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Facts
A search under section 132 was conducted on the assessee, leading to a voluntary disclosure of Rs. 3 Crores as additional income. This disclosure was made to settle with the department, without any specific incriminating material being found. The AO initiated penalty proceedings under section 271AAB based on this disclosure.
Held
The Tribunal held that the declaration made by the assessee during the search under section 132(4) does not qualify as "undisclosed income" as defined in section 271AAB. There was no incriminating material found, and the disclosure was made to buy peace. Therefore, the penalty under section 271AAB cannot be levied.
Key Issues
Whether the voluntary disclosure of income made during a search, without any incriminating material, qualifies as 'undisclosed income' for the purpose of levying penalty under Section 271AAB of the Income Tax Act.
Sections Cited
132, 153A, 143(2), 132(4), 271AAB, 271AAB(1), 271AAB(1)(a), 274, 275, 270A, 271, 139, 153A, 270A, 271(1)(c), 271AAB(1A), 271AAB(1A)(a), 271AAB(1A)(b), 271AAB(2), 274, 275
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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI.LAXMI PRASAD SAHU & SHRI.SOUNDARARAJAN K
Per Laxmi Prasad Sahu, Accountant Member :
This is an appeal filed by the assessee against the Order passed by the learned CIT(A)-15, Bangalore, vide DIN :ITBA/APL/M/250/2024- 25/1073374839(1) dated 17.02.2025.
Briefly stated facts of the case are that search under section 132 of the Act was conducted in the case of assessee Shri. S. R. Ravishankar at No.80, 1st Main Road, Chamarajpet, Bengaluru- 560018, on 09.10.2014 in connection with search proceedings in the group case of Shri. R. Chandru and others. Consequent to search and seizure operation the case was centralized and notice was issued to the assessee under section 153A of the Act on 25.02.2016 to file return of income within 30 days from the receipt of notice. Accordingly, assessee filed return of income on 30.10.2015 declaring income Page 2 of 12 of Rs.4,01,79,290/-. Accordingly notice under section 143(2) of the Act was issued. During the course of search under section 132(4) of the Act assessee admitted income of Rs. 3 Crores and it was noticed that Rs.3 Crores was offered as income in the return filed for Assessment Year 2015-16. During the course of search it was observed that assessee was offering income @ 5 to 6% in the previous 6 years. However, during the impugned Assessment Year assessee offered net profit of Rs.4,21,01,458/- which is 8.23% of the total turnover. In the Assessment Year 2014-15 assessee has shown profit of Rs.1,91,47,241/- which is only 6.19% of the total turnover. The AO initiated penalty proceedings under section 271AAB of the Act because of the income offered as a result of finding of during the course of search and seizure and would not have been found to be so. Had the search not been conducted, additional income of Rs.3 Crores would not have been offered to tax had the search not taken place. Accordingly, the AO observed that case of the assessee comes under section 271AAB(1) of the Act. Accordingly, penalty of Rs.30 lakhs was imposed @ 10% on undisclosed income as per section 271AAB(1)(a) of the Act.
Aggrieved from the above Order, assessee filed appeal before the learned CIT(A). The learned CIT(A), after considering the submissions and case law relied on by the learned Counsel penalty was confirmed and dismissed appeal of the assessee.
Aggrieved from the above Order, assessee filed appeal before the Tribunal. The learned Counsel reiterated the submissions made before the lower authorities and has filed written synopsis which is as under:
The appellant herein seeks the leave of the Hon’ble Income Tax Appellate Tribunal to file the following written submissions in support of grounds of appeal.
