PENALTY FOR UNDISCLOSED INCOME

[DR.MARIAPPAN GOVINDARAJAN]

Search and seizure

Section 132 of the Income Tax Act, 1961 (‘Act’ for short) provides the procedure for conducting searches in the premises of the assessees and also seize the records found during the search.  The authorised officer may, during the course of the search or seizure, examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing and any statement made by such person during such examination may thereafter be used in evidence.

Penalty

Section 271AAA of the Act provides penalties in search cases.  Section 271AAA(1) provides that the Assessing Officer may direct that, in a case where search has been initiated under section 132 on or after the 1st day of June, 2007, but before the 1st day of July, 2012 the assessee shall pay by way of penalty, in addition to tax, if any, payable by him, a sum computed at the rate of 10% of the undisclosed income of the specified previous year.

Undisclosed income

Explanation to this section defines the expression ‘undisclosed income’ as-

• 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-

• 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
• otherwise not been disclosed to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner before the date of the search; or

• any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted.

Specified previous year

Explanation to Section 271AAA defines the expression ‘specified previous year’ as  the previous year-

(i) which has ended before the date of search, but the date of filing the return of income under sub-section (1) of section 139 for such year has not expired before the date of search and the assessee has not furnished the return of income for the previous year before the said date; or

(ii) in which search was conducted.

Non-applicability of Section 271AAA (1)

The provisions of Section 271AAA (1) is not applicable to the assessee if-

• admits the undisclosed income and specifies the manner in which such income has been derived, in the course of the search, in a statement under section 132 (4);
• substantiates the manner in which the undisclosed income was derived; and
• pays the tax, together with interest, if any, in respect of the undisclosed income.

In K. KRISHNAMURTHY VERSUS THE DEPUTY COMMISSIONER OF INCOME TAX - 2025 (2) TMI 583 - SUPREME COURT, one Hasim Moosha, entered into a Memorandum of Undertaking with K. Krishnamurthy, the appellant in the present appeal, and Surendra Reddy for the purchase of certain land.  A sum of Rs.10 lakhs was paid to Hasim Moosha to facilitate the transfer of lands in the name of Krishnamoorthy and Surendra Reddy. 

A transaction was entered into between Hashim Moosa and the Space Employees’ Co-operative Society Ltd. (in short ‘Society’) on 26.09.2009.  It was in order to facilitate purchase of land for this transaction that the MOU dated 19.01. 2009 was entered into by the Appellant with Mr. Hashim Moosa.

A search and seizure operation were carried out in the premises of Krishnamoorthy on 25.11.2010 under Section 132 of the Income Tax Act, 1961 (‘Act’ for short).  Upon the search the appellant disclosed an income of Rs.2.28 crores. 

The Department issued a notice to the appellant on 21.08.2012 calling for return of income for the assessment year 2011 – 12.  The appellant filed the return for the said assessment year on 05.11.2012, declaring an income of Rs.4.77 crore. 

On 30.09.2023, the Department imposed a penalty on the appellant under Section 271AAA of the Act on the ground that the appellant did not make payment of tax and penalty in terms of Section 271AAA (2) of the Act 1961 after receipt of show cause notice and considering the entire received income as the undisclosed income.

On the same day the Department imposed penalty @10% of the tax under Section 271AAA of the Act for the Assessment year 2010-11 to the tune of Rs.47.80 lakhs. 

The appellant filed an appeal against the penalty order for the assessment year 2010-11 before the First Appellate Authority, Commissioner of Income Tax (Appeals).  The First Appellate Authority allowed the appeal on the ground that 2009-10 cannot be the ‘specified previous year’ for the purpose of Section 271AAA of the Act. 

The appellant filed an appeal against the penalty order passed for the assessment year 2011-12 before Commissioner of Income Tax (Appeals).  The First Appellate Authority rejected the appeal of the appellant on the ground that the basic condition existing in the section has not been fulfilled i.e. to say the assessee has not met up with the liability prescribed under the section despite the time limits set by the Assessing Officer.  The appellant filed an appeal before the Income Tax Appellate Tribunal (‘ITAT’ for short) against the order of the First Appellate Authority.  The ITAT rejected the appeal of the appellant on the ground of non-compliance with Section 271AAA (2) of the Act. 

