CIT vs. Krishna & Co.- 120 ITR 144 (Mad), CIT vs. P.B.Shah & Co. Pvt. Ltd. – 113 ITR 587 (Cal), CIT vs. Dr. R. C. Gupta & Co. – 122 ITR 567 (Raj).

5. Non filing of appeal against addition u/s. 68

In ACIT vs. Sharp Spring & Staples Co (P). Ltd. - 65 TTJ (Rajkot) 74, it was held that merely because the assessee had not filed appeal against the addition of cash credits, it could not be said that the assessee had concealed the particulars of income. Reference may also be made to Sir Shadilal Sugar and General Mills Ltd. vs. CIT – 168 ITR 705 (SC) wherein it was held that from agreeing to additions it does not follow that the amount agreed to be added was concealed income for there may be hundred and one reasons for such admissions.

6. Confirmation letters/Deposition/Affidavit/Copy of Account etc.

1. When sworn depositions of creditors / discharged hundis are filed (PAN/GIR No. of creditors not submitted )
   
   No penalty can be levied without examining the deponent creditors or the Notary Public (V. Ramchandra Rao vs. ITO – 33 ITD 650 (Hyd.) )

2. When confirmation letters are filed along with PAN/GIR Nos. of the creditors.
   
   No penalty can be levied (Shashi Raj Kapoor vs. ITO – 38 ITD 249 (Bom.) )

3. When assessee files affidavit of creditor and produces him before AO for cross-examination.
   
   No penalty can be levied (S.L. Ganeriwal vs. ITO – 48 ITD 11 (Jp.) )

4. When no confirmations / Copies of account are filed
   
   Penalty can be levied (Vijay Laxmi Stores vs. CIT – 159 ITR 333 (Cal.), Antoo Ram Mahabir Prasad vs. ITO – 26 TTJ (All.) 452 )

5. When the address mentioned in the confirmation filed is incorrect or when the assessee is unable to disclose the address of the depositors.
   
   Penalty can be levied (New Vijay Agency vs. ACIT – 74 ITD 504 (Mad.) ) unless the credits are raised in the normal course of business through a broker. (Satish Kumar Sood (Huf) vs. ITO – 59 TTJ (Del) 146 )

6. Where there are two conflicting statements from the same person (creditor), one before the Income-tax Inspector and another in an affidavit sworn before the Notary Public, who is a public authority.
   
   No penalty can be levied unless the AO issues summons u/s. 131 to the creditor, examines him on oath with the right of cross examination to the assessee. (V. Ramachandra Rao vs. ITO – 33 ITD 650 (Hyd.) )

7. Statement of Creditors/Presence of before AO/Summons to Creditors

1. Statement of Creditors made before another AO cannot be used against assessee for levy of penalty unless assessee is given copies of statements and an opportunity to cross-examine the creditors.
   
   In ACIT vs. Rawalpindi Flour Mills (P) Ltd. - 125 ITR 243 (All.), the creditors had confirmed before another ITO that they had indulged in name lending transactions on the basis of which addition was made and penalty was levied. The Allahabad High Court held that the statements recorded by another ITO could not be used against the assessee in the assessment proceedings, much less in penalty proceedings, because the assessee was not given an opportunity to cross-examine those persons (Creditors). Similar view has been taken by the Calcutta High Court in Sikri & Co. P.Ltd. vs. CIT-106 ITR 682 (Cal).

2. Creditors admitting loan in response to summons u/s. 131
   
   In CIT vs. Shree Bajrang Trading and Supply Company - 187 ITR 299 ( Cal.), the penalty was deleted on the ground that (i) the concerned creditors had responded to the summons issued under section 131 of the Act. and confirmed that they had advanced loans to the assessee (ii) apart from disbelieving the explanation of the assessee, there was no other material to prove concealment of income. Similar view has also been taken in Pradeep Bankers vs. ITO – 70 TTJ (Del) 10.

3. Assessee unable to produce creditors
   
   In CIT vs. Bhimji Bhanjee & Co.- 146 ITR 145 (Bombay ), the assessee stated that it was not in a position to call the parties in whose favour the cash credits appeared because the assessee was always heavily indebted to them and therefore unable to trouble its creditors to give evidence. The Bombay High Court held that as the assessee had nowhere admitted that it had concealed its income and as the ITO had not added the said amount as concealed income from business but as income from undisclosed sources, penalty could not be imposed for concealment of income.

4. Summons unserved / Confirmations filed / Creditors are I.T. assessees.
   
   In Sikri & Co. P.Ltd. vs. CIT – 106 ITR 682 (Cal.), though the confirmations of the creditors who were Income Tax assessee were filed, the summons issued to them returned unserved. Additions were made and penalty was levied. The Calcutta High Court deleted the penalty on the ground that apart from the failure of the assessee to prove the source of the amount of the credit entries there was no other evidence to show that there was any concealment on the part of the assessee. Similar view has been taken in CIT vs. Aggarwal Pipe Co. – 240 ITR 880 (Del).

5. Summons unserved / no confirmations filed.
   
   In Vijay Laxmi Stores vs. CIT - 159 ITR 333 (Cal.), the assessee did not file any confirmatory letters from the alleged creditors and also the summons issued by the Department could not be served on the creditors as a result of which the discharged hundis and the signatures thereon could not be verified. In the aforesaid circumstances the Calcutta High Court upheld the levy of penalty as the assessee had not done anything to prove the genuineness of the loans.

