Penalty u/s 271AAA(1) not leviable on undisclosed income offered during assessment proceedings and not during search – Supreme Court.
In a recent judgment, the Hon’ble Supreme Court held that penalty u/s 271AAA(1) was not leviable when assessee offered undisclosed income during the course of assessment proceedings only and not at any time during the search.
ABCAUS Case Law Citation:
4412 (2025) (02) abcaus.in SC
Important Case Laws relied upon by Parties:
Dilip N. Shroff vs. CIT [(2007) 6 SCC 329
In the instant case, the appellant assessee had challenged the impugned judgment and order passed by the High Court of Karnataka confirming penalty u/s 271AAA(1) of the Income Tax Act, 1961 (the Act).
A search and seizure operation was carried out during AY 2011-12 at the Appellant’s premises under Section 132 of the Act. The Appellant disclosed additional income from land transactions for the Assessment Years 2010-11 as a consequence of the search and seizure. A notice under Section 142(1) of the Act was issued to the Appellant calling for return of income for Assessment Year 2011-2012. At the time of issue of said notice the due date for filing return of income for AY 2010-2011 had expired in terms of Section 139(1) of the Act. The AO completed the Assessment Order for AY 2011-12 making addition. In the assessment order it was stated that the assessee, consequent to search action had admitted income for the Asst. Years 2010-11 and 2011-12 before the DDIT(Inv.).
Later, an order imposing penalty under Section 271AAA of the Act was passed against the Appellant for AY 2011-12 solely on the ground that the Appellant did not make payment of tax and penalty in terms of Section 271AAA(2) of the Act after receipt of Show Cause Notice and considering the entire received income as the undisclosed income. Similarly, on the same day, another order imposing penalty under Section 271AAA of the Act was passed in respect of AY 2010-2011 imposing Penalty at the rate of Ten per cent on the entire returned income.
The CIT (Appeals) appeal preferred against the Penalty Order in respect of AY 2010-11 while accepting the submission of the Appellant that it cannot be the ‘specified previous year’ for the purpose of Section 271AAA of the Act. However, appeal for the AY 2011-12 was rejected solely relying on Section 271AAA(2) of the Act. The Income Tax Appellate Tribunal (‘ITAT’) rejected the Appellant’s appeal again on the ground of non-compliance with Section 271AAA(2) of the Act.
Against the judgment of the ITAT, the Appellant preferred an appeal under Section 260A of the Act which was dismissed by the Hon’ble High Court vide impugned order.
Before the Hon’ble Supreme Court the Appellant submitted that the Revenue Authorities as well as the High Court, without expressly stating so, proceeded on the erroneous presumption that the levy of penalty under Section 271AAA(1) of the Act is automatic and that the only exception thereto was sub-clause (2) of Section 271AAA of the Act. It was contended that the Revenue Authorities without satisfying themselves as to the satisfaction of ‘undisclosed income’ as stipulated in Section 271AAA(1) of the Act, levied the penalty.
The Hon’ble Supreme Court opined that the view that Section 271AAA(1) of the Act stipulates that the Assessing Officer may, notwithstanding anything contained in any other provisions of the Act 1961, direct the assessee, in a case where search has been carried out to pay by way of a penalty, in addition to the tax, a sum computed at the rate of Ten per cent of the undisclosed income of the specified previous year. However, the imposition of penalty is not mandatory. Consequently, penalty under this Section may be levied if there is undisclosed income in the specified previous year.
The Hon’ble Supreme Court further opined that though under Section 271AAA(1) of the Act, the Assessing Officer has the discretion to levy penalty, yet this discretionary power is not unfettered, unbridled and uncanalised. Discretion means sound discretion guided by law. It must be governed by rule, not by humour, it must not be arbitrary, vague and fanciful.
Section 271AAA(2) of the Act stipulates that Section 271AAA(1) shall not be applicable if the assessee (i) in a statement under sub-section (4) of Section 132 in the course of the search, admits the undisclosed income and specifies the manner in which such income has been derived; (ii) substantiates the manner in which the undisclosed income was derived; and (iii) pays the tax, together with interest, if any, in respect of the undisclosed income. Consequently, if the aforesaid conditions (i) and (ii) are satisfied and the tax together with interest on the undisclosed income is paid upto the date of payment, even with delay, in the absence of specific period of compliance, then penalty at the rate of 10% (Ten per cent) under Section 271AAA of the Act 1961 is normally not leviable.
The expression ‘Undisclosed Income’ has been defined in Explanation (a) appended to Section 271AAA of the Act. As Section 271AAA is a penalty provision, it has to be strictly construed. The fact that the assessee has surrendered some undisclosed income during the course of search or that the surrender is emerging out of the statements recorded during the course of search is not sufficient to fasten the levy of penalty. The onus is on the Assessing Officer to satisfy the condition precedent stipulated in the said Explanation, before the charge for levy of penalty is fastened on the assessee. Consequently, it is obligatory on the part of the Assessing Officer to demonstrate and prove that undisclosed income of the specified previous year was found during the course of search or as a result of the search.
The Hon’ble Supreme Court further opined that the expression ‘specified previous year’ has been defined in Explanation (b) appended to Section 271AAA of the Act. Since in the present case, the search was conducted in AY 2011-12 and as the year for filing returns under Section 139(1) of the Act which ended prior to that date had expired, Explanation b(i) is not applicable so as to make AY 2010-11 the specified previous year. Consequently, by virtue of Explanation b(ii), AY 2011-12 (the year in which the search was conducted) is the specified previous year in the present case for the purpose of Section 271AAA(1) of the Act.
In the present case, the Appellant admitted undisclosed income for AY 2011-12 during the search before DDIT (Inv.) as well as substantiated the manner in which the said undisclosed income was derived and paid tax together with interest thereon, albeit belatedly. Consequently, all the conditions precedent mentioned in Section 271AAA(2) stand satisfied and, therefore, penalty under Section 271AAA(1) is not attracted on the said amount.
The Hon’ble Supreme Court noted that admittedly, for the AY 2011-12, the Appellant had not offered in the declaration before the DDIT(Inv.) From the assessment order it was apparent that the Appellant offered income from other sources on account of land transactions during the course of assessment proceedings only and not at any time during the search.
The argument of the Revenue that these land transactions had not been found in the search at the Appellant’s premises but had been found due to ‘copies of sale deeds collected from the society did not found merit with the Hon’ble Supreme Court which opined that the sale deeds had been collected as a result of the search and in continuation of the search. As the causation for collecting the sale deeds from the Society was the search at the Appellant’s premises, it cannot be said that the said documents were not found in the course of the search. Further, the Court opined that the expression ‘found in the course of search’ is of a wide amplitude. It does not mean documents found in the assessee’s premises alone during the search. At times, search of an assessee leads to a search of another individual and/or further investigation/interrogation of third parties. All these steps and recoveries therein would fall within the expression ‘found in the course of search’.
As a result, the Hon’ble Supreme Court held that only the income declared before DDIT(Inv) constituted undisclosed income found during the search and therefore penalty under Section 271AAA(1) of the Act was leviable on the said amount. The exception carved out in Section 271AAA(2) was not attracted to the amount of income which was not admitted in the declaration before the DDIT(Inv.) during the course of search but was disclosed by the Appellant only during the assessment proceedings.
Accordingly, the Hon’ble Supreme Court directed the appellant assesseet to pay penalty u/s 271AAA(1) only on the income offered in the declaration before the DDIT(Inv.).
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