10% Penalty U/S.271AAA Of Income Tax Act Is Normally Not Leviable When Assessee Admits, Substantiates Undisclosed Income & Pays Tax With Delay: SC

The Appeal before the Apex Court was filed challenging the impugned judgment of the Karnataka High Court dismissing the appeal preferred by the Appellant under Section 260A of the Income Tax Act, 1961.

The Division Bench comprising Justice J.B. Pardiwala and Justice Manmohan explained,“This Court is of the view that 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.”

AOR Sameer Abhyankar represented the Appellant while A.S.G. N Venkatraman represented the Respondent.

Factual Background

A Memorandum of Understanding (MOU) was entered into between one Hashim Moosa and the Appellant as well as Surendra Reddy on the other, for procuring lands at a certain price from the land procurers, i.e. the Appellant and Surendra Reddy. Rs.10 lakh was paid to the procurers for arranging the facilitation of the transfer of land from the landowners to Hashim Moosa/his nominees. A search and seizure operation was carried out at the Appellant’s premises under Section 132 and the Appellant disclosed an income of Rs.2,27,65,580.

The Appellant returned a total income of Rs.4,77,11,330 for the Previous Year (PY) 2010- 2011, relevant to AY 2011-2012. The Respondent issued the Assessment Order whereby the total income of the appellant was assessed as Rs.4,78,02,616. An order imposing penalty under Section 271AAA was passed against the Appellant solely on the ground that the Appellant did not make payment of tax and penalty in terms of Section 271AAA(2) after receipt of Show Cause Notice and considering the entire received income as the undisclosed income. Another order imposing penalty under Section 271AAA was passed in respect of AY 2010-2011. Penalty at the rate of 10% was imposed on the entire returned income amounting to Rs.47,80,261.

The CIT (Appeals) allowed the appeal preferred against the Penalty Order in respect of AY 2010- 2011 while accepting the submission of the Appellant that 2009-10 cannot be the ‘specified previous year’ for the purpose of Section 271AAA. However, the appeal preferred against the Penalty Order in respect of AY 2011-2012 was rejected while solely relying on Section 271AAA(2). The Income Tax Appellate Tribunal as well as the High Court rejected the Appellant’s appeal. Aggrieved thereby, the Appellant approached the Apex Court.

Reasoning

Noting that the present matter was based upon the interpretation of Section 271AAA of the Act 1961, the Bench mentioned that the Section is a complete code in itself which 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% 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 Bench observed, “Section 271AAA(2) of the Act 1961 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.

In the present matter, by virtue of Explanation b(ii), AY 2011-12 (the year in which the search was conducted) was the specified previous year for the purpose of Section 271AAA(1) of the Act 1961.”The Bench held that penalty under Section 271AAA(1) was not attracted on the said amount of Rs.2,27,65,580 as the Appellant admitted this amount as income for AY 2011-12 during the search as well as substantiated how the said undisclosed income was derived and paid tax together with interest thereon, albeit belatedly.

Noting that the Appellant had not offered in the declaration any income on land transactions belonging to Sharab Reddy and NHR Prasad Reddy, the Bench said, “...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….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 the income of Rs.2,49,90,000 constituted undisclosed income found during the search,the Bench held that the penalty under Section 271AAA(1) is leviable on the said amount. It was also noticed that the said amount was not admitted in the declaration during the course of search but was disclosed by the Appellant only during the assessment proceedings.

Thus, the Bench disposed of the Petition with a direction to the Appellant to pay penalty at the rate of 10% on Rs.2,49,90,000 and not Rs.4,78,02,616.

Cause Title: K. Krishnamurthy v. The Deputy Commissioner of Income Tax (Neutral Citation: 2025 INSC 208)

Appearance:

Appellant: AOR Sameer Abhyankar, Advocates Rahul Kumar, Krishna Rastogi, Aakash Thakur, Aryan Srivastava

Respondent:A.S.G. N Venkatraman, AOR Raj Bahadur Yadav, Advocates H R Rao, Tejas Patel, Mohd Akhil, Priyadarshini Priya, S A Haseeb, Navanjay Mahapatra, Brijesh Yadav

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