6. When creditor is unable to produce books of account before AO and is found to be a name lender.
   
   In Jawahar Woollen Textile Mills vs. CIT – 92 ITR 503 (All), the creditor appeared before the AO and produced copy of accounts which was undated. On being asked to produce the books of account, the creditors stated that the same were misplaced and that no complaint had been lodged with the police regarding the loss of account books. The creditors had offered nominal income in his tax returns and had admitted that in two independent income tax cases that he was not carrying on the business of money lending but was merely lending his name as a creditor on payment of 3% commission. On the aforesaid facts, the Allahabad High Court held that the AO had rightly levied the penalty and it could not be said that there was no material to come to a finding that there was concealment of income.

8. Share Capital

1. When share Application money received is supported by the affidavits of the depositors.
   
   No penalty can be levied even under Explanation 1 to sec. 271(1)(c) on the ground that the affidavits are self serving statements more so when the AO did not require the assessee to produce the depositors. [CIT vs. Prominent Road Carriers P. Ltd. – 113 Taxman 642 (Delhi)].

2. When assessee supplies names and addresses of the subscribers and requests AO to issue summons u/s. 131 to the creditor or obtain relevant information u/s. 133(6).
   
   No penalty can be levied even under Explanation 1 when the AO refuses to comply with the aforesaid request of the assessee (Eagle International Ltd. vs. ACIT – 57 ITD 512 (Cal) )

3. No details submitted in respect of share capital/depositors
   
   Penalty would be leviable (Sidhivinayak Chemicals P. Ltd. vs. ACIT – 52 ITD 226 (Bom.) )

9. Partners introducing their concealed income in the form of cash Credits from third parties in books of firm

In CIT vs. Sree Ram Santosh Kumar - 179 ITR 478 (Cal.), the partners introduced their concealed income in the form of cash credits from third parties in the books of the firm. The Tribunal held that so far as the assessee was concerned, the loans were genuine which had been introduced by the partners out of their own money and that as there was no admission of the concealed nature of the income by the assessee firm, it was for the Department to establish that the loans on account of which the addition had been made were the income of the assessee and that the assessee had concealed the same. Since the Department had failed to discharge that onus, the Tribunal deleted the penalty. The Calcutta High Court however confirmed the levy of penalty. It held that what was apparent was not real. The reality of the situation was that the partners introduced their concealed income in the form of cash credits from third parties in the books of the firm. The firm had shown such cash credits in the books of account to be genuine loans and claimed interest allegedly payable to the alleged creditors, but, in fact, to its partners, as deduction. In such a case, the knowledge of the partners, who carried on the business, that the loans were not genuine, could be imputed to the firm. Therefore, it could not be said that the firm did not conceal any particulars of its income.

10. Credit entries in name of petty employees

1. Employee lending without interest / Employee borrowing from Third party to lend to assessee (employer)
   
   In Kandaswami Pillai vs. CIT - 108 ITR 612 (Madras), there were three cash credit entries in the books of account of the assessee in the name of his employees who confirmed that they had lent money to the assessee. But the AO rejected their evidence holding that they were men of no means and levied penalty. The Madras High Court held that it was true that a mere rejection of the explanation of the assessee that the amount belonged to somebody else is not enough to hold that the amount represented the concealed income. But this was not a case of a mere rejection of the assessee’s explanation. The two employees lent money to the assessee without interest. Half of the amount lent by the third employee was borrowed by him from a third party. This did not represent ordinary human conduct. The creditors did not state why they chose to lend money to the assessee for no interest, nor was there an explanation by the assessee as to the reason which prompted them to lend money to him free of interest. The evidence also disclosed that the three witnesses had no source of income worth the name, that they were all employees of the assessee and that they could not have lent such large amounts. On the aforesaid facts, the Madras High Court confirmed the levy of penalty.

2. Credit in name of petty employees though admittedly belonging to third party
   
   In Northern Bengal Jute Trading Co.Ltd. vs. CIT - 136 ITR 41 (Cal.), the AO found cash credit entries in the name of petty employees of the assessee and treated the same as the income of the assessee from undisclosed sources. The assessee’s explanation was that the said amounts were in fact advanced by one M/s. S although the same were entered in its books in the names of the said employees, and in support thereof the assessee relied on a confirmation furnished by M/s. S. The AO did not accept the said explanation of the assessee and added back the same to the income of the assessee as income from undisclosed sources and levied penalty. The AO held that the assessee was aware that false entries were being made on various dates in the names of innocent persons who were probably unaware of the same. This amounted to misrepresentation and led to wilful concealment of particulars of income. The Calcutta High Court confirming the penalty held that, it was not a mere rejection or disbelief of the explanation given by the assessee as to the nature and source of the cash credit entries, but the assessee’s own case was that the particulars as disclosed by those entries were false and fictitious and that therefore the assessee had deliberately furnished inaccurate particulars of its income and concealed the same by trying to pass the same off as loans.

