Supreme Court of India
K. KRISHNAMURTHYversusTHE DEPUTY COMMISSIONER OF INCOME TAX
- Citation
- 2025 INSC 208
- Decided
- 12 February 2025
- Disposal
- Disposed off
- Bench
- B PARDIWALA
Holding
Penalty under Section 271AAA(1) is not levied on income for which the assessee satisfied all three conditions of Section 271AAA(2), and the specified previous year is the year in which the search was conducted, making only the undisclosed income of Rs.2,49,90,000 liable to a 10% penalty.
Summary
The appellant, K. Krishnamurthy, was searched under Section 132 of the Income Tax Act in November 2010, during which he disclosed an income of Rs.2,27,65,580 for AY 2011-12 and later, during assessment proceedings, disclosed an additional Rs.2,49,90,000 arising from land transactions. The Assessing Officer levied a penalty under Section 271AAA on the total assessed income of Rs.4,78,02,616, arguing that the appellant had not complied with the conditions of Section 271AAA(2). The appellant contended that the penalty should not apply to the income he had admitted and paid tax on during the search, and that the "specified previous year" was AY 2011-12, not AY 2010-11. The Supreme Court held that the appellant satisfied all three conditions of Section 271AAA(2) for the Rs.2,27,65,580, so no penalty could be imposed on that amount, and clarified that the "specified previous year" is the year in which the search was conducted. However, the Court found that the Rs.2,49,90,000 was undisclosed income discovered as a result of the search and not admitted during the search, making it liable to a 10% penalty. Consequently, the appellant was directed to pay penalty only on Rs.2,49,90,000.
Issues considered
- Whether compliance with all three conditions of Section 271AAA(2) is mandatory to exempt penalty.
- Whether the penalty under Section 271AAA can be reduced when tax and interest are paid with delay.
- Interpretation of the term ‘specified previous year’ under Explanation (b) to Section 271AAA.
- Interpretation of ‘undisclosed income’ and ‘found in the course of search’ under Explanation (a) to Section 271AAA.
Legislation cited
- Income Tax Act, 1961s. 132, s. 139(1), s. 142(1), s. 143(3), s. 260A, s. 271AAA
Subjects
Imposition of penaltyUndisclosed incomeSpecified previous yearPenalty where search has been initiatedSearch and seizure operationPenalty OrderAssessment orderCopies of sale deeds collected from the societyCausation for collecting the sale deeds from the SocietyExpression ‘found in the course of search’Investigation/interrogationPenalty provisionStrict construction
Judgment
[2025] 2 S.C.R. 557 : 2025 INSC 208
K. Krishnamurthy
v.
The Deputy Commissioner of Income Tax
(Civil Appeal No. 2411 of 2025)
13 February 2025
[J.B. Pardiwala and Manmohan,* JJ.]
Issue for Consideration
Matter pertains to imposition of penalty u/s.271AAA of the Income
Tax Act, 1961 on undisclosed income in the specified previous year.
Headnotes†
Income Tax Act, 1961 – s.271AAA – Penalty where search has
been initiated – ‘Undisclosed Income’ – ‘Specified previous
year’ – ‘Found in the course of search’ – Search and seizure
operation carried out at the appellant’s premises and the
appellant disclosed an income of certain amount – Order
imposing penalty u/s.271AAA passed against the appellant
for AY 2011- 2012 – Another order passed in respect of AY
2010-2011 imposing penalty at the rate of 10% on the entire
returned income – Tribunal allowed the application against
the Penalty Order in respect of AY 2010- 2011 accepting the
appellant’s case that 2009-10 cannot be the ‘specified previous
year’ for the purpose of s.271AAA, however the application
against the Penalty Order in respect of AY 2011-2012 rejected –
Thereafter, the appellant’s appeal rejected by the appellate
tribunal as also by the High Court – Correctness:
Held: By virtue of explanation b(ii), AY 2011-12-year in which
the search was conducted, is the specified previous year for the
purpose of s. 271AAA(1) – Appellant admitted Rs.2,27,65,580/- as
income for AY 2011-12 during the search as well as substantiated
the manner in which the said undisclosed income was derived and
paid tax together with interest thereon, albeit belatedly – Thus,
all the conditions mentioned in s.271AAA(2) satisfied and penalty
u/s.271AAA(1) not attracted on the said amount – Furthermore,
expression ‘found in the course of search’ is of a wide amplitude –
* Author
558 [2025] 2 S.C.R.
