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Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: SHRI B.M. BIYANI, & SHRI PARESH M. JOSHI
आदेश/ O R D E R
Per B.M. Biyani, AM:
Feeling aggrieved by order of first-appeal dated 13.02.2025 passed by CIT(A)-3, Bhopal [“CIT(A)”] which in turn arise out of penalty-order dated 18.01.2021 passed by Central Circle-1, Bhopal [“AO”] u/s 271AAB of Income-tax Act, 1961 [“the Act”] for Assessment-Year [“AY”] 2017-18, the assessee has filed this appeal on the grounds as mentioned in Form No. 36 (Appeal Memo).
The background facts leading to this appeal are such that a search u/s 132 of the Act was conducted by Income-tax Department upon assessee on 04.08.2017 pursuant to which the assessments for AYs 2012- 13 to 2018-19 were framed u/s 153A/143(3). In present appeal, we are Page 1 of 11 concerned with AY 2017-18 for which the assessee filed original return u/s 139 on 19.07.2017 declaring a total income of Rs. 8,23,530/-. However, the assessee re-filed return in response to notice issued by AO u/s 153A after search, declaring a total income of Rs. 10,28,200/- after declaring an “additional income” of Rs. 2,04,670/-. While completing assessment, the AO accepted the total income of Rs. 10,28,200/- declared by assessee without any variation. Thus, there was no dispute between assessee and AO for taxation of additional income. However, the AO initiated proceeding for imposition of penalty u/s 271AAB qua the additional income of Rs. 2,04,670/- through show-cause notice dated 11.12.2019. Ultimately, the AO passed penalty-order dated 18.01.2021 imposing a penalty of Rs. 1,22,802/- (rounded off to Rs. 1,22,800/-) equal to 60% of “additional income”. Aggrieved, the assessee carried matter in first-appeal to CIT(A) and made a detailed submission. The CIT(A) reduced quantum of penalty from 60% to 30% and allowed part-relief. Still aggrieved, the assessee has come in next appeal before us challenging the orders of lower-authorities.
Ld. AR for assessee carried us to the assessment-order, penalty-order, order of first-appeal and the documents filed in paper-book. He submitted that the assessee declared additional income of Rs. 2,04,670/- [Rs. 1,48,354 (+) Rs. 56,318] in the return of income filed in response to notice u/s 153A on two counts as under:
Page 2 of 11 (i) The assessee received maturity proceed of Rs. 8,54,438/- from Kotak
Life Insurance policy and declared the same as ‘exempt income u/s 10(10D)’ in the original return of income (Paper-Book Pages 6-9) filed u/s 139. However, at the time of re-filing return in response to notice u/s 153A, the assessee came to know that the policy taken by assessee was not entitled to exemption u/s 10(10D). Therefore, the assessee declared taxable portion of Rs. 1,48,354/- embedded in the maturity proceed of Rs. 8,54,438/- received from insurance company.
(ii) The assessee was having interest income of Rs. 56,318/- from bank but the same was not declared in original return under the impression that bank interest was not taxable. However, at the time of re-filing return in response to notice u/s 153A, the assessee re-considered the same as taxable income and declared income of Rs. 56,318/- in return.
Having explained the details of additional income of Rs. 2,04,670/-, Ld. AR drew us to Para 6-7 of penalty-order to show that the AO has imposed penalty u/s 271ABB qua the additional income of Rs. 2,04,670/- by citing the reasons that (i) the said additional was un-disclosed in original return u/s 139 and therefore the assessee has concealed the same in original return, and (ii) had there been no search, the assessee would have not disclosed such additional income and the same would have been evaded.
During first-appeal, the CIT(A) concurred with these observations of AO and Page 3 of 11 concluded that the additional income will fall in the purview of ‘undisclosed income’ as per definition given in clause (c) of Explanation to section 271AAB.
Ld. AR thereafter submitted that the assessment-order passed by AO does not refer any “incriminating material” having been found during search nor it is a case of any “surrender” made by assessee during search. The AO has merely assessed the “additional income” offered by assessee in the return of income filed in response to notice u/s 153A. Despite this, the AO has imposed penalty u/s 271AAB by making “his self-made unrelated observations” that (i) the said additional was un-disclosed in original return u/s 139(1) and therefore the assessee has concealed the same in original return, and (ii) had there been no search, the assessee would have not disclosed such additional income and the same would have been evaded. Ld. AR contended that while making such observations, the AO has travelled beyond the scope and ambit of section 271AAB. To show this, Ld. AR carried us to the relevant portion of section 271AAB reading as under:
“(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
Page 4 of 11 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). XXX 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 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 Page 5 of 11
(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.” [emphasis supplied] 6. Ld. AR submitted that a bare reading of above provision shows that the section prescribes penalty @30% or 60% of the “undisclosed income” and the term “undisclosed income” has also been defined by Parliament in Explanation (c) to section 271AAB itself. The said Explanation [re-produced in preceding para and emphasised in bold letters] prescribes that “undisclosed income” means (i) any income represented 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 u/s 132, or (ii) any income represented by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course which is found to be false and would not have been found to be so had the search not been conducted. He submitted that in present case of assessee, the AO has simply assessed the “additional income” already included by assessee in the return of income and moreover the said “additional income” was in the form of ‘taxable portion of maturity receipt of life insurance’ and ‘bank interest’. Ld. AR contended that the additional
Page 6 of 11 income offered by assessee is neither represented by ‘any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions’ so as to fall in sub-clause (i) of clause (c) of Explanation to section 271AAB nor ‘any entry in respect of an expense recorded in the books of account or other documents maintained in normal course’ so as to fall in sub-clause (ii) of clause (c) of Explanation to section 271AAB. Therefore, when there is no “undisclosed income” falling within sub-clause (i) or sub-clause (ii) of clause (c) of the Explanation, the AO had no jurisdiction to invoke section 271AAB and impose penalty thereunder. Ld. AR submitted that the AO has given “his self-made unrelated observations” not known to the provision of section 271AAB.
