37. Penalty – Block assessment – Sections 132(4), 158BC and 158BFA(2) – On mutual understanding with department, director of assessee – company filed return showing undisclosed income and assessee filed Nil return – Undisclosed income assessed finally partly in hands of director and partly in hands of assessee – Penalty not leviable on assessee

CIT vs. Saraf Agencies Ltd.; 394 ITR 444(Cal):

Pursuant to a search and seizure, the assessee company and
its director filed returns. On a mutual understanding with the Department, the
director of the assessee-company filed return showing undisclosed income of Rs.
2,02,66,971 and the assessee filed Nil return. The Assessing Officer assessed
the undisclosed income of the assessee company at Rs. 491.50 lakh and initiated
penalty proceedings u/s. 158BFA(2) of the Act, 1961. The undisclosed income of
the assessee was reduced to Rs. 37 lakh by the Commissioner (Appeals). The
Assessing Officer imposed penalty u/s. 158BFA(2) on the undisclosed income of
Rs. 37 lakh. The Commissioner (Appeals) deleted the penalty. The Commissioner
(Appeals) held that the developments in the course of the assessment
proceedings did not modify the quantum of undisclosed income but only the
proportion of distribution of the undisclosed sum between the assessee and the
director. He also held that the director was acting upon some kind of understanding
about the person who should make the declaration and that the levy of penalty
on the technical ground that the assessee declared nil undisclosed income u/s.
158BC of the Act and that there was some income found after the appellate
decision, was not justified and cancelled the penalty. The Tribunal upheld the
order of the Commissioner (Appeals).

On appeal by the Revenue, the Calcutta High Court upheld the
decision of the Tribunal and held as under:

“i)  The imposition of penalty, when the returns of
undisclosed income were filed in consultation with the Department, was
inequitable. What had emerged after the search and seizure was that the
Department itself was unable to conclude whether the undisclosed income
belonged to the assessee or its director. It was on the basis of an
understanding arrived at between the parties that the director had made a
disclosure of Rs. 2.16 crore and the assessee filed a nil return. Finally, the
undisclosed income of the director was assessed at Rs. 2.02 crore approximately
and that of the assessee at Rs. 37 lakh.