Page 3 of 12 1. Ground No 2 and 3: Confirming the penalty u/s. 271AAB of the Act of Rs. 30,00,000/- though declaration made during the search u/s. 132(4) does not qualify as undisclosed income. 1.1. The appellant has declared a sum of Rs.3,00,00,000/- as additional income for assessment year 2015-16. The declaration was made during the statement recorded u/s. 132(4) of the Act. The above declaration was purely with the intention to buy peace with the department. It is further pertinent to note that there is no incriminating material/ documents/ transaction/ any entry found during the course of search. Further, even in the assessment order, there is no mention of any document/transaction which is found during the course of search leading to disclosure of income during the course of search proceedings. 1.2. It is submitted that the declaration made during the course of search under section 132(4) of the Act does not qualify as "undisclosed income" as defined in Explanation (c) to section 271AAB. To attract penalty under section 271AAB, the income disclosed must fall within the ambit of "undisclosed income", as specifically defined in the Explanation to that section. The definition is reproduced as below: "undisclosed income" means— (i) 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— A) 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 B) otherwise not been disclosed to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner before the date of search; or (ii) 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. 1.3. In the instant case, the declaration was not related to any entry in books of account or document not recorded before the date of search, or any asset such as money, bullion, jewellery, etc., found and not disclosed in books. However, the appellant states that the declaration was made merely to buy peace and to avoid litigation.
Page 4 of 12 1.4. Hence, there is no incriminating material, document, asset, or entry indicating any undisclosed income found or seized and the alleged income was duly recorded in the regular books of account and disclosed in the return of income. Thus, in absence of any tangible or corroborative incriminating material, the declaration does not qualify as “undisclosed income” under Explanation (c) to Section 271AAB and the provisions of section 271AAB are not applicable. 1.5. In support of the above proposition, we rely on the judgement held by Income Tax Appellate Tribunal, “SMC” Jaipur in the case of Shri Paras Mal Jain V. The DCIT Central Circle-1, Jaipur [ITA No. 353/JP/2022] (Page no 40 – 59 of paper book). The relevant portion of the judgement that supports the above proposition has been reproduced below: 2.5 We have heard both the parties and perused the materials available on record. Brief facts of the case are that the assessee is engaged in business manufacturing, trading and export of precious & semi precious stones from last several years. A search u/s 132 of the I.T. Act, 1961 took place at residence and business premises of assessee 23-05-2013. In course of search, the assessee surrendered an income of Rs.25,00,000/- on account of land advance which he admitted as his additional business income for current year. The assessee filed original return on 29-09-2013 declaring total income of Rs. 89,40,360/- which included said additional income of Rs.25,00,000/- offered to tax in course of search. The assessment u/s 143 (3) r.w.s. 153B (1) (b) of I. T. Act, 1961 was completed on 21-03-2016 after disallowance of expenses on account of personal element/unverifiable expenses. The A.O. simultaneously initiated penalty proceedings u/s 271AAB of the Act. The A.O. thereafter took penalty proceedings initiated by him u/s 271AAB by issuing fresh show cause notice(s) to which assessee filed his explanation. The explanation filed by assessee has been held by A.O. as not sustainable at all and levied a penalty of Rs.2,50,000/- on assessee. The assessee filed appeal before the ld. CIT (A) against said penalty order and in course of hearing filed written submissions which is reproduced in appeal order of ld. CIT (A). The Ld. CIT(A) in his order dated 29-07-2022 after considering reply filed by assessee confirmed the penalty levied by AO. The Ld. CIT (A) thus dismissed the appeal filed by assessee. It is noted from the records that the Department had carried out the search and seizure operation on the assessee group and thus did not find any