(2013) 358 ITR 593 (SC)
Penalty for under-reporting and misreporting; penalty for concealment and other failures
No. A surrender made after the Revenue has confronted the taxpayer with incriminating material is not voluntary. The statutory presumption applies unless the taxpayer offers a bona fide explanation, and a plea of buying peace is not such an explanation.
Does a surrender of income made during assessment, said to be voluntary and to buy peace, preclude the levy of penalty?
During assessment proceedings the Assessing Officer came into possession of documents, found in the course of a survey on another entity, which indicated that share application money recorded in the assessee's books did not represent genuine subscriptions. When confronted with this material, the assessee offered an additional sum to tax, stating that the surrender was made voluntarily to buy peace and to avoid protracted litigation, and on the express condition that no penalty be levied. The Assessing Officer accepted the surrender and levied penalty.
The penalty was upheld by the appellate authorities and the Delhi High Court. The assessee appealed to the Supreme Court.
For the assessee
The additional income was offered voluntarily and in good faith to end the dispute and cooperate with the Department. Where a taxpayer comes forward and offers income, penalising it discourages settlement and cooperation. The surrender was made on the footing that no penalty would follow.
For the Revenue
The offer came only after the assessee was confronted with material showing the entries to be bogus. A surrender extracted in those circumstances is not voluntary in any meaningful sense, and the assessee never explained the source of the money or the nature of the entries.
The Court held that the surrender was not voluntary. The assessee had offered the amount only when confronted with material gathered by the Department indicating that the share application money was not genuine, and an offer made at that stage is a response to detection rather than a voluntary disclosure. The Court held that the statute raises a presumption against the assessee once an addition is made, and that the burden lies on the assessee to offer an explanation that is bona fide and to substantiate it. A statement that the amount is offered to buy peace or to avoid litigation is not an explanation at all: it says nothing about the source of the money or the nature of the entries, and leaves the material unanswered. The Court rejected the suggestion that the Assessing Officer must establish concealment independently, holding that the statutory presumption operates unless displaced. It also held that a condition attached by the assessee that no penalty should be levied has no legal effect, since the levy is governed by statute and cannot be bargained away.
Under the IT Act 2025 the penalty structure in Sections 439 and 440 distinguishes under-reporting from misreporting, and a surrender following detection will ordinarily fall on the misreporting side with its higher rate. The practical lesson survives the restructuring: an offer of additional income should be accompanied by a substantiated explanation of the source and circumstances, since a bare surrender leaves the taxpayer without a defence.