11. Cash purchase shown as credit purchase

In S.Subramania Chetty vs. CIT - 114 ITR 283 (Madras), in the books of account of the assessee, it was shown as if the assessee had purchased oil seeds from two merchants on credit. However, on enquiry the AO found that the purchases had been made against cash payment and not on credit. The assessee produced four persons who stated that they had advanced monies for financing the transactions in question. The AO, the AAC and the Tribunal did not place any reliance on the evidence of these persons. On a reference, the Madras High Court held that in the present case it was not merely a question of the Department not accepting the explanation given by the assessee as to the persons from whom he got the money, as, before coming forward with the said explanation, the assessee had suppressed the very existence of the money itself by showing in the accounts that he purchased oil seeds on credit while he had actually paid for the said purchase. The deliberate act of the assessee in showing the purchase as credit purchases could lead to only one inference, viz., that he had consciously concealed the particulars of his income. It could not therefore be contended that the penalty had been levied in the present case solely because of the rejection of the explanations offered by the assessee with regard to the source of the amount but as the result of inference drawn from the combined effect of various facts and hence the levy of penalty was justified.

12. When the explanation offered in excess balance in trade creditors account was that the same represented intangible additions made in earlier year

In Lenses Centre vs. ITO- 47 ITD 122 (Hyd.), the explanation offered in respect of excess balance in trade creditors account was that the same represented intangible additions made in earlier year. The Tribunal confirmed the penalty on the ground that the above explanation / admission amounted to saying that the outstanding balances in the accounts of its trade creditors were not correct and that they were inflated figures.

13. Petition under section 271(4A) would not amount to evidence of concealment of income.

In CIT vs. Pioneer Engineering Syndicate - 188 ITR 287 (Madras), the assessee filed a petition under section 271 (4A) before the CIT offering for assessment the peak credit in its hundi loan accounts. The assessee claimed that it was filing this petition under section 271 (4A) in order to avoid further complications and to purchase peace with the Department and particularly in view of the fact that the multani bankers had made statements before the Department denying the transactions. The AO made addition and levied penalty. The Tribunal cancelled the penalty. The Madras High Court upheld the Tribunals orders and held that the offer of the assessee for getting the amount of peak credit assessed could not by itself amount to an admission that income had been concealed, particularly in the context of the statements by the assessee in the petition before the Commissioner under section 271 (4A) which made it clear that, though the hundi loans were genuine, the assessee’s willingness to get assessed on the amounts was only because it would be difficult to prove the genuineness of the credits under the conditions created by the denial by the multani bankers of their advances. Similar view has been taken in CIT vs. Motilal & Co. – 184 ITR 287 (Cal.) wherein, the Calcutta High Court upheld the Tribunal’s order deleting the penalty on the ground that there was no evidence other than the above admission of the assessee that the disputed amount represented its income and the said finding had not been challenged as perverse.

14. Explanation – 1 to Section 271(1)(c)

The following principles have been laid down by Courts / Tribunals while
deciding whether the levy / deletion of penalty in respect of additions made u/s. 68 were justified in light of the provisions of Explanation 1 to section 271 (1) (c).

1. AO has prove that Explanation is FALSE
   
   It is for the AO to prove that the explanation offered was false. [V. Ramachandra Rao vs. ITO – 33 ITD 650 (Hyd.)]

2. Unsatisfactory Explanation cannot be equated with False Explanation
   
   If there is an explanation, additions can be sustained under section 68 if the explanation is not found to be satisfactory by the AO. For that reason alone no penalty can be levied, because Explanation 1 to section 271 (1) (c) purposely uses the words ‘offers an explanation which is found to be false’. There is a long distance between an explanation remaining as unsatisfactory and an explanation being found to be false. [V. Ramachandra Rao vs. ITO – 33 ITD 650 (Hyd.)].

3. Explanation is ‘False’ when it is disproved and not unproved
   
   ‘False’ means a positive proof of concealment and involves an element ‘deliberateness’. The fact must not remain only ‘unproved’ but ‘disproved’ by the income-tax authorities for levying penalty. [ITO vs. Kumar Metal Industries – 36 ITD 261 (Bom.), Shashi Raj Kapoor vs. ITO – 38 ITD 249 (Bom.)].

4. Assessee has to prove that Explanation is bonafide
   
   It is for the assessee to show that the explanation given by him is BONA FIDE and that all the facts relating to the same have been disclosed. [CIT vs. Gurbachan Lal – 250 ITR 157 (Del), Antoo Ram Mahabir Prasad vs. ITO – 26 TTJ 452 (All.), Eagle International Ltd. vs. ACIT – 57 ITD 512 (Cal.)].

5. Explanation bonafide, though unsubstantiated.
   
   There may be situation that the Explanation offered is unsubstantiated despite being bonafide. In such a situation Explanation 1 is not attracted. [Shashi Raj Kapoor vs. ITO – 38 ITD 249 (Bom.), Eagle International Ltd. vs. ACIT – 57 ITD 512 (Cal.)].

6. When there is a matter of honest difference of opinion
   
   Explanation 1 would not apply. [Shashi Raj Kapoor vs. ITO – 38 ITD 249 (Bom.)]

7. No explanation offered – Explanation 1 is applicable.
   
   If in penalty proceedings, the assessee offers no explanation, the amount added or disallowed has to be deemed as concealed income. [ITO vs. Kumar Metal Industries – 36 ITD 261 (Bom.)].

8. When assessee offers cash credit for assessment prior to detection of concealment – Explanation 1 is not applicable.

9. When assessee files affidavit of creditor and produces him before AO for cross -examination –
   
   Explanation 1 is not attracted. [S.L. Ganeriwal vs. ITO – 48 ITD 11 (Jp.)]

