The Supreme Court of India recently affirmed that the exception to penalty encompassed under Section 271AAA(2) of the Income Tax Act, 1961 shall be applicable if the Assessee has declared the undisclosed income only during the stage of assessment proceedings and not during search, even if requisite taxes were paid voluntarily.
The decision was rendered by the Supreme Court while adjudicating a Civil Appeal filed by K. Krishnamurthy against an order passed by the Karnataka High Court which dismissed the appeal filed by the Assessee under Section 260A of the Income Tax Act, 1961.
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The case follows a Memorandum of Understanding (MOU) dated January 19, 2009 entered into by K. Krishnamurthy, Surendra Reddy, and Hashim Moosa for procuring land. The MOU had no monetary transactions involved except for ₹10,00,000/- paid to the procurers for arranging facilitation of transfer of land from the landowners to Mr. Hashim Moosa and his nominees.
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A search and seizure operation was conducted on November 25, 2010, at the premises of K. Krishnamurthy during which he revealed an income of ₹2,27,65,580/-. Following the issuance of a notice, the Assessee filed a belated return of income for the Previous Year (P.Y.) 2010- 2011, relevant to Assessment Year (A.Y.) 2011-2012 declaring additional income of ₹2,49,90,000.
Assessing a total income of ₹4,78,02,616/-, the Assessing Officer (AO) slapped a penalty at 10% of the entire returned income, amounting to ₹47,80,261 on the ground that Krishnamurthy had failed to meet the conditions under Section 271AAA(2). Following failed appeals before the Appellate Authority and the Karnataka High Court, the present Appeal was filed.
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Sameer Abhyankar appearing for the Petitioner contended that the penalty was imposed without verifying whether the income was truly ‘undisclosed’ as per Section 271AAA(1).
Whereas, Raj Bahadur Yadav appearing for the Revenue relied on the decision of the Delhi High Court in PCIT vs. Amul Gabrani (2024) to claim that an arraigned assessee shall comply with the triplet conditions of admission of undisclosed income, explanation of its source, and timely tax payment to claim exemption from penalty.
A Division Bench of Justice J.B. Pardiwala and Justice Manmohan observed that the Appellant had only disclosed part of the income during search, while ₹2,49,90,000 was admitted later during assessment, justifying the penalty. Being so, the Apex Court clarified that the term ‘found in the course of search’ is of wide amplitude and includes subsequent recoveries linked to the search. Since the income in question was discovered through sale deeds obtained as a result of the search, it was rightly categorized as undisclosed.
The Supreme Court disposed of the appeal levying a penalty of 10% on the ₹2,49,90,000 revealed during assessment proceedings.
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