evidence which could show that the assessee was having undisclosed income and the ld. AR submitted that the revenue authorities had exerted undue pressure and obtained surrender of income from the assessee. It is worthwhile to mention that CBDT Circular F.No.286/2/2003-IT(Inv.) dated 10-03-2003 indicates that practice of confession of additional income during search and seizure operation does not serve any useful purpose and there should be concentration on collection of evidence of Page 5 of 12 income which leads to information on what has not been disclosed or is not likely to be disclosed before the Income Tax Department. The Bench noted that the Board Circular dated 10-03-2003 (supra) submitted by the ld. AR assessee through its written submission has merit. We have taken into consideration the case laws cited by both the parties and also kept in mind the citations as mentioned by the ld. CIT(A) in his order, however, we find that the recent judgement of ITAT Jaipur Bench in the case of Rajendra Kumar Gupta vs DCIT in dated 18-01-2019 finds favour in the case of the assessee as the Bench has discussed the issue in its order very elaborately and judiciously……… Respectfully following the above decision in the case of Rajendra Kumar Gupta (supra) and in view of the above deliberation that the income surrendered is not an undisclosed income as specified in Explanation (c) of Section 271AAB of the Act, therefore, we do not concur with the findings of the ld. CIT(A) as the ld. AR of the assessee has very explicitly narrated the case in his written submission countering the decision taken by the ld. CIT(A) in his order. Thus, the grounds of appeal raised by the assessee in his appeal are allowed (Emphasis supplied) 1.6. We also rely on the decision of Hon’ble Income Tax Appellate Tribunal, Jaipur Bench, in the case of R. P. Wood Products Private Limited, Naya Bazar, Ajmer DCIT Central Circle, Ajmer (Pg No 60 – 108). The relevant portion of the judgement that substantiates the above proposition has been reproduced below:
15. In addition to the above decision the co-ordinate bench of this tribunal in the case of Rajendra Kumar Gupta Vs. DCIT (Supra) has considered the issue of levy of penalty and the in that case also the bench observed that once the income does not fall in the category of undisclosed income as per provision of section 271AAB of the Act the penalty deserve to be deleted. On being consistent to the view already taken by the coordinate bench and the facts of the assessee's case shows that the entries in the IPhone and other seized documents representing the income on account of the sales of goods on commission basis and that too the profit is assessed on estimation. Thus, in the absence there was no undisclosed income found during the course of search and no incriminating material was found, hence we hold that there is no case for imposing penalty u/s 271AAB of the Act, accordingly, we set aside the order of the lower authorities and cancel the penalty u/s 271AAB of the Act. (Emphasis Supplied)
Page 6 of 12 1.7. Further, it can be seen from the assessment order that there is no reference to any incriminating material which whispers about the undisclosed income. In fact, the assessment order does not refer to any undisclosed income, admission as income, etc. The Ld Commissioner of Income Tax (Appeals) relies on the decision of Hon’ble Supreme Court in support of the levy of penalty under Section 271A AB of the Act. However, the Hon’ble Supreme Court affirms three requirements for the levy of penalty under Section 271AAB of the Act, which have to be satisfied cumulatively. The three conditions affirmed by the Supreme Court are as under. i. Search action u/ s 132 of the Income Tax Act, 1961 should be initiated u/ s 132 on or after 01.06.2012 ii. The assessee has made disclosure of undisclosed income during the course of search action, has paid the tax together with interest and has filed return of income iii. The assessee substantiates the manner in which he has earned the undisclosed income. 1.8. It can be seen from the above third condition that the learned assessing officer or CIT(A) has not brought any material on record while substantiating the manner in which the assessee has earned the undisclosed income. In the absence of satisfaction of above conditions, the addition cannot be called as undisclosed income and penalty under Section 271A AB of the Act cannot be levied.