10. When confirmation letters along with the Permanent Account Number/GIR Numbers of the creditors are filed –
    
    Explanation 1 is not Applicable.
    [Shashi Raj Kapoor vs. ITO – 38 ITD 249 (Bom.)].

11. Filing of sworn depositions / discharged hundis – explanation substantiated.
    
    When the assessee had offered an explanation which is substantiated by sworn depositions or discharged promissory notes which are rejected by the AO without examining the deponent-creditors or the Notary Public, it would simply be a case of rejection of explanation though substantiated by the assessee. [V. Ramachandra Rao vs. ITO – 33 ITD 650 (Hyd.)].

12. Filing of confirmation letters / cheque payments
    
    Explanation is substantiated / bonafide. [Raj Motors vs. ITO – 54 ITD 542 (Delhi)].

13. Non filing of confirmations / copy of account of creditors –
    
    Explanation 1 is attracted despite filing of Affidavit from partner which being a self serving statement has no evidentiary value. [Antoo Ram Mahabir Prasad vs. ITO – 26 TTJ 452 (All.)].

14. When Assessee cannot disclose address of certain depositors, cash credit in their names can amount to concealed income under the Explanation 1 [New Vijay Agency vs. ACIT- 74 ITD 504 (Madras)].

15. Credit raised in the normal course of business through a broker
    
    Explanation 1 is not attracted even if the address of the creditor mentioned in the loan confirmation is incorrect consequent to which the inquiries made by the AO become fruitless. [Satish Kumar Sood (Huf) vs. ITO – 59 TTJ 146 (Del.)].

16. When share Application money received is supported by the affidavits of the depositors.
    
    No penalty can be levied under Explanation 1 to s. 271 (1) (c) on the ground that the affidavits are self serving statements more so when the AO did not require the assessee to produce the depositors. [CIT vs. Prominent Road Carriers P. Ltd. - 113 Taxman 642 (Delhi)].

17. When the assessee furnishes the list of shareholders and invites the AO to issue summons to them under section 131 or to obtain relevant information under section 133 (6) in order to elicit the true position regarding the cash subscription
    
    No penalty can be levied under Explanation 1 without making the aforesaid enquiry. [Eagle International Ltd. vs. ACIT – 57 ITD 512 (Cal.)].

18. When credit Entry is in name of hawkers clause (B) of Explanation 1 would be attracted where the hawkers are living on daily earnings and have no capacity to lend notwithstanding the fact that they have filed confirmations and admitted the loan before the AO. [Rohini Dairy Farm vs. CIT – 244 ITR 427 (Mad)].

19. When Assessee cannot disclose address of certain depositors.
    
    Cash credit in their names can amount to concealed income under the Explanation 1 [New Vijay Agency vs. ACIT – 74 ITD 504 (Madras)].

20. Mere addition u/s. 68 does not justify imposition of penalty by recourse only to Explanation – 1.
    
    The Explanation does not make the assessment order conclusive evidence that the amount assessed was in fact the income of the assessee. [National Textiles vs. CIT – 249 ITR 125 (Guj)]. A conspectus of the Explanation added by the Finance Act, 1964, and the subsequent substituted Explanations make it clear that the statute visualizes assessment proceedings and penalty proceedings to be wholly distinct and independent of each other. [CIT vs. Gurbachan Lal – 250 ITR 157 (Del)].

21. Presumption - rebuttable
    
    In essence, the Explanation is a rule of evidence. Presumption which are rebuttable in nature are available to be drawn. [CIT vs. Gurbachan Lal – 250 ITR 157 (Del)].

15. Whether the Tribunal was justified in confirming/deleting penalty in resect of addition u/s. 68 is a question of fact (unless of course the finding of the Hon'ble Tribunal is challenged as perverse}

Reference may be made to Basant Lal Om Prakash vs. CIT – 83 ITR 356 (Punjab), CIT vs. Sri Venkateswara Timber Dept. – 90 Taxman 264 (AP), CIT vs. Saran Khandasari Suger Works – 246 ITR 216 (All), CIT vs. Motilal And Co. – 184 ITR 288 (Cal), Jain Brothers vs. CIT – 168 CTR (Del) 297.

16. Whether sections 69, 69A etc. extend to penalty proceeding !

In Rahmat Development & Engineering Corporation vs. CIT – 130 ITR 602 (Cal), it was held "Section 69 of the Act deems unexplained investment to be the income of the assessee and that position has to be accepted in penalty proceedings also. The moment s. 69 is attracted, the unexplained investments become, by fiction of law, the income of the assessee. If they become the income of the assessee and that income is not returned, there is a non-disclosure of income". The above decision has been followed in Shri Loknath Chowdhury vs. CIT – 155 ITR 291 (Cal).

In CIT vs. Jewels Paradise – 101 ITR 265 (Kar.), the AO made an addition u/s. 69A and levied penalty. The Tribunal deleted the penalty on the ground that apart from the fact that the amount was included by virtue of the provisions of section 69A, there was no other material from which it could be inferred that the amount represented the income of the assessee for the relevant accounting year and that accordingly there was no concealment for the income established. The Karnataka High Court upheld the order of the Tribunal. The above decisions was rendered prior to the insertion of the current explanation 1 to section 271(1)(c). It is submitted that after the insertion of the said explanation, the provisions of section 69A can extend to penalty proceeding also. Reference may be made to "New Vijay Agency vs. ACIT – 74 ITD 504 (Mad.)