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It does not mean documents found in the assessee’s premises
alone during the search – At times, search of assessee leads to a
search of another individual and/or further investigation/interrogation
of third parties – All these steps and recoveries would fall within
the expression ‘found in the course of search’ – Appellant offered
Rs.2,49,90,000/- under the head income from other sources on
account of these land transactions during the course of assessment
proceedings only and not at any time during the search – Since
income of Rs.2,49,90,000/- constitutes undisclosed income found
during the search-copies of sale deeds collected from the society,
penalty u/s.271AAA(1) leviable on the said amount – Also, as the
said amount was not admitted in the declaration before the DDIT
during the course of search but was disclosed by the appellant
only during the assessment proceedings, and that too, after the
Assessing Officer had asked for copies of the sale deeds from
the Society – Exception carved out in s.271AAA(2) not attracted
to the said portion of the income – Appellant to pay penalty at the
rate of 10% on Rs.2,49,90,000/- and not on the entire returned
income. [Paras 30-43]
Income Tax Act, 1961 – s.271AAA explanation (a) – Expression
‘Undisclosed Income’ – Meaning of:
Held: s. 271AAA is a penalty provision, it has to be strictly
construed – Fact that the assessee has surrendered some
undisclosed income during the course of search or that the surrender
is emerging out of the statements recorded during the course of
search is not sufficient to fasten the levy of penalty – Onus is on the
Assessing Officer to satisfy the condition precedent stipulated in the
said Explanation, before the charge for levy of penalty is fastened
on the assessee – Thus, obligatory on the part of the Assessing
Officer to demonstrate and prove that undisclosed income of the
specified previous year was found during the course of search or
as a result of the search. [Paras 34, 35]
Income Tax Act, 1961 – s. 271AAA explanation (b) – Expression
‘specified previous year’ – Meaning of. [Para 36]
Income Tax Act, 1961 – s.271AAA – Interpretation of –
Explained. [Paras 29-36]
[2025] 2 S.C.R. 559
K. Krishnamurthy v.
The Deputy Commissioner of Income Tax
Case Law Cited
Ajay Kumar Sood Engineers and Contractors K N Kandla & Co.
v. DCIT, MANU/IG/0095/2024; Dilip N. Shroff v. CIT [2007] 7
SCR 499 : (2007) 6 SCC 329; DCIT v. Aryan Mining & Trading
Corporation Ltd., 2019 SCC OnLine ITAT 4649; PCIT v. Amul
Gabrani, ITA No.1251 of 2018 dated 24th July, 2024; Som Raj
and Others v. State of Haryana and Others [1990] 1 SCR 535 :
(1990) 2 SCC 653 – referred to.
Books and Periodicals Cited
Chaturvedi & Pithisaria’s Income Tax Law Seventh Edition –
referred to.
List of Acts
Income Tax Act, 1961.
List of Keywords
Imposition of penalty; Undisclosed income; Specified previous
year; Penalty where search has been initiated; Search and
seizure operation; Penalty Order; Assessment order; Copies of
sale deeds collected from the society; Causation for collecting
the sale deeds from the Society; Expression ‘found in the course
of search’; Investigation/interrogation; Penalty provision; Strict
construction.
Case Arising From
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2411 of 2025
From the Judgment and Order dated 02.08.2022 of the High Court
of Karnataka at Bengaluru in ITA No. 125 of 2017
Appearances for Parties
Sameer Abhyankar, Rahul Kumar, Aakash Thakur, Sarthak Dora,
Ms. Ayushi Bansal, Aryan Srivastava, Amish Tandon, Advs. for
the Appellant.
N Venkataraman, A.S.G., Raj Bahadur Yadav, H R Rao, Tejas
Patel, Mohd Akhil, Ms. Priyadarshini Priya, S A Haseeb, Navanjay
Mahapatra, Ms. Kiran Bala Sahay, Advs. for the Respondent.
560 [2025] 2 S.C.R.
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Judgment / Order of the Supreme Court
Judgment
Manmohan, J.
1. Leave granted.
2. The present appeal has been filed challenging the impugned judgment
and order dated 02nd August, 2022 passed by the High Court of
Karnataka at Bengaluru in I.T.A. No. 125 of 2017 whereby the High
Court dismissed the appeal preferred by the Appellant under Section
260A of the Income Tax Act, 1961 (for short ‘Act 1961’).
FACTS
3. The facts giving rise to the present appeal are that a Memorandum
of Understanding (‘MOU’) dated 19th January, 2009 was entered
into between Mr. Hashim Moosa on the one hand and the Appellant
as well as Mr. Surendra Reddy on the other, for procuring lands at
a certain price from the land procurers, i.e. the Appellant and Mr.
