I declared the seized assets in my section 132(4) statement but nobody asked me how I earned the money, and I paid the tax only with a revised return. Do I lose the Explanation 5 immunity?
No. The Gujarat High Court held that the assessee had complied with the second exception to Explanation 5 and cancelled the penalty. Where the authorised officer does not ask how the undisclosed income was derived, the assessee cannot be denied immunity because the statement does not say so; the officer is bound to explain Explanation 5 in full and cannot stop short so that the Revenue may take advantage of the lapse. As for payment, the provision fixes no time for paying the tax and interest, and it is enough that payment is shown before the assessment is completed. Disclosure in the return itself is not what the exception turns on.
Decided by the High Court (High Court of Gujarat - judgment delivered by D.A. Mehta, J) on 2008-02-05, reported as [2008] 299 ITR 305 (Guj); (2008) 215 CTR (Guj) 493. It bears on section 271(1)(c), section 132(4), section 139(1) of the Income Tax Act 1961, in Penalty and Search, Survey & Block Assessment matters.
This is the leading Gujarat authority on immunity under Explanation 5 to section 271(1)(c), and it is followed widely. It answers the two objections departments almost always raise. On the manner of deriving the income, it agrees with the Allahabad High Court in Radha Kishan Goel: a statement is recorded in question and answer form in the setting of a search, and it is unrealistic to expect an assessee, literate or not, to volunteer averments in the exact statutory format; if the income is declared and the tax paid there is substantial compliance. On payment, it holds that no point of time is prescribed, the words together with interest, if any, themselves showing that the legislature contemplated late payment, and it fixes the outer limit as the completion of the assessment, because that is when the officer must record his satisfaction. It also explains why the return of income is largely beside the point once Explanation 5 applies.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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A search under section 132 took place on 3 July 1987 at the premises of M/s Dinal Gems at Opera House, Bombay. The assessee was present, was personally searched, and diamonds worth Rs 5,06,712 were found on his person and seized. He made a statement under section 132(4). For assessment year 1988-89 he filed a return on 17 October 1989 declaring Rs 20,880 and then a revised return on 27 September 1990 declaring Rs 5,27,600, which included the value of the diamonds, paying the tax at that stage. The assessment under section 143(3) was completed on 25 February 1991 on total income of Rs 5,77,600. Penalty of Rs 5,61,464 was levied under section 271(1)(c) and confirmed by the Commissioner (Appeals). The Tribunal deleted it on 24 May 1994, holding that the case fell within the second exception to Explanation 5 in the light of the statement recorded at the search. At the Commissioner's instance the Tribunal referred the question whether the assessee had fulfilled all the conditions for immunity in relation to the inclusion of Rs 5,06,712 representing the value of the diamonds.
The question was answered in the affirmative, in favour of the assessee and against the Revenue, and the reference disposed of with no order as to costs. The Tribunal was justified in holding that, having made a declaration under section 132(4) and paid the tax on it, the assessee had fulfilled the conditions for immunity under Explanation 5. There is no prescription of the time at which the tax on the declared income must be paid, and it is sufficient compliance if payment is shown before the assessment is completed, the outer limit being the assessment proceedings because that is when the Assessing Officer must record his satisfaction. The failure of the statement to specify the manner in which the income was derived did not defeat the claim. The Revenue's contention that penalty was leviable under the main provision because the income was omitted from the original return was rejected.
The Court read Explanation 5 as a self-contained scheme for search cases. Where an assessee is found in possession of a valuable asset and claims it was acquired out of income of a year ended before the search for which no return had been filed or in which the income was not declared, or of a year ending on or after the search, the income is deemed concealed even though declared in a return filed after the search - subject to two exceptions. The first turns on entries in the books or disclosure to the Commissioner before the search; the second on a statement under section 132(4) declaring that the asset was acquired out of undisclosed income, specifying the manner in which it was derived, and payment of tax with interest. Because the deeming fiction operates regardless of what the post-search return says, disclosure in the return is not the touchstone; the touchstone is the declaration at the search. Here the search was in July 1987 and the return for 1988-89 was not due before 31 July 1988, so what the original return showed was beside the point. On timing of payment, nothing in the exception fixes a date, and the words together with interest, if any, show the legislature contemplated payment after the advance tax dates; the outer limit is the completion of assessment, when the officer must verify whether the income was declared and the tax paid. On the manner of derivation, the Court held that the authorised officer recording the statement must explain Explanation 5 in its entirety and cannot stop short so as to let the Revenue profit from the omission; a statement taken in question and answer form during a search cannot be expected to track the statutory format, and following Radha Kishan Goel, declaration of the income and payment of tax amount to substantial compliance.
