Mandatory compliance for section 271AAA exemption bars proportionate penalty reduction when tax and interest are paid late.

Section 271AAA penalty applies in search cases unless the assessee cumulatively satisfies all three exemption conditions in sub-section (2). The Karnataka HC noted that tax and interest on the undisclosed income were paid belatedly, so the third condition was not met. Because the statutory scheme requires full compliance with every condition, the exemption did not apply and the penalty remained attracted. The court also held that the Act does not permit proportionate reduction of the penalty once the conditions for relief are not fully satisfied. The appeal therefore failed and the Revenue's position was upheld.

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Issues: (i) Whether compliance with all three conditions in sub-section (2) of section 271AAA of the Income-tax Act, 1961 is mandatory; (ii) Whether the penalty under section 271AAA can be reduced proportionately where tax and interest on the undisclosed income were paid belatedly and the third condition in sub-section (2) was not satisfied.

Issue (i): Whether compliance with all three conditions in sub-section (2) of section 271AAA of the Income-tax Act, 1961 is mandatory.

Analysis: Sub-section (1) levies penalty at 10% of undisclosed income in search cases, while sub-section (2) carves out an exception only if all three conditions are fulfilled. The third condition, payment of tax together with interest, was not complied with.

Conclusion: The first issue is answered in favour of the Revenue. Compliance with all three conditions under section 271AAA(2) is mandatory.

Issue (ii): Whether the penalty under section 271AAA can be reduced proportionately where tax and interest on the undisclosed income were paid belatedly and the third condition in sub-section (2) was not satisfied.

Analysis: The statutory scheme does not provide for reduction of the penalty on a proportionate basis once the assessee fails to satisfy the conditions for exemption under sub-section (2). Belated payment does not cure non-compliance with the third condition.

Conclusion: The second issue is answered against the assessee and in favour of the Revenue. Proportionate reduction of penalty is not permissible.

Final Conclusion: The statutory penalty under section 271AAA remained attracted because the exemption conditions were not fully met, and the appeal was unsuccessful.

Ratio Decidendi: The exemption from penalty under section 271AAA operates only when all prescribed conditions are cumulatively satisfied; failure to satisfy any one condition leaves the penalty liability intact without scope for proportional reduction.

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