Surendra Reddy. As per Clause 10 of this MOU, Rs.10,00,000/-
(Rupees Ten lakhs only) was paid to the procurers for arranging
facilitation of transfer of land from the landowners to Mr. Hashim
Moosa/his nominees. No other payment, except a reimbursement
under Clause 11, was contemplated under this MOU.
4. A transaction was entered into between Mr.Hashim Moosa and the
Space Employees’ Co-operative Society Ltd. (in short ‘Society’) on
26th September, 2009. It was in order to facilitate purchase of land for
this transaction that the MOU dated 19th January, 2009 was entered
into by the Appellant with Mr. Hashim Moosa.
5. A search and seizure operation was carried out at the Appellant’s
premises on 25th November, 2010 under Section 132 of the Act
1961. As recorded in paragraph 4 of the assessment order dated 15th
March, 2013, the Appellant disclosed an income of Rs.2,27,65,580/-
(Rupees Two Crores Twenty Seven Lakhs Sixty Five Thousand Five
Hundred Eighty Only) as a consequence of the search and seizure.
6. A notice dated 21st August, 2012 under Section 142(1) of the Act
1961 was issued to the Appellant calling for return of income for
[2025] 2 S.C.R. 561
K. Krishnamurthy v.
The Deputy Commissioner of Income Tax
Assessment Year (‘AY’) 2011-2012. The Appellant filed his return
of income on 05th November, 2012. The Appellant returned a total
income of Rs.4,77,11,330/- (Rupees Four Crores Seventy Seven
Lakhs Eleven Thousand Three Hundred Thirty Only) for Previous
Year (‘PY’) 2010-2011, relevant to AY 2011-2012. It is pertinent to
mention that the due date for filing return of income for AY 2010-2011
expired on 31st July, 2010 in terms of Section 139(1) of the Act 1961.
7. The Respondent issued the Assessment Order dated 15th March,
2013 for PY 2010-2011 relevant to AY 2011-2012, in respect of the
Appellant. The total income assessed was Rs.4,78,02,616/- (Rupees
Four Crores Seventy Eight Lakhs Two Thousand Six Hundred Sixteen
Only). The relevant portion of the Assessment Order, which has
attained finality, is reproduced hereinbelow:-
“4. Declaration before the DDIT(Inv) during search
proceedings:
4.1. Space Employees’s Co-operative Housing Society
Limited entered into an MOU on 26-09-2009 with Mr.
Hashim Moosa for acquiring 120 acres (which was
further extended to 150 acres) of lands in Hoskote
Taluk for a consideration of Rs.74,26,980/- per acre.
The Society will pay Mr. Moosa Rs.73,26,980/- per acre
of registered land to and the balance Rs.1 lakh per
acre shall be deposited in a Joint Escrow Account till
the entire extent of 120 acres of land is registered in
favour of the Society.
4.2. To procure lands for the Society, Mr. Hashim
Moosa had entered into an MOU on 19-01-2009 with
Mr. K. Krishna Murthy and P. Surendra Reddy for
procuring lands @ Rs.70,00,000/- per acre.
4.3. Consequent to search action in your case, the
assesse had admitted income for the Asst. Years
2010-11 and 2011-12 before the DDIT(Inv.) as under:
For the Asst. Year 2011-12
Total area registered during 41 acres and Amount
the FY 2010-11 36 guntas (in Rs.)
Net Income from other sources 2,27,65,580
562 [2025] 2 S.C.R.
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“5. Transaction of lands belonging to Mr. Sharab
Reddy and NHR Prasad Reddy:
5.1. Mr. Krishnamurthy and Mr. Ananda Reddy have
transferred 16.25 acres of lands which are in the
names Mr. NHR Prasada Reddy and Mr. Sharab Reddy
in favour of the Society.
5.2. On the basis of the copies of sale deeds collected
from the Society, it was seen that Mr. N.H.R. Prasad
Reddy sold 7 acres and 36 guntas of land to the Society
and received total sale consideration of Rs.4,34,50,000/-.
Similarly, his brother Mr. N.H.Sharaba Reddy sold
10 acres and 33 guntas of lands to the Society and
received sale consideration of Rs.5,95,37,500/-. Overall
they had sold 18 acres and 29 guntas of land and
received total sale consideration of Rs.10,29,87,500/-.
The consideration received by them works out to
Rs.55,00,000/- per acre.
5.3. Though, the assessee had admitted that he had
undertaken transaction and had promised to get
alternative lands to Mr. NHR Prasad Reddy & Sharab
Reddy, he had not offered any income on this count
before the DDIT (Inv.) The assessee has offered
an amount