Therefore, the penalty imposed by AO and upheld by CIT(A) is illegal and deserves to be quashed.
Per contra, Ld. DR for revenue re-iterated the observations made by AO in penalty-order [the very same observations are also mentioned by CIT(A) in impugned order of first-appeal]. Since we have already noted AO’s observations in earlier para, we do not wish to repeat the same. Additionally, Ld. DR submitted that the “additional income” offered by assessee very much falls in sub-clause (ii) of clause (c) of Explanation to section 271AAB.
He referred the language of said sub-clause (ii) reading as under:
“(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 Page 7 of 11 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.” [emphasis supplied] He submitted that the conjunction “or” has been used in above language and hence there are two independent parts of sub-clause (ii). According to him, second part starting after “or” is independent and the assessee’s case falls therein. He made a particular emphasis to the words appearing therein reading thus: “which is found to be false and would not have been found to be so had the search not been conducted.” With these submissions, he requested to uphold the penalty.
In rejoinder, Ld. AR for assessee did not agree with the interpretation given by Ld. DR. He submitted that the conjunction “or” has been used in- between the terms “books of accounts” and “documents” only. However, the provision of sub-clause (ii) is applicable only if there is “any income represented by any entry in respect of an expense recorded in the books of account or documents …..”. Therefore, there has to be an entry of ‘expense’ in order to attract sub-clause (ii). Since in present case, the ‘additional income’ offered by assessee in the form of ‘taxable portion of maturity proceed of life insurance’ and ‘bank interest’ is not an entry of ‘expense’, the sub-clause (ii) is not applicable at all.
We have considered rival contentions of both sides and perused the case-record. We have also examined the provisions of section 271AAB as noted above. The learned Representatives of both sides are ad idem that for Page 8 of 11 levy of penalty u/s 271AAB, the existence of “undisclosed income” is must.
Then, the limited question which calls for our adjudication is whether or not the ‘additional income’ of Rs. 2,04,670/- offered by assessee in the return filed in response to notice u/s 153A consisting of ‘taxable portion in maturity proceed of life insurance’ and ‘bank interest’ falls within the definition of ‘undisclosed income’ as prescribed in clause (c) of Explanation to section 271AAB? The AO was influenced to impose penalty taking into account aspects that the assessee did not disclose the additional income in return originally filed u/s 139(1) and that had there been no search, the assessee would not have offered the additional income. However, these points considered by AO are not relevant in so far as the provision of section 271AAB is concerned. We find that the Parliament has in its own wisdom prescribed the definition of ‘undisclosed income’ in very clear terms in clause (c) of Explanation to section 271AAB and not left the same for the discretion or wisdom of tax payers or tax authorities. As per prescribed definition, the “undisclosed income” can have certain forms. While sub- clause (i) of clause (c) of the Explanation requires any money, bullion, jewellery or valuable article or things or any entry in books of accounts or other documents or transactions found in the course of search, the sub- clause (ii) requires an entry in respect of expenses recorded in the books of accounts or other documents maintained in the normal course. In present case, there is none. Therefore, the case of assessee does not have Page 9 of 11 ‘undisclosed income’ and consequently the AO is wrong in invoking section 271AAB on the basis of his self-made unrelated observations.
The Ld. DR for revenue has sought to place an interpretation that because of use of conjunction “or” in the language of sub-clause (ii), there are two distinct parts of sub-clause (ii). His attempt is to submit that the part of sentence starting after “or” is an independent part which is nothing to do with the part of sentence occurring before “or”. We are afraid to accept such an interpretation. We agree with the submission of Ld. AR that the conjunction “or” has been used in-between the terms “books of accounts” and “documents” only, otherwise there is a single sentence throughout. Ld. AR is correct in submitting that the entire sub-clause (ii) shall apply only if there is “any income represented by any entry in respect of an expense recorded in the books of account or documents …..”. Therefore, there has to be an entry of ‘expense’ in order to attract sub-clause (ii).
Accordingly, we reject the interpretation given by Ld. DR. Since in present case, the ‘additional income’ offered by assessee in the form of ‘taxable portion of maturity proceed of life insurance’ and ‘bank interest’ is not an entry of ‘expense’, the sub-clause (ii) is not applicable at all.
In view of above discussions and for the reasons stated therein, we have no hesitation in accepting assessee’s claim that the penalty u/s 271AAB was not imposable in present case there being no “undisclosed
Page 10 of 11 income”. We, therefore, allow the claim of assessee and delete the penalty imposed by AO. The assessee succeeds in this appeal.
Resultantly, this appeal is allowed.
Order pronounced in open court on 28/11/2025