it is incumbent upon the authorized officer to explain the provisions of Explanation 5 in entirety to the assessee concerned and the authorized officer cannot stop short at a particular stage
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Handle my notice → Ask a CA on WhatsAppNo. The Gujarat High Court held that the assessee had complied with the second exception to Explanation 5 and cancelled the penalty. Where the authorised officer does not ask how the undisclosed income was derived, the assessee cannot be denied immunity because the statement does not say so; the officer is bound to explain Explanation 5 in full and cannot stop short so that the Revenue may take advantage of the lapse. As for payment, the provision fixes no time for paying the tax and interest, and it is enough that payment is shown before the assessment is completed. Disclosure in the return itself is not what the exception turns on. This was decided by the High Court (High Court of Gujarat - judgment delivered by D.A. Mehta, J) and bears on section 271(1)(c), section 132(4), section 139(1) of the Income Tax Act 1961. It is reported as [2008] 299 ITR 305 (Guj); (2008) 215 CTR (Guj) 493. This is the leading Gujarat authority on immunity under Explanation 5 to section 271(1)(c), and it is followed widely. It answers the two objections departments almost always raise. On the manner of deriving the income, it agrees with the Allahabad High Court in Radha Kishan Goel: a statement is recorded in question and answer form in the setting of a search, and it is unrealistic to expect an assessee, literate or not, to volunteer averments in the exact statutory format; if the income is declared and the tax paid there is substantial compliance. On payment, it holds that no point of time is prescribed, the words together with interest, if any, themselves showing that the legislature contemplated late payment, and it fixes the outer limit as the completion of the assessment, because that is when the officer must record his satisfaction. It also explains why the return of income is largely beside the point once Explanation 5 applies. If it applies to you, the first step is this: If the section 132(4) statement is silent on how the income was earned, check the questions actually put; where the authorised officer never asked, the omission cannot be held against you.
A search under section 132 took place on 3 July 1987 at the premises of M/s Dinal Gems at Opera House, Bombay. The assessee was present, was personally searched, and diamonds worth Rs 5,06,712 were found on his person and seized. He made a statement under section 132(4). For assessment year 1988-89 he filed a return on 17 October 1989 declaring Rs 20,880 and then a revised return on 27 September 1990 declaring Rs 5,27,600, which included the value of the diamonds, paying the tax at that stage. The assessment under section 143(3) was completed on 25 February 1991 on total income of Rs 5,77,600. Penalty of Rs 5,61,464 was levied under section 271(1)(c) and confirmed by the Commissioner (Appeals). The Tribunal deleted it on 24 May 1994, holding that the case fell within the second exception to Explanation 5 in the light of the statement recorded at the search. At the Commissioner's instance the Tribunal referred the question whether the assessee had fulfilled all the conditions for immunity in relation to the inclusion of Rs 5,06,712 representing the value of the diamonds. The matter was decided on 2008-02-05 by the High Court (High Court of Gujarat - judgment delivered by D.A. Mehta, J). On those facts the High Court held as follows. The question was answered in the affirmative, in favour of the assessee and against the Revenue, and the reference disposed of with no order as to costs. The Tribunal was justified in holding that, having made a declaration under section 132(4) and paid the tax on it, the assessee had fulfilled the conditions for immunity under Explanation 5. There is no prescription of the time at which the tax on the declared income must be paid, and it is sufficient compliance if payment is shown before the assessment is completed, the outer limit being the assessment proceedings because that is when the Assessing Officer must record his satisfaction. The failure of the statement to specify the manner in which the income was derived did not defeat the claim. The Revenue's contention that penalty was leviable under the main provision because the income was omitted from the original return was rejected.