2. Ground No 4: That the learned Commissioner of Income Tax (Appeals) erred in law and on facts in holding that the penalty u/s. 271AAB of the Act is automatic and such finding is perverse as the conditions for levying penalty are not satisfied in the facts of the case. 2.1. Section 271AAB prescribes specific conditions, and penalty is discretionary and not automatic. Even where the assessee admits income in a statement under section 132(4), the penalty can be levied only if the income qualifies as "undisclosed" within the meaning of Explanation (c). 2.2. From perusal of the above provision, it is pertinent to note that the words used are “AO may direct” which proves that the penalty under section 271AAB is neither automatic nor mandatory but discretionary. 2.3. We also rely on the judgement held by Income Tax Appellate Tribunal, Indore Bench, in the case of Mukesh Kumar Ranka, Indore, Madhya V. ACIT, Central Circle, Ujjain [ITA Nos.97 & 98/Ind/2024] (Page no 109 – 148 of paper Book). The relevant portion of the judgement that substantiates the above proposition has been reproduced below:
Page 7 of 12 2.4. Before imposing the penalty under sec. 271AAB, the AO has to issue a show cause notice and give a proper opportunity of hearing to the assessee. Thus, the levy of penalty u/s. 271AAB is not automatic but the A.O. has to take a decision to impose the penalty after giving a proper opportunity of hearing to the assessee. It is statutory requirement that the explanation of the assessee for not fulfilling the conditions as prescribed u/s 271AAB of the Act is required to be considered by the AO and particularly whether the explanation furnished by the assessee is bonafide and non-compliance of the same is due to the reason beyond the control of the assessee. Therefore, the penalty u/s 271AAB is not a consequential act but the AO has to first initiate proceedings by issuing a show cause notice and after considering the explanation and reply of the assessee has to take a decision. This requirement of giving an opportunity of hearing itself makes it clear that the penalty u/s 271AAB is not mandatory but the AO has to take a decision based on the facts and circumstances of the case otherwise there is no requirement of issuing any notice for initiation of proceedings but the levy of penalty would be consequential and only computation of the quantum was to be done by the AO as in the case of levy of interest and fee u/s 234A to E. (Emphasis supplied) Further, Hon’ble Supreme Court in the case of Hindustan Steel Ltd. v. Assistant Commissioner [83 ITR 26] (Page no 149 – 157 of paper book), held that a penalty should not be imposed merely because it is lawful to do so. Even if a minimum penalty is prescribed, the authority will be justified in not imposing penalty where the breach is merely technical or is based upon the bona fide belief that a particular provision has been complied with. The Supreme Court stressed the importance of not levying penalty where the assessee acts with "honest and genuine belief".
In addition to the written synopsis, learned Counsel submitted that during the course of search proceedings no incriminating documents were found and AO has also not referred to any seized material. Therefore it cannot be said that there was undisclosed income found during the course of search. The admission made by the assessee was to buy peace of mind and to avoid litigation with the department.
Page 8 of 12 5. On the other hand, learned DR relied on the Order of lower authorities and submitted that the penalty imposed by the AO is on the basis of admission made during the course of search statement during the search and seizure proceedings under section 132(4) of the Act. Assessee has declared 5 to 6% income for last 6 years and in this year assessee declared 8.23% net profit only on the basis of search conducted. Had no search been conducted assessee would not have offered Rs.3 Crores as income for the year. Therefore the submission of the assessee is completely wrong. The declaration made by the assessee is because of the search and assessee has offered it in his return of income. The assessee’s case falls under the definition of undisclosed income. The conditions laid down in section 271AAB of the Act for levy of penalty are satisfied in the case of the assessee. First there was search under section 132 of the Act and the statement under section 132(4) of the Act was recorded. During the course of search assessee admitted undisclosed income of Rs.3 Crores and specified the manner in which such income has been derived and the same has been accepted in the return of income filed and due taxes have been paid. Therefore penalty under section 271AAB of the Act is automatic. The case of the assessee is also covered under section 271AAB (3)(c)(i)(ii) of the Act. Assessee declared additional income only because of the search. Therefore penalty initiated by the AO is within the purview of section 271AAB of the Act. In support of his arguments the learned DR relied on the Order in the case of Sandeep Chandak Vs. PCIT reported in (2018) 93 taxmann.com 406 (SC) and DCIT Vs. Tapadiya Construction Ltd., reported in (2025) 171 taxmann.com 810 (Pune – Trib.) and he further submitted that the case relied on by the learned Counsel is not applicable to the present facts of the case since in this case assessee has declared additional income of Rs.3 Crores because of the search which satisfy the condition for levy of penalty laid down in section 271AAB of the Act.