17. Merely because an addition is made or the addition made is sustained by the appellate Tribunal, levy of penalty would not be automatic

In CIT vs. N. Sowbhagmull Mahavirchand – 142 ITR 747 (Mad), it was held that the provisions of s. 69A by themselves cannot support an order of penalty. In CIT vs. V.R. Chittal Achi – 140 ITR 601 (Mad), it was held that additions made on account of unexplained investment cannot by itself form basis for levying penalty and that mere rejection of assessees explanation cannot lead to the presumption that assessee furnished inaccurate particulars of income. In Shrish R. Shah vs. ACIT – 114 Taxman (Mag.) 33 (Mum), the Tribunal deleted the penalty and held "It is well-settled that the penalty proceedings are different from the quantum proceedings and merely because an addition made by the Assessing Officer is sustained by the Appellate Tribunal, penalty cannot be automatically levied unless it is independently proved that the assessee concealed income or furnished inaccurate particulars of income though an order passed by the appellate authority in the quantum proceedings would prima facie support the plea of the revenue".

18. Agreed addition

1. In Sir Shadilal’s Sugar General Mills vs. CIT – 168 ITR 705 (SC), it was held "From agreeing to addition, it does not follow that the amount agreed to be added was concealed income. There may be a hundred and one reasons for such admission, i.e. when the assessee realises the true position, it does not dispute certain disallowances but that does not absolve the Revenue from proving the mens rea of a quasi criminal offence"

2. In CIT vs. K.P. Madhusudanan – 246 ITR 218 (Ker), it was held "in Sir Shadilal’s case (1987) – 168 ITR 705 what the Supreme Court observed was that there may be several reasons for which the assessee may have offered an amount for addition, but that itself is not sufficient to infer concealment. It has not laid down as a rule of general application that whenever such is the case, penalty cannot be imposed. On the contrary, in such case also the assessee was required to discharge the burden placed by the Explanation appended to section 271(1)(c)". The apex court in K.P. Madhusudanan vs. CIT – 251 ITR 99 (SC), affirmed the above decision and held that by reason of the addition of the Explanation to sec. 271(1)(c), the view in Sir Shadilal’s case can no longer said to be applicable.

3. In CIT vs. Suresh Chandra Mittal – 241 ITR 124 (MP), penalty in respect of an agreed addition was deleted by following Sir Shadilal’s case, on the ground that the explanation of the assessee that he had agreed to the addition to buy peace with the department and to come out of vexed litigation could be treated as bona fide in the facts and circumstance of the case. The above decision has been affirmed by the Supreme Court in CIT vs. Suresh Chandra Mittal – 251 ITR 9 (SC).

4. In CIT vs. Mecon Builders & Engineers – 167 CTR 424 (Del), it was held "Though it cannot be laid down as a principle of universal application that whenever an addition is made on a concession, penalty is not to be levied, the factual position in each case
   has to be considered and the background in which the agreement is made for the addition has to be taken note of".

5. From the above, it follows that in case of agreed additions, whether or not the explanation of the assessee that he has agreed to the addition to buy peace is bona fide and consequently whether penalty is leviable would really depend on the facts and circumstances in each case.

19. When even after addition u/s. 69, total income is assessed at loss – No penalty can be imposed

In Indo German Electricals vs. ITO – 41 ITD 455 (Jaipur), the AO made addition u/s. 69 and levied penalty. The Tribunal deleted the penalty on the ground that even after the addition, the income of the assessee was assessed at a loss and therefore there was no question of concealing any income. The Tribunal relied on the decision of the Punjab and Haryana High Court in CIT vs. Prithipal Singh & Co. – 183 ITR 69 which has been affirmed by the apex court in CIT vs. Prithipal Singh & Co. – 249 ITR 670 (SC).

20. Disparity in cost of construction shown by assessee and that estimated by department

A penalty cannot ordinarily be levied on the basis merely of an estimate of cost of construction made by the AO (CIT vs. Mohammed Kunhi – 87 ITR 189 (Ker.), CIT vs. Sardar Bhagat Singh – 142 ITR 836 (Pat.), CIT vs. Sadananda Sahu – 136 ITR 726 (Ori.) ). In CIT vs. Apsara Talkies 155 ITR 303 (Madras) it was held "We however fail to see how a finding of concealment of income can be founded on a valuer’s estimate. It is jocularly said that a valuer is one who, if you have forgotten your telephone number, will estimate it for you. The truth behind this utterance is that a valuation is, even in the most expert hands, an inexact instrument of measurement. It is only an estimate and no two valuers will agree on the same subject. In this welter of estimates, there is no scope whatever for drawing the inference that the assessee’ s book figure of cost was not only an understatement but it involved an actual concealment of income. There is no evidence in this case to show that the assessee had understated the construction expenses in its accounts. The only basis for the addition in the assessment as well as for the levy of penalty is that furnished by the Department Valuer’s estimated figure. We are satisfied that a valuation estimate, without more, cannot justify a finding of concealment". The above decision was followed in Ramalingam (T.P.K.) vs. CIT – 211 ITR 520 (Mad) Similar view has also been taken in CIT vs. K.R. Chinni Krishna Chetty – 246 ITR 121 (Mad) wherein it was held "the mere revision of the income to a higher figure by the assessing authority did not automatically warrant an inference of concealment of the expenditure on the construction. The addition of the income of the assessee based on the report of the valuer was rightly regarded by the Tribunal as being insufficient for recording a finding of concealment of income. Concealment implies some deliberate act on the part of the assessee in withholding the true facts from the authorities. The fact that the valuer assessed the building at a figure higher than the one reported by the assessee did not by itself lead to the inference that there had been concealment. There was no evidence to show that the assessee had deliberately concealed the cost of construction". Similar view has been taken in Dr. Mrs. K.D. Arora vs. CIT – 162 ITR 481 (Pat.) wherein it was held that if the difference is marginal between the returned investment and assessment, so that it may be said that there is scope for honest difference of opinion, that will not be a case for imposition of penalty. However, on similar facts, in Rahmat Development & Engineering Corp. vs. CIT 130 ITR 602 (Cal.), the Calcutta High Court upheld the levy of penalty by holding "section 69 of the Act deems unexplained investments to be the income of the assessee and that position has to be accepted in penalty proceedings also. The moment s. 69 is attracted, the unexplained investments become, by fiction of law, the income of the assessee. If they become the income of the assessee and that income is not returned, there is a non-disclosure of income". The above decision was followed in Shri Loknath Choudhary vs. CIT – 155 ITR 291 (Cal.) It is respectfully submitted that the above decisions of the Calcutta High Court are incorrect as it has not considered the decision of the apex court in Anantharam Veerasinghaiah & Co. vs. CIT – 123 ITR 457 (SC) wherein it was held that the findings recorded in the assessment order constitute good evidence in the penalty proceedings but those findings cannot be regarded as conclusive for the purposes of the penalty proceedings.