The appellant, then, filed an appeal before the High Court challenging the order of the authorities below.  The following substantial questions were raised before the High Court-

• Whether the compliance with all the three conditions mentioned in Section 271AAA (2) mandatory or not?
• Whether penalty prescribed @ 10% of undisclosed Income under Section 271AAA of the Act can be reduced if the tax together with interest on the undisclosed income as declared by the Assessee in the course of search in a statement under Section 132(4) is partly complied with, with a delay, in the absence of specific period for such compliance specified in the Sub-clause (iii) of Section 271AAA of the Act?

The High Court dismissed the appeal of the appellant. The High Court held that the compliance of all three conditions in Sub-clause (2) of Section 271AAA of the Act are mandatory.  Second question with regard to reduction of penalty commensurate with quantum of tax which the appellant has deposited, is also answered against the assessee and in favour of the revenue, because, admittedly, appellant had not disclosed the income at all. But for search, the same could not have been unearthed. Having filed the returns, the assessee did not comply with condition No.3 in Sub-Section (2).

Against this order of High Court, the appellant filed the present appeal before the Supreme Court.  The appellant submitted the following before the Supreme Court-

• The Revenue Authorities as well as the High Court, without expressly stating so, have proceeded on the erroneous presumption that the levy of penalty under Section 271AAA(1) of the Act 1961 is automatic and that the only exception thereto was sub-clause (2) of Section 271AAA of the Act 1961.
• The Revenue Authorities without satisfying themselves as to the satisfaction of ‘undisclosed income’ as stipulated in Section 271AAA (1) of the Act 1961, levied the penalty.
• Unless there is undisclosed income in terms of the said provision in the specified previous year an order of levy of penalty cannot be issued by the Assessing Officer.
• The declaration before the DDIT(Inv.) during search proceedings was made voluntarily.
• The penalty could not have been imposed on the entire returned income for FY 2010-2011.
• The penalty could have been imposed on the alleged undisclosed income of Rs.2,27,65,580/- referred to in the said declaration.

The Department submitted the following before the Supreme Court-

• There were concurrent findings of all the authorities below against the appellant upholding the penalty amount on the entire income returned as he had failed to meet the conditions of the section.
• There was a search and the assessment was completed at Rs.4,78,02,616/-.
• The charging section is attracted as the assessee/Appellant had failed to  comply with the mandatory conditions of Section 271AAA (2) of the Act 1961.
• The assessee had never admitted to any undisclosed income and the income was detected only after a search and the assessee never disclosed or explained the manner in which that income was derived/earned and lastly, he did not pay the tax and the interest thereon until 2016 i.e. after 3 years of the assessment order.

The Supreme Court considered the submissions of both the parties.  The Supreme Court analysed the provisions of Section 271AAA of the Act which is a complete code in itself.  The Supreme Court observed 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 10% of the undisclosed income of the specified previous year. The Supreme Court held that the imposition of penalty is not mandatory.

Section 271AAA (2) of the Act 1961 stipulates that Section 271AAA (1) shall not be applicable if the assessee-

• admits the undisclosed income and specifies the manner in which such income has been derived in a statement under  Section 132(4) in the course of the search;
• substantiates the manner in which the undisclosed income was derived;
• pays the tax, together with interest, if any, in respect of the undisclosed income.

If the abovesaid requirements are met then 10% penalty would not be imposable. 

In respect of ‘undisclosed income’ the Supreme Court held that the onus is on the Assessing Officer to satisfy the conditions precedent stipulated in the said Explanation, before the charge for levy of penalty is fastened on the assessee.

In respect of the penalty imposed for the assessment year 2011-12 the Supreme Court observed that the appellant offered Rs.2,49,90,000/- under the head income from other sources on account of these land transactions during the course of assessment proceedings only and not at any time during the search.  Therefore, penalty under Section 271AAA (1) of the Act 1961 is leviable on the said amount.  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, the Supreme  Court was of the view that the exception carved out in Section 271AAA(2) is not attracted to the said portion of the income.

The Supreme Court directed the appellant to pay penalty at the rate of 10% on Rs.2,49,90,000/- and not Rs.4,78,02,616/-.