ROHAN M THAKKAR LEGAL HEIR OF LATE MAHESH N THAKKAR,MUMBAI vs. DCIT CENTRAL CIRCLE 8(3), MUMBAI

Brief facts are that a search and seizure action under section 132 was carried out in the Modi Group cases on 18.11.2015, in which the assessee, Late Shri Mahesh Nanji Thakkar, was also covered. During the search, the residential premises of the assessee and various bank lockers operated by him and the members of his family were searched. Jewellery valued at ₹1,24,12,034 was found at the residential premises, whereas jewellery valued at ₹2,47,16,605 was found in the bank lockers. Thus, jewellery aggregating to ₹3,71,28,639 was found and inventorised. The assessee was called upon to explain its source and ownership with reference to the wealth-tax returns and valuation reports of

The assessee filed his return of income on 01.10.2016 declaring total income of ₹2,25,32,440. The amount of ₹29,75,000 admitted in the statement under section 132(4) was, however, omitted from the said return. The assessee thereafter filed a revised return on 30.11.2017 declaring total income of ₹2,55,07,440, wherein the amount of ₹29,75,000 was included and offered to tax under the head “Income from other sources”. The corresponding tax was also paid. The assessment was subsequently completed under section 143(3) on 29.12.2017. The disclosure of ₹29,75,000 was accepted, though penalty proceedings under section 271AAB were initiated. In the penalty proceedings, the assessee contended that nearly the entire jewellery found during the search had been reconciled and only a relatively small portion could not

Before us, the learned counsel submitted that the jewellery had been acquired in earlier years and, therefore, its value could not be treated as the undisclosed income of the specified previous year merely because it was found during the search. Alternatively, it was contended that the assessee had made a categorical admission in the statement under section 132(4), identified the income with the unreconciled jewellery, paid the corresponding tax and declared the amount in the revised return before completion of the assessment. Thus, even if section 271AAB were held applicable, the case fell within clause (a), attracting penalty at 10%, and not within the residuary clause (c). The learned DR, on the other hand, relied upon the findings of the Assessing

We have heard the rival submissions and carefully perused the material placed on record. Section 271AAB, as applicable to the search in the present case, constitutes a special penalty regime for undisclosed income detected during a search under section 132. It does not prescribe a single uniform rate. Instead, it creates graded consequences depending upon the conduct of the assessee during and after the search. Clause (a) prescribes penalty at 10% where the assessee, in the course of search, admits the undisclosed income in a statement under section 132(4), specifies and substantiates the manner in which it was derived, pays the tax together with interest and declares the income in the return furnished for the specified previous year. Clause (b) applies where the income is not admitted during the search but is subsequently declared and the prescribed conditions are fulfilled. Clause (c) is residuary and governs cases not falling within clauses (a) or (b). Thus, before determining the applicable rate, it is necessary to ascertain, first, whether the amount answers the statutory description of “undisclosed income” and, thereafter, which of the graded clauses is attracted by the facts.

Tested on these parameters, the jewellery valued at ₹29,75,000 falls within the statutory definition. It was physically found during the search and could not be reconciled with the wealth-tax returns, valuation reports or any other contemporaneous record maintained by the

The next question is whether the penalty is exigible at 30% under clause (c), as held by the authorities below, or at 10% under clause (a). The material facts relevant to this determination are that the assessee made a clear admission of the undisclosed income during the search in the statement

The Assessing Officer invoked clause (c) principally on two grounds: that the assessee had not specified and substantiated the manner in which the undisclosed income was derived, and that the amount was not declared in the return initially filed. Insofar as the first ground is concerned, the disclosure was not an amorphous or ad hoc surrender unconnected with any identifiable asset. It was directly referable to a specifically identified quantity and value of jewellery found during the search which could not be reconciled with the disclosed wealth-tax records. The nature of the undisclosed income and the manner in which it manifested itself were therefore apparent from the statement and the search material: it represented unexplained acquisition or investment in the unreconciled jewellery. There is nothing on record to show that the authorised officer called

As regards the omission from the return initially filed, it is undisputed that the amount was subsequently incorporated in the revised return on 30.11.2017, before the assessment was completed on 29.12.2017, and the tax relating thereto stood paid. The revised return disclosed the same income which had been admitted during the search and was acted upon by the Assessing Officer while completing the assessment. The initial omission is undoubtedly a lapse and is sufficient to repel the assessee’s plea for complete immunity from penalty. Nevertheless, while determining which of the graded clauses applies, the subsequent statutory compliance cannot be ignored altogether. Section 271AAB differentiates between an assessee who admits the undisclosed income during the search, pays the tax and declares it in the return, and an assessee whose income is established dehors such admission or remains undeclared.

Clause (c) is residuary in character and should apply where the factual conditions bringing the case within the preceding clauses are absent. It cannot be invoked mechanically merely because the compliance under clause (a) is considered imperfect in form, when its substantive ingredients stand fulfilled. Here, the Department did not have to independently determine the amount of undisclosed income dehors the assessee’s statement; the assessee did not retract the admission or dispute the ownership of the jewellery in the assessment; and the income was ultimately brought into the return and accepted before the assessment attained finality. Viewed in the totality of these facts, the omission to include the amount in the first return does not justify fastening the residuary rate of 30%, though it equally does not warrant deletion of the penalty. The conduct of the assessee is appropriately visited by the rate prescribed under clause (a), which is designed for cases where the undisclosed income is candidly admitted during the search and thereafter brought to tax.

Accordingly, we hold that the jewellery valued at ₹29,75,000 constitutes undisclosed income within the meaning of the Explanation to section 271AAB; however, the penalty thereon is leviable under section 271AAB(1)(a) at the rate of 10% and not under the residuary clause (c) at 30%. The penalty is therefore restricted to ₹2,97,500 as against ₹8,92,500 levied by the Assessing Officer and confirmed by the learned CIT(A). The Assessing Officer is directed to grant consequential relief.

In the result, the appeal of the assessee is partly allowed.