Case Note & Summary
The appeal arose from a penalty order under Section 271AAA of the Income Tax Act, 1961, for Assessment Year 2011-2012. The appellant, K. Krishnamurthy, was involved in land procurement and during a search under Section 132, he admitted undisclosed income of Rs.2,27,65,580. He filed a return showing total income of Rs.4,78,02,616. The Assessing Officer imposed a penalty of 10% on the entire returned income under Section 271AAA(1), citing non-compliance with condition (iii) of Section 271AAA(2) (payment of tax and interest). The CIT(Appeals) upheld the penalty for AY 2011-2012, and the ITAT and High Court affirmed. The Supreme Court granted leave confined to the second question: whether penalty can be reduced if the assessee partly complies with condition (iii) with delay. The Court held that compliance with all three conditions is mandatory, but penalty under Section 271AAA(1) is computed only on undisclosed income, not the entire returned income. Since the assessee had partly paid tax, the penalty should be proportionate to the undisclosed income. The Court set aside the impugned order and remanded the matter to the Assessing Officer to recompute the penalty on the undisclosed income of Rs.2,27,65,580.
Headnote
A) Income Tax - Penalty under Section 271AAA - Mandatory Conditions - Section 271AAA(2) of the Income Tax Act, 1961 - The court held that compliance with all three conditions in Section 271AAA(2) is mandatory for immunity from penalty under Section 271AAA(1). The assessee must admit undisclosed income, substantiate the manner of deriving such income, and pay tax and interest. (Paras 13-14) B) Income Tax - Penalty under Section 271AAA - Proportionate Penalty - Section 271AAA(1) of the Income Tax Act, 1961 - The court held that penalty under Section 271AAA(1) is computed at 10% of the undisclosed income, not the entire returned income. If the assessee partly complies with condition (iii) by paying some tax, the penalty should be reduced proportionately. (Paras 15-16)
Issue of Consideration
Whether compliance with all three conditions in Section 271AAA(2) of the Income Tax Act, 1961 is mandatory, and whether penalty under Section 271AAA(1) can be reduced if the assessee partly complies with condition (iii) with delay.
Final Decision
The Supreme Court set aside the impugned judgment and order of the High Court and remanded the matter to the Assessing Officer to recompute the penalty under Section 271AAA(1) on the undisclosed income of Rs.2,27,65,580 only, after giving the appellant an opportunity of hearing.
Law Points
- Section 271AAA penalty is not automatic
- compliance with all three conditions in Section 271AAA(2) is mandatory
- penalty must be computed only on undisclosed income
- part compliance with condition (iii) does not attract full penalty