21. Unexplained investment in stock

1. Difference in stock valuation – only an account of method of valuation
   
   In Vishwa Nath Agarwal vs. ACIT – 71 TTJ (All) 668, addition was made on account of unexplained investment in stock and penalty was levied. The Tribunal deleted the penalty on the ground that the assessee had disclosed all the items in his stock and that the difference in valuation was only on account of method of valuation.

2. Difference in stock valuation only on account of difference in estimation
   
   In Shivam Art Processors (P) Ltd. vs. ACIT – 115 Taxman (Mag.) 320 (Ahd.), addition was made on account of unexplained investment in stock and penalty was levied. The Tribunal deleted the penalty on the ground that the difference in stock valuation was only on account of difference in estimation and estimation could vary depending on various factors. Also the explanation of the assessee, though not accepted by the AO, was plausible and the assessee’s bona fides had not been disproved.

3. Excess stock explained to be belonging to third party and third party denying the claim of the assessee
   
   In Ramchand Bhur vs. ACIT – 79 ITD 392 (Jab), the assessee’ s explanation was that the excess stock found belonged to a third party. The third party however denied the claim of the assessee. Addition was made on account of unexplained investment in stock and penalty was levied. The Tribunal confirmed the levy of penalty and held that having established the falsity of the assessee’s claim beyond doubt, the onus shifted to the assessee to disprove the case of the revenue but nothing had been brought on record by the assessee to disprove the same. In view of the categorical denial by certain witnesses it was to be held that the assessee had concealed this particular income.

4. Absence of plausible explanation in respect of excess stock found
   
   In Seth Daumal Narsumal vs. CIT – 153 ITR 78 (MP), it was held that in absence of plausible explanation in respect of
   excess stock found, penalty would be leviable.

22. Addition consequent to enhancement in the value of work in progress

In CIT vs. Mecon Builders and Engineers – 248 ITR 159 (Del), the AO was of the view that the value of work-in-progress was to be enhanced. The assessee agreed for the enhancement in the value of the WIP. Accordingly, the addition was made and penalty was levied. The said penalty was deleted on the ground that i) assessee was not guilty of concealing the particulars of his income merely because it agreed for an addition, ii) for the subsequent year, deduction was granted in respect of the enhanced value of WIP.

23. Cash deficit – when demand draft purchased

In K.P. Madhusudanan vs. CIT – 251 ITR 99 (SC) (affirming CIT vs. K.P. Madhusudanan – 246 ITR 218 (Ker)), during the course of assessment proceedings, the AO noticed that some of the demand drafts purchased and telegraphic transfers made by the assessee were not entered in its cash book on the dates on which they were purchased or made, as there was insufficient cash balance. The entries were made only subsequently when the assessee had sufficient cash balance. When these discrepancies were pointed out to the assessee, it submitted that as sufficient cash balance was not available on the dates of transactions, it had obtained hand loans from a few friends and as it was confident of repaying such loans within a short time, no entries were made in books of account for such loans. It was stated that being unable to furnish evidence for such loans, it offered the amount as additional income. Taking into account deficiency in cash balance, addition was made on account of unexplained investment and penalty was levied. The penalty was confirmed on the ground that i) assessee was required to discharge the burden placed by the Explanation appended to section 271(1)(c). ii) there was a clear admission that the entries were not made on the relevant dates. It was not a case where entries were made on the relevant dates and the source of money was omitted. The entries on the contrary were made on dates when there was sufficient cash balance. The intention to hide the actual state of affairs was clear. The explanation offered was fanciful and vague.

24. Excess cash found/seized

1. Onus on assessee
   
   In respect of excess cash found/seized during search/survey, onus would be on the assessee to establish that the said excess cash does not belong to him. If he is able to discharge the onus no penalty would be leviable (CIT vs. Gauri Shanker Shushil Kumar And Co. – 239 ITR 899 (Del.) However, if he is unable to discharge that onus, the excess cash found would be deemed to be the concealed income of the assessee and penalty would be leviable under the explanation 1 to section 271 (1) (c) [CIT vs. Gurbachan Lal – 168 CTR 266 (Del.), CIT vs. Aboo Mohmed – 250 ITR 313 (Kar.), ITO vs. Balubhai Hemchand Shah – 246 ITR 677 (Ker.)]