Page 9 of 12 6. Considering the rival submissions, we noted form the Order of lower authorities that during the course of search and seizure statement recorded under section 132(4) of the Act, assessee admitted Rs.3 Crores as undisclosed income and specified the manner in which such income has been derived. This is clear from the Order of learned CIT(A) at para 5.5(ii). The AO has imposed penalty of Rs.30 lakhs being 10% of Rs.3 Crores and the same has been offered by the assessee in his return of income and paid due taxes. Both the authorities below have found that if the search had not been conducted assessee would not have offered this Rs.3 Crores as income and for last 6 years the rate of NP is 5 to 6% and this year including the declared income is 8.23%. The case of the assessee comes under the definition of undisclosed income as mentioned in section 271AAB of the Act. For the sake of convenience, we are reproducing section 271AAB of the Act as under:
(1) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section-132 on or after the 1st day of July, 2012 but before the date on which the Taxation Laws (Second Amendment) Bill, 2016 receives the assent of the President, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him,— (a) a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year, if such assessee— (i) in the course of the search, in a statement under sub-section (4) of section-132, admits the undisclosed income and specifies the manner in which such income has been derived; (ii) substantiates the manner in which the undisclosed income was derived; and (iii) on or before the specified date— (A) pays the tax, together with interest, if any, in respect of the undisclosed income; and (B) furnishes the return of income for the specified previous year declaring such undisclosed income therein; (b) a sum computed at the rate of twenty per cent of the undisclosed income of the specified previous year, if such assessee— (i) in the course of the search, in a statement under sub-section (4) of section-132, does not admit the undisclosed income; and (ii) on or before the specified date— Page 10 of 12 (A) declares such income in the return of income furnished for the specified previous year; and (B) pays the tax, together with interest, if any, in respect of the undisclosed income; (c) a sum computed at the rate of sixty per cent of the undisclosed income of the specified previous year, if it is not covered by the provisions of clauses (a) and (b). (1A) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section-132 on or after the date on which the Taxation Laws (Second Amendment) Bill, 2016 receives the assent of the President, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him,— (a) a sum computed at the rate of thirty per cent of the undisclosed income of the specified previous year, if the assessee— (i) in the course of the search, in a statement under sub-section (4) of section-132, admits the undisclosed income and specifies the manner in which such income has been derived; (ii) substantiates the manner in which the undisclosed income was derived; and (iii) on or before the specified date— (A) pays the tax, together with interest, if any, in respect of the undisclosed income; and (B) furnishes the return of income for the specified previous year declaring such undisclosed income therein; (b) a sum computed at the rate of sixty per cent of the undisclosed income of the specified previous year, if it is not covered under the provisions of clause (a). (2) No penalty under the provisions of section-270A or clause (c) of sub- section (1) of section-271 shall be imposed upon the assessee in respect of the undisclosed income referred to in sub-section (1) or sub-section (1A). (3) The provisions of sections 274 and 275 shall, as far as may be, apply in relation to the penalty referred to in this section. Explanation.—For the purposes of this section,— (a) "specified date" means the due date of furnishing of return of income under sub-section (1) of section-139 or the date on which the period specified in the notice issued under section-153A for furnishing of return of income expires, as the case may be; (b) "specified previous year" means the previous year— (i) which has ended before the date of search, but the date of furnishing 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 Page 11 of 12 furnished the return of income for the previous year before the date of search; or (ii) in which search was conducted; (c) "undisclosed income" means— (i) 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— (A) 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 (B) otherwise not been disclosed to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner before the date of search; or (ii) 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.
During the course of hearing, the learned DR relied on the judgment of Hon’ble Apex Court in the case of Sandeep Chandak (supra) in which it has been held that assessee admits undisclosed income during the course of search and manner in which such income has been derived then provision of section 271AAB of the Act would automatically attract and a similar fact is also present and as per the observation of the learned CITA) as noted in his Order at para No.5.5(i,ii,iii), the conditions for imposing penalty under section 271AAB of the Act are satisfied. Therefore respectfully following the judgments relied on by the learned DR and on carefully going through the Order of the lower authorities, we dismiss appeal of the assessee.