2025 (2) TMI 583 - SC - Income Tax

Section 271AAA penalty applies only to undisclosed income not admitted during search proceedings despite tax payment

K. KRISHNAMURTHY Versus THE DEPUTY COMMISSIONER OF INCOME TAX

The SC held that penalty under Section 271AAA is discretionary but not unfettered, requiring undisclosed income found during search. The appellant ... Penalty u/s 271AAA - Appellant did not make payment of tax - As argued Revenue Authorities without satisfying themselves as to the satisfaction of ‘undisclosed income’ as stipulated in Section 271AAA(1) levied the penalty HELD THAT:- Section 271AAA(1) 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 10% (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. This Court is of the view that though under Section 271AAA(1) of the Act 1961, 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. [See: Som Raj and Others vs. State of Haryana and Others, [1990 (2) TMI 306 - SUPREME COURT]. Section 271AAA(2) 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. (See: Chaturvedi & Pithisaria’s Income Tax Law Seventh Edition). 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 is normally not leviable. The expression ‘Undisclosed Income’ has been defined in Explanation (a) appended to Section 271AAA.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. Expression ‘specified previous year’ has been defined in Explanation (b) appended to Section 271AAA of the Act 1961. Since in the present case, the search was conducted on 25th November, 2010 and as the year for filing returns under Section 139(1) of the Act 1961 which ended prior to that date had expired on 31st July, 2010, 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 1961. Penalty levied - In the present case, the Appellant admitted Rs.2,27,65,580/- as 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. Penalty @ 10% levied - It is an admitted position that the Appellant had not offered in the declaration before the DDIT(Inv.) any income on land transactions belonging to Mr. Sharab Reddy and Mr. NHR Prasad Reddy. The argument that the said 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’ cuts no ice with this Court as the sale deeds had been collected as a result of the search and in continuation of the search. This Court is of the view that 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, this Court is of the opinion 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’. Since income of Rs.2,49,90,000/- constitutes undisclosed income found during the search, penalty under Section 271AAA(1) of the Act 1961 is leviable on the said amount. Also, as the said amount 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, and that too, after the Assessing Officer had asked for copies of the sale deeds from the Society, this Court is of the view that the exception carved out in Section 271AAA(2) is not attracted to the said portion of the income. 1. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment include:Whether compliance with all three conditions mentioned in Subsection (2) of Section 271AAA of the Income Tax Act, 1961 is mandatory for avoiding penalty.Whether the penalty prescribed at 10% of undisclosed income under Section 271AAA can be reduced if the tax and interest on the undisclosed income are paid, albeit with delay.The interpretation of the terms 'undisclosed income' and 'specified previous year' as defined under Section 271AAA.Whether the penalty under Section 271AAA(1) is automatic or subject to discretion.Whether the penalty could be imposed on the entire returned income or only on the undisclosed income admitted during the search.2. ISSUE-WISE DETAILED ANALYSISCompliance with Section 271AAA(2)Legal Framework and Precedents: Section 271AAA(2) provides conditions under which penalty under Section 271AAA(1) is not applicable. These conditions include admission of undisclosed income during the search, specifying and substantiating the manner of derivation, and payment of tax with interest.Court's Interpretation and Reasoning: The Court held that all three conditions in Section 271AAA(2) are mandatory for avoiding penalty. The appellant failed to meet the third condition of timely payment of tax and interest.Application of Law to Facts: The appellant did not pay the tax and interest on the undisclosed income until three years after the assessment order, failing the condition of Section 271AAA(2).Conclusion: Compliance with all conditions is mandatory to avoid penalty under Section 271AAA(1).Discretion in Imposing Penalty under Section 271AAA(1)Legal Framework and Precedents: Section 271AAA(1) allows the Assessing Officer to impose a penalty at 10% of the undisclosed income. The use of 'may' suggests discretion.Court's Interpretation and Reasoning: The Court emphasized that the discretion to impose penalty is not unfettered and must be exercised judiciously, guided by law.Conclusion: The imposition of penalty is discretionary, not automatic, but must be based on a sound legal basis.Interpretation of 'Undisclosed Income' and 'Specified Previous Year'Legal Framework and Precedents: The terms are defined in the Explanation to Section 271AAA. 'Undisclosed income' refers to income not recorded or disclosed before the search, and 'specified previous year' relates to the year of search or the year before if returns were not filed.Court's Interpretation and Reasoning: The Court held that the onus is on the Assessing Officer to prove the existence of undisclosed income during the search. AY 2011-12 was determined as the specified previous year.Conclusion: The definitions must be strictly construed, and the burden of proof lies with the Assessing Officer.Penalty Imposition on Undisclosed IncomeKey Evidence and Findings: The appellant admitted Rs.2,27,65,580/- as undisclosed income during the search and paid the tax with interest, albeit late. However, Rs.2,49,90,000/- was not admitted during the search but only during assessment proceedings.Application of Law to Facts: Penalty is not attracted on the admitted amount since conditions of Section 271AAA(2) were met, albeit with delay. However, penalty is leviable on the amount not admitted during the search.Conclusion: Penalty is applicable only on the amount not disclosed during the search, emphasizing the importance of timely disclosure and payment.3. SIGNIFICANT HOLDINGSCore Principles Established: Compliance with all conditions of Section 271AAA(2) is mandatory to avoid penalty. The discretion to impose penalty under Section 271AAA(1) is not automatic and must be exercised judiciously.Final Determinations on Each Issue: The Court directed the appellant to pay a penalty at 10% on Rs.2,49,90,000/-, not on the entire returned income, underscoring the need for strict adherence to statutory conditions for penalty exemption.Verbatim Quote: 'Since income of Rs.2,49,90,000/- constitutes undisclosed income found during the search, penalty under Section 271AAA(1) of the Act 1961 is leviable on the said amount.'