Case Name: K. Krishnamurthy Vs. The Deputy Commissioner of Income Tax
Case Number: Civil Appeal No. 2411 of 2025
Date: 13 Feb,2025
Quorum: Justice Manmohan
Facts
The appeal was filed against the imposition of a penalty under Section 271AAA of the Income Tax Act, 1961, upon a search being carried out at the taxpayer’s premises on November 25, 2010. The taxpayer (the Appellant) had been engaged in several land deals, specifically entered into an MOU dated January 19, 2009 for the purpose of facilitating the transfer of land. The Appellant voluntarily accepted an income of ₹2,27,65,580 during the search. Subsequently, however, in the course of assessment proceedings, a further sum of ₹2,49,90,000—derived from land transactions—was discovered. The last assessment order (March 15, 2013) reflected a total income of ₹4,78,02,616 for the period in question, and the penalty was calculated on the “undisclosed income” as found during and subsequent to the search.
Issues
- Is the penalty under Section 271AAA automatically levied on the whole returned income, or simply on the part of it that is “undisclosed income”?
- Is the penalty avodable or reducible if the taxpayer owns up to and proves the undisclosed income at the time of search and later pays the tax (with interest), as envisaged under Section 271AAA(2)?
- What is “undisclosed income” and “specified previous year” in this instance, particularly considering the timing of the search relative to the filing deadlines?
Legal Provisions
Section 271AAA(1) of the Income Tax Act, 1961: Provides for the Assessing Officer with the discretion to impose a penalty of 10% of the undisclosed income of the specified previous year when a search is being conducted.
Section 271AAA(2): Offers a waiver of the penalty if the taxpayer, in the course of the search, (i) owns up to the undisclosed income and gives reasons for its derivation, (ii) proves how the income was derived, and (iii) subsequently pays the tax as well as any interest payable thereon—albeit after a lapse of time.
Arguments by the Appellant
The Appellant argued that admitted income of ₹2,27,65,580 could not be subject to a penalty as he voluntarily disclosed it, explained its derivation, and eventually paid the tax and interest. They argued that penalty could only be levied on income which was actually “undisclosed” at the date of the search and not on the total income amount disclosed later in the assessment proceedings.
Referring to appropriate case law, the Appellant argued that the Assessing Officer needs to come up with explicit, concrete proof (e.g., cash, documents, or other valuable materials) that supports the fact that the income detected was actually “undisclosed income” according to the Act.
Arguments by the Respondent
The Income Tax Department contended that although the Appellant met the requirements of the admitted income (₹2,27,65,580), he did not qualify under Section 271AAA(2) for the further amount of ₹2,49,90,000. This second amount was not revealed at the time of search but later through documents received in relation to the search.
The Respondent stressed that the power of the Assessing Officer to impose penalty is discretionary in nature but has to be utilized only after making sure that the taxpayer has not fulfilled the conditions required. The conditions for the exemption were never fulfilled for the amount of disclosed income as the same was known only after search and without there being an explicit admission by the Appellant at the time of search.
It was contended that although the documents resulting in the identification of the additional income may not have been present physically at the Appellant’s office, they were nonetheless procured as a direct result of the search process and hence are covered under the definition of “found in the course of search.”
Analysis
The Court scrutinized the statutory wording of Section 271AAA and its explanatory note carefully. Although Section 271AAA(1) authorizes the Assessing Officer to levy a penalty, no penalty is levied automatically. The Assessing Officer has to exercise discretion by applying strictly the conditions under Section 271AAA(2). In so far as the voluntarily admitted amount of income (₹2,27,65,580), the Appellant fulfilled the conditions by disclosing its derivation and depositing the tax and interest thereon. That amount, therefore, should not attract any penalty. Conversely, the ₹2,49,90,000 was not disclosed during the search and was only later disclosed through documents connected to the search.
This delay in disclosure results in the protective conditions under Section 271AAA(2) not being applicable to this amount. The Court also explained that since the search was done on November 25, 2010—and the return of the financial year ended prior to that date had to be submitted by July 31, 2010—the “specified earlier year” for the purpose of penalty should be regarded as the year in which the search took place (AY 2011–12).
Judgment
On going through the returns, the Court held that the amount of ₹2,27,65,580 of income admitted during search and subsequently regularized by payment of tax and interest is not liable for any penalty under Section 271AAA. A fine of 10% is appropriately levied on the extra undisclosed income of ₹2,49,90,000 because the income was not disclosed during the time of the search and does not enjoy the conditions of exemption.
Therefore, the fine is determined only for the undisclosed income of ₹2,49,90,000.
Conclusion
The Court held that even though the voluntary confession by the taxpayer and subsequent payment of the tax charge of ₹2,27,65,580 make that amount immune from penalty, the other undisclosed income of ₹2,49,90,000 does not satisfy the safe harbor provisions contained in Section 271AAA(2).
Thus, a penalty of 10% on ₹2,49,90,000 is warranted. This ruling reiterates that the discretionary ability to inflict a penalty should be invoked with a clear illustration of concealed income and conforming to the legislative conditions, to ensure fairness of application.
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