The deeming provision in Explanation 5 of Section 271(1)(c) of the Income Tax Act aims to encourage a fair confession and surrender of income during a search, to expedite tax collection and avoid further litigation.

( 1 ) TRIBUNAL has referred the following question under Section 256 (1) of the Income Tax Act, 1961, (hereinafter referred to as "the Act") for opinion of this Court relating to the assessment year 1989-90:

"whether on the facts and circumstances of the case, I. T. A. T. was justified in holding that conditions laid down in explanation 5 (2) to Section 271 (1) (c) were fulfilled and no penalty was leviable Under Section 271 (1) (c)?"

( 2 ) THE brief facts of the case are follows:

( 3 ) A search was conducted at the residential as well as business premises of the assess Opposite party (hereinafter referred to as "assessee") on 30. 08. 1988, during the course of which cash, jewellery and other valuable articles and things were found and seized. It appears that during the course of the assessment proceedings to settle the dispute on agreed basis assessee moved an application before CIT on which direction was issued by Commissioner of Income-tax, Kanpur, in which it was remarked that penalty proceedings under Section 271 (1) (c) of the Act may not be applicable where additional income is covered by Explanation 5 of Section 271 (1) (c) of the Act as the said income stood surrendered in the statement under Section 132 (4) of the Act for which returns were due to be filed within the statutory period. Assessment was completed on an income of Rs. 24,43,980/-, which included unexplained cash of Rs. 1,65,000/- and unexplained jewellery of Rs. 22,63,557/ -. The unexplained income as stated above was taken in assessment in accordance with the directions issued by Commissioner of Income Tax. Thereafter, the assessing authority examined the mater and concluded that the provisions of Explanations 5 to Section 271 (1) (c) of the Act were not applicable to the present case as all the ingredients of Explanation 5 (2) were not fulfilled and consequently a penalty of Rs. 12,63,100/- was imposed. The said penalty order was also confirmed by the Commissioner of Income Tax (Appeals) in an appeal filed by the assessee. Assessee filed the second appeal before the Tribunal. Tribunal allowed the appeal and deleted the penalty. Tribunal held that the provisions of Explanation 5 (2) of Section 271 (1) (c) of the Act were full attracted on the facts and circumstances of the case.

( 4 ) HEARD Sri A. N. Mahajan, learned Standing Counsel and Sri Shakeel Ahmad, learned counsel for the assessee.

( 5 ) LEARNED Standing Counsel submitted that Explanation 5 stood added under Section 271 (1) (c)of the Act by the Taxation Laws (Amendment) Act, 1984, w. e. f. 01. 10. 1984, which deals with the penalty in the cases of search. He submitted that under the Explanation (5) any money, bullion, jewellery or other valuable article or thing which are found at the time search are deemed to be concealed income unless such income is recorded in the books of account or declared or disclosed to the Chief Commissioner of Commissioner before the date of search or during the course of search makes statement under Sub-section 4 of Section 132 of the Act that any money, bullion, jewellery or other valuable articles or things found in his possession or in his control has been acquired out of his income which has not been disclosed so far in his return of income to be furnished before the expiry of the time specified in Sub-section 1 of Section 139 of the Act and also specifies in the statement the manner in which such income has been derived and pays the tax, together with the interest, if any, in respect of such income. He submitted that though the assessee has made the statement recorded under Section 132 (4) of the Act that the unexplained cash and unexplained jewellery were undisclosed income but in the statement the manner in which such income has been derived has not been disclosed and, therefore, explanation 5 (2) is not applicable in the present case and the Tribunal has committed an error in holding that Explanation 5 (2) of Section 271 (1) (c) of the Act was attra