Supreme Court: No Penalty Under Section 271AAA IT Act If Assessee Admits, Substantiates Undisclosed Income & Pays Tax with Delay
Supreme Court: No Penalty Under Section 271AAA IT Act If Assessee Admits, Substantiates Undisclosed Income & Pays Tax with Delay
In a significant ruling, the Supreme Court addressed the imposition of penalty under Section 271AAA(1) of the Income Tax Act, 1961, concerning undisclosed income surrendered by the assessee during a search operation. The Court clarified that simply surrendering undisclosed income is not enough for levying a penalty under this provision. The key observation was that the assessee must not only admit the undisclosed income but also substantiate how it was derived and pay the appropriate tax and interest, even if delayed. Under such circumstances, a penalty at the rate of 10% under Section 271AAA is typically not applicable.
The appeal before the Apex Court was filed against the Karnataka High Court's judgment, which had dismissed the appellant's appeal under Section 260A of the Income Tax Act. The Division Bench of Justices J.B. Pardiwala and Manmohan emphasized that since Section 271AAA is a penalty provision, it must be strictly construed. It was held that the mere surrender of undisclosed income during a search or through statements recorded during the search is not sufficient to levy a penalty. The onus is on the Assessing Officer to prove that all conditions stipulated in the provision are met before imposing a penalty.
The case involved a Memorandum of Understanding (MOU) between the appellant, Surendra Reddy, and Hashim Moosa for procuring lands. A search operation under Section 132 of the Income Tax Act was carried out at the appellant’s premises, during which an income of Rs. 2,27,65,580 was disclosed. The appellant filed a return showing a total income of Rs. 4,77,11,330 for the financial year 2010-2011, relevant to assessment year 2011-2012. The Respondent issued an assessment order, declaring a total income of Rs. 4,78,02,616, and imposed a penalty under Section 271AAA. The penalty was levied solely because the appellant did not make payment of tax and penalty as required under Section 271AAA(2), after receiving the Show Cause Notice. A similar penalty was also imposed for the assessment year 2010-2011.
The CIT (Appeals) allowed the appeal for AY 2010-2011, agreeing with the appellant's argument that the year 2009-2010 was not the "specified previous year" for Section 271AAA. However, the appeal for AY 2011-2012 was dismissed, relying on Section 271AAA(2). Both the Income Tax Appellate Tribunal and the High Court rejected the appellant's appeal, leading to the present appeal before the Supreme Court.
The Court noted that Section 271AAA of the Income Tax Act is a complete code in itself. It stipulates that a penalty can be imposed on undisclosed income in cases where a search has been carried out, but the penalty is not mandatory. The Court referred to Section 271AAA(2), which specifies that penalty is not applicable if the assessee admits the undisclosed income, specifies how it was derived, substantiates the manner of derivation, and pays the tax along with any interest on the undisclosed income. In this case, the appellant had disclosed an income of Rs. 2,27,65,580 during the search, explained how the income was derived, and paid tax and interest, albeit with a delay.
The Supreme Court held that penalty under Section 271AAA(1) was not applicable to the disclosed income of Rs. 2,27,65,580 for AY 2011-2012. However, it ruled that the penalty was applicable to another amount of Rs. 2,49,90,000, which was found during the search but was not disclosed during the search proceedings. This amount was only disclosed later during the assessment proceedings, and as a result, the penalty under Section 271AAA(1) was levied on this sum.
The Supreme Court directed the appellant to pay a penalty of 10% on Rs. 2,49,90,000, not on the entire assessed income of Rs. 4,78,02,616 as initially imposed. The decision reinforced the strict application of the conditions for penalty imposition under Section 271AAA and clarified that mere surrender of undisclosed income is insufficient to warrant a penalty.
