Income Tax Act | No Penalty Under S.271AAA If Undisclosed Income Is Admitted, Explained & Tax Paid Even With Delay : Supreme Court

Essentially, the said provision talks about penalty where a search has been initiated. The explanation reads as:

“(a) “Undisclosed income” means— (i) any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has— (A) not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or……”

In this context, the Apex Court explained that before levying any penalty, the Assessing Officer must satisfy the condition provided in the above explanation.

“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 Court added.

In the present case, a search and seizure operation was carried out at the appellant's premises and as a result, the appellant disclosed an income of a certain amount. An order imposing a penalty under Section 271AAA was passed against the appellant. When challenged, the CIT rejected the appellant's plea and the same was also dismissed by the Appellate Tribunal. Since the High Court was also dismissed, the case came before the Supreme Court.

At the outset, the Bench of Justices J.B. Pardiwala and R. Mahadevan perused the entire provision in detail. It observed that as per Section 271AAA(1), the Assessing Officer may direct the Assessee, in a case where a search has been conducted, to pay a penalty. However, the imposition of a penalty is not mandatory., the Court said and observed:

“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.”

Coming to Section 271AAA(2), observed that the penalty will not be levied in cases where the assessee admits the undisclosed income, substantiates the manner in which such income was derived and pays the tax.

For context, sub-sectio (2) of Section 271AAA says :

(2) Nothing contained in sub-section (1) shall apply if the assessee, —

(i) in the course of search, in a statement under sub-section (4) of section 132, 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.”

In view of this, the Court concluded that since the appellant had admitted Rs.2,27,65,580 as income for assessment 2011-12 during the search and had complied with the aforesaid conditions, no penalty is leviable. However, with respect to a certain amount, the Court said that the same income was not admitted under the head income from other sources during the search.

“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, the Court opined that the expression 'found in the course of search' does not merely mean documents found in the assessee's premises.

“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'.,” the Court said.

In view of this, the Court disposed of the appeal with a direction to the appellant to pay a penalty at the rate of 10% only with respect to the aforesaid amount.

Case Name: K KRISHNAMURTHY VERSUS THE DEPUTY COMMISSIONER OF INCOME TAX., CIVIL APPEAL NO. 2411 OF 2025

Citation : 2025 LiveLaw (SC) 202

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