Summary
Construing Section 271AAA of the Income Tax Act, 1961, the Supreme Court held that penalty for undisclosed income found in a search is discretionary, that the Assessing Officer must prove the income is 'undisclosed income' found in the course of the search, and that the immunity in sub-section (2) is available even where tax and interest are paid late. It confined the 10% penalty to the income first disclosed during assessment, not the amount the assessee admitted during the search, and not the entire assessed income.
Issues
- Whether penalty under Section 271AAA(1) is mandatory, and on whom the burden lies to show that the income is 'undisclosed income' of the specified previous year.
- Whether the immunity under Section 271AAA(2) is lost where the assessee admits the undisclosed income during the search but pays the tax and interest on it belatedly, no period for payment being prescribed.
- Whether income arising from sale deeds collected from a third party after the search is undisclosed income 'found in the course of a search'.
- On what amount the 10% penalty was leviable in this case.
Provisions considered
- Section 271AAA(1), Income Tax Act, 1961Held that the word 'may' makes the penalty discretionary, not automatic, though the discretion must be exercised soundly according to law; penalty can be levied only where there is undisclosed income of the specified previous year. (¶¶ 29, 30, 31)
- Section 271AAA(2), Income Tax Act, 1961Held that if the assessee admits the undisclosed income in a statement under Section 132(4) and specifies and substantiates how it was derived, payment of tax with interest up to the date of payment, even if delayed, suffices since no period is prescribed; applied to exempt the amount admitted during the search but not income disclosed only at assessment. (¶¶ 32, 33, 37, 38, 42)
- Section 271AAA, Explanation (a) ('undisclosed income'), Income Tax Act, 1961Being a penalty provision, it was strictly construed: a surrender during search is not enough, and the Assessing Officer must prove that undisclosed income of the specified previous year was found in the course of or as a result of the search. The phrase 'found in the course of search' was read widely to include material obtained from third parties in continuation of the search. (¶¶ 34, 35, 40, 41)
- Section 271AAA, Explanation (b) ('specified previous year'), Income Tax Act, 1961As the search took place on 25 November 2010, after the due date under Section 139(1) for the preceding year had expired, clause (b)(i) did not apply and the year in which the search was conducted was the specified previous year under clause (b)(ii). (¶ 36)
Held
- Penalty under Section 271AAA(1) is not mandatory; the Assessing Officer has a discretion, which is not unfettered but must be a sound discretion guided by law and not arbitrary, and penalty may be levied only where there is undisclosed income in the specified previous year. (¶¶ 30, 31)
- Where the assessee admits the undisclosed income during the search in a statement under Section 132(4), specifies and substantiates the manner in which it was derived, and pays the tax with interest up to the date of payment, even belatedly, penalty under Section 271AAA is normally not leviable, since sub-section (2)(iii) prescribes no time for payment. (¶ 33)
- Section 271AAA, being a penalty provision, must be strictly construed; a surrender of income during the search, or one emerging from statements recorded during the search, does not by itself attract penalty. The onus is on the Assessing Officer to show that undisclosed income as defined in the Explanation was found in the course of or as a result of the search. (¶¶ 34, 35)
- The expression 'found in the course of search' is wide and is not limited to material found at the assessee's premises; it covers material obtained from further searches, investigation or questioning of third parties prompted by the search. Sale deeds collected from the housing society because of the search at the assessee's premises were therefore found in the course of the search. (¶¶ 40, 41)
- On the amount the assessee admitted during the search, substantiated, and paid tax and interest on, albeit late, all conditions of Section 271AAA(2) were satisfied and no penalty was attracted. (¶¶ 37, 38)
- The income from the land transactions, which was not admitted during the search and was offered only during assessment after the Assessing Officer obtained the sale deeds from the society, was undisclosed income found during the search to which the sub-section (2) exception did not apply, so the 10% penalty was leviable on that amount alone and not on the entire assessed income. (¶¶ 39, 42, 43)
Result
Appeal disposed of; the appellant directed to pay penalty at 10% on Rs.2,49,90,000 only, instead of on the entire assessed income of Rs.4,78,02,616.