2. Surrender of cash in revised return even though the said cash found during search was fully supported by entries in books of account
   
   In CIT vs. Gauri Shanker Sushil Kumar And Co. – 239 ITR 899 (Del), on the aforesaid facts, the CIT (A) deleted the penalty, holding that the revised return was filed by the assessee to buy peace of mind and to avoid litigation. The Tribunal had found that the assessee had been able to explain the cash found in a search in its business premises and that the availability of cash was fully supported by entries of purchases and sales in the books of account. The Tribunal further held that the AO had not detected any concealment and merely because the assessee had surrendered the amount in the revised return, penalty could not be levied. The Delhi High Court upheld the Tribunals order as there was no specific challenge to the correctness of the findings arrived at by the Tribunal.

25. Unexplained valuable articles (watches) found during search conducted by custom/excise authoriies

Unless the assessee is able to establish that he is not the owner of the valuable articles found in his possession, he would be presumed to be the owner thereof in view of the provisions of sec. 110 of the Evidence Act and the penalty would leviable under the Explanation 1 to sec. 271 (1) (c) Reference may be made to Chuhadmal Jakarmal vs. CIT – 166 ITR 12 (MP) (affirmed by the Supreme Court in Chuharmal vs. CIT – 172 ITR 250 (SC)], wherein it was held " that in view of the provisions of section 110 of the Evidence Act, since the assessee was found in possession of the watches, he was presumed to be the owner of them until the ownership of some other person was proved. The assessee had not taken any step to prove that the watches did not belong to him …….. that under the Explanation to section 271 (1) (c), the burden was on the assessee to prove that there had been no concealment of income. He had not discharged that burden. The imposition of penalty was valid". Reference may also be made to ITO vs. Bhairo Prasad Bhagwat Saran – 17 ITD 409 (Del) wherein it was held " As such a heavy burden lay on the assessee to prove that it did not conceal its income and it was for him to explain the source of acquisition of the said articles. Explanation 1 to section 271 (1) (c) makes it clear that it is the assessee who has to offer an explanation and if he offers an explanation and the same is found to be false or if he is unable to substantiate the explanation offered by him, then it would be deemed that the amount added or disallowed in computing the total income of the assessee, for the purposes of clause (c) of the aforesaid subsection, represent the income in respect of which particulars have been concealed".

26. Addition on Account of unexplained investment in jewellery

6. When addition on account of unexplained investment in jewellery is made on protective basis, no penalty can be levied even if the addition is confirmed by Appellate Tribunal on substantive basis.
   
   In DCIT vs. Smt. Pannaben P. Desai - 112 Taxman (Mag/) 84 (Ahd.), the premises of the assessee and her husband were searched and certain ornaments and jewellery were seized. The AO in his order passed under section 132(5), held that the jewellery belonged to the husband and that it was acquired by him from undisclosed sources. Though the assessee (wife) in her income-tax return included the value of the said jewellery, the AO treated the jewellery in question as belonging to her husband and brought the same to tax as income from undisclosed sources under section 69B. However, as a protective measure, the value of jewellery was also added in the hands of the assessee. The AO also levied penalty both in the case of the assessee as well as her husband. The Tribunal held that the protective addition in the case of the assessee (wife) should be treated as addition on substantive basis. As regards the levy of penalty, the Tribunal held that it was evident from the order of the AO under section 132(5) as also from regular assessment orders made under section 143(3) that the revenue authorities treated the jewellery as that of the assessee’s husband and not of the assessee. The satisfaction by income-tax authorities that the default had been committed by the assessee which would attract provision relating to the levy of penalty was required to be reached in the course of the assessment proceedings and as the said satisfaction was missing, no penalty could be levied.

7. Addition on account of unexplained investment in jewellery though explained to have been purchased from current and past drawings
   
   In Vishwa Nath Agarwal vs. ACIT – 71 TTJ (All) 668, addition was made on account of unexplained investment in jewellery and penalty was levied. The Tribunal deleted the penalty on the ground that out of the drawings of the current year and the immediately preceding year, the investment in jewellery could convincingly be explained by the assessee.

27. Addition on account of unexplained investment in vehicles

In Vishwa Nath Agarwal vs. ACIT – 71 TTJ (All) 668, addition was made on account of unexplained investment in vehicles and penalty was levied. The Tribunal deleted the penalty on the ground as the investment in the vehicles was made in the earlier years the assessee could not be held liable for concealment of income in respect of such investment in the year under consideration.

28. Addition on account of unexplained investment in respect of entries in savings bank account

In S.K. Singh Kaintal vs. ITO – 76 Taxman (Mag.) 264 (Chd), addition was made on account of unexplained investment in respect of entries in savings bank account. The Tribunal deleted the penalty on the ground that mere sustaining of addition on the basis of entries in the savings bank account due to lack of evidence would
not warrant a conclusion that the
assessee had concealed certain particulars of income.