The Court read Explanation 5 as a self-contained scheme for search cases. Where an assessee is found in possession of a valuable asset and claims it was acquired out of income of a year ended before the search for which no return had been filed or in which the income was not declared, or of a year ending on or after the search, the income is deemed concealed even though declared in a return filed after the search - subject to two exceptions. The first turns on entries in the books or disclosure to the Commissioner before the search; the second on a statement under section 132(4) declaring that the asset was acquired out of undisclosed income, specifying the manner in which it was derived, and payment of tax with interest. Because the deeming fiction operates regardless of what the post-search return says, disclosure in the return is not the touchstone; the touchstone is the declaration at the search. Here the search was in July 1987 and the return for 1988-89 was not due before 31 July 1988, so what the original return showed was beside the point. On timing of payment, nothing in the exception fixes a date, and the words together with interest, if any, show the legislature contemplated payment after the advance tax dates; the outer limit is the completion of assessment, when the officer must verify whether the income was declared and the tax paid. On the manner of derivation, the Court held that the authorised officer recording the statement must explain Explanation 5 in its entirety and cannot stop short so as to let the Revenue profit from the omission; a statement taken in question and answer form during a search cannot be expected to track the statutory format, and following Radha Kishan Goel, declaration of the income and payment of tax amount to substantial compliance. In the words reproduced by the source cited on this page: "it is incumbent upon the authorized officer to explain the provisions of Explanation 5 in entirety to the assessee concerned and the authorized officer cannot stop short at a particular stage"
It was decided by the High Court on 2008-02-05 and is reported as [2008] 299 ITR 305 (Guj); (2008) 215 CTR (Guj) 493. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 271(1)(c), section 132(4), section 139(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The question was answered in the affirmative, in favour of the assessee and against the Revenue, and the reference disposed of with no order as to costs. The Tribunal was justified in holding that, having made a declaration under section 132(4) and paid the tax on it, the assessee had fulfilled the conditions for immunity under Explanation 5. There is no prescription of the time at which the tax on the declared income must be paid, and it is sufficient compliance if payment is shown before the assessment is completed, the outer limit being the assessment proceedings because that is when the Assessing Officer must record his satisfaction. The failure of the statement to specify the manner in which the income was derived did not defeat the claim. The Revenue's contention that penalty was leviable under the main provision because the income was omitted from the original return was rejected. It arises in Penalty and Search, Survey & Block Assessment matters, on section 271(1)(c), section 132(4), section 139(1) of the Income Tax Act 1961, and was decided by High Court of Gujarat - judgment delivered by D.A. Mehta, J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Make the declaration in the statement itself - that is what the second exception turns on, not what appears in the return filed after the search. Pay the tax with interest before the assessment is completed and put the challans on record; there is no requirement to pay it with the return. Where the search falls in a year for which the return was not yet due, take the point that whether the income appeared in the original return is irrelevant to the exception.
Still good law. A citedby search returns 10 High Court decisions and the Gujarat High Court treats the point as settled by it. In Pr. CIT v Ravani Developers (10 June 2019) the Bench held that 'the issue is squarely covered by the decision of this Court in the case of Mahendra C. Shah' and dismissed the Revenue's appeal on that ground. The same Court has carried the reasoning forward from Explanation 5 to s.271(1)(c) into the later penalty provision, holding in Pr. CIT-2 v Mukeshbhai Ramanlal (24 July 2017) and repeatedly since that the decision 'would hold the field even in the context of sub-section (2) of section 271AAA' (see also Pr. CIT v Vijay Jitendra Trivedi, 9 July 2018; CIT v Niraj Kumbhat, 1 April 2014; CIT v Champaklal, 23 May 2012; CIT v Bankim, 21 December 2011), and the Bombay High Court adopted the same formulation in Pr. CIT v Phoenix Mills Limited (7 February 2019). Nothing overruling or doubting it was found. BUT A PRACTITIONER OUTSIDE GUJARAT MUST READ THE DELHI POSITION. In Pr. CIT v Smt. Ritu Singal (Delhi High Court, 12 March 2018) the assessee relied on this judgment and the Bench rejected that reliance, holding at para 16 that 'Unless such facts are mentioned with some specificity, it cannot be said that the assessee has fulfilled the requirement that she... substantiates the manner in which the undisclosed income was derived' - that is, the manner must be stated with specificity, where this judgment treats the requirement as satisfied when the authorised officer recording the s.132(4) statement did not ask. The two positions sit uneasily together and no Supreme Court decision resolving them was found, so the status is recorded as good law on the strength of the verified Gujarat application while flagging the Delhi line as a real risk. Note also that Gujarat itself confines the ratio on facts: in Pr. CIT v M/s Sun Corporation (17 September 2018) the Bench held it 'would not apply', and in Pr. CIT v Nitin Raichura (8 November 2016) the Revenue's ground was that the Tribunal 'has erred in applying' it. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The harvested page carries a header naming Z.K. Saiyed as author and bench, while the judgment itself is delivered by D.A. Mehta, J; the text is taken as authoritative and the header is disregarded, and the names of any other judges on the bench could not be established. The Supreme Court decision in G.C. Agarwal, cited by the Revenue, appears in the text without a usable citation and the Court does not deal with it expressly. The judgment does not say what the assessee's section 132(4) statement actually contained beyond the fact that it did not state the manner in which the income was derived. This case concerns Explanation 5 as it stood for a 1987 search; the later Explanation 5A regime is not considered. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The question was answered in the affirmative, in favour of the assessee and against the Revenue, and the reference disposed of with no order as to costs. The Tribunal was justified in holding that, having made a declaration under section 132(4) and paid the tax on it, the assessee had fulfilled the conditions for immunity under Explanation 5. There is no prescription of the time at which the tax on the declared income must be paid, and it is sufficient compliance if payment is shown before the assessment is completed, the outer limit being the assessment proceedings because that is when the Assessing Officer must record his satisfaction. The failure of the statement to specify the manner in which the income was derived did not defeat the claim. The Revenue's contention that penalty was leviable under the main provision because the income was omitted from the original return was rejected.
TaxSphere, “CIT v Mahendra C. Shah”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-mahendra-c-shah/ (validity last checked 2026-08-29)
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