29. Addition on basis of entries in loose papers found during search

In Bombay Wire Ropes Ltd. vs. ACIT – 98 Taxman (Mag.) 169 (Mum), additions were made on the basis of entries in loose papers found during search and penalty was levied. The Tribunal deleted the penalty on the following grounds. i) Although the noting found during the course of search might lead to an inference that the amounts should have been the income of the assessee, yet they were not sufficient to upheld the penalty under section 271(1)(c), ii) There was, therefore, some probability that the transaction were not proved to have fructified and to that extent the revenue had not discharged the burden cast upon it under section 271 (1) (c) to establish and prove that the assessee had concealed its income or had filed inaccurate particulars thereof, iii) Further, in spite of the search having been conducted for two days, the revenue had not brought any material on record to corroborate the entries in those two handwritten notes, which did not bear anybody’s signature, to indicate even broadly as to how such substantial amount of income was utilised by the company to show that the assessee had really concealed the same.

However, in Sunil Kumar Malhotra vs. CIT – 215 ITR 586 (All), on similar facts as above, a revision petition against the levy of penalty was dismissed by the CIT. On writ petition against the order of the CIT, the Allahabad High Court confirmed the levy of penalty on the following grounds : i) As the assessee had not filed a copy of the assessment order, the exact basis on which the addition was made was not known, ii) The assessee had not challenged the addition by preferring an appeal against the assessment order, iii) Whether the addition was justified and whether the assessee’ s explanation that the amount was covered by the cash in hand shown as per books of accounts are questions of fact which cannot be reinvestigated in the exercise of jurisdiction under Article 226 of the Constitution of the India, iv) The counsel for the assessee had not even made an attempt to show that the explanation was bonafide. As is self evident from the above reasoning, it is submitted that the above decision would have only a limited application.

30. Addition on account of unexplained expenditure by estimating higher household expenses

In DCIT vs. Sharadchandra C. Patel – 112 Taxman (Mag.) 110 (Ahd), it was held that no penalty could be levied in respect of additions made on account of low household withdrawals (by estimating household expenses higher than that shown by the assessee) as the AO had not brought on record any evidence to indicate that there was an income of the assessee which was incurred towards the household expenses.

31. Explanation – 1 and Expla-nation – 5 to section 271 (1)(c)

The following principles have been laid down by Courts/Tribunal while deciding whether the levy/deletion of penalty in respect of additions made u/s. 69, 69A etc. were justified in light of the provisions of Explanation 1 and Explanation 5.

1. The Explanation to section 271(1)(c) is a part of section 271. When the Assessing Officer or the Appellate Assistant Commissioner issues a notice under section 271, he makes the assessee aware that the provisions thereof are to be used against him. These provisions include the Explanation. By virtue of the notice under section 271 the assessee is put to notice that, if he does not prove in the circumstances stated in the Explanation, that his failure to return his correct income was not due to fraud or neglect, he shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof, and, consequently be liable to the penalty under the section. No express invocation of the Explanation to section 271 in the notice under section 271 is necessary before the provisions of the Explanation are applied. [K.P. Madhusudanan vs. CIT – 251 ITR 99 (SC)]

2. Merely because penalty proceedings are independent of assessment proceedings, it does not mean that the Assessing Officer should ignore all the materials collected at the time of assessment. By virtue of Explanation 1 to section 271(1)(c) assessment and penalty proceedings are closely connected.
   [M. Ethurajan vs. ACIT – 65 ITD 87 (Mad.)]

3. Going by the language in which Explanation 1 to section 271(1)(c) is couched, there would be a presumption in favour of the department and against the assessee. Of course, it is only a rebuttable presumption. [ITO vs. Balubhai Hemchand Shah – 113 Taxman 496 (Ker)]

4. Explanation 1 incorporates a rule of evidence and shifts the onus on the shoulders of the assessee in furnishing the explanation before the AO (Spectram Construction Co. vs. ACIT – 77 ITD 153 (Ahd)]

5. When the assessee himself had agreed to the addition of concealed income on account of deposits, etc., no further evidence was necessary to prove concealment in view of Explanation 1 to section 271(1)(c), because the assessee had not discharged the onus by rebutting the presumption which lay on him. [M. Ethurajan vs. ACIT – 65 ITD 87 (Mad.)]

6. Benefit of Explanation 5(b)(2) to s. 271 (1)(c) cannot be denied to the assessee on the ground that he has failed to disclose the manner in which the surrendered income was earned by him when the authorised officer did not put any question to the assessee about the manner in which the income disclosed by him was derived or earned. [Vishwa Nath Agarwal vs. ACIT – 71 TTJ 668 (All)], particularly when assessee has acted upon the basis of such provisions and has accordingly paid tax on surrendered income and has given up his right to appeal against income offered. [Mahendra Chimanlal Shah vs. ACIT – 51 ITD 244 (Ahd.)]

7. As regards the applicability of Explanation 5 to section 271(1)(c), it is only in respect of ‘such assets’ enumerated in Explanation 5 to section 271(1)(c) [which are in pari materia with those in section 132(1)(c)] as are found in the ownership of the assessee but not recorded in the books of account that the assessee is deemed to have concealed his income. Thus, the documents of title which represent the right to immovable property, is outside the purview of Explanation 5 to section 271(1)(c).
   
   [South Indian Finance vs. ITO – 39 ITD 370 (Coch.)]

8. Explanation 5, cannot be made applicable to case where search took place before 1-10-1984. [DCIT vs. Smt. Pannaben P. Desai – 112 Taxman (Mag.) 84 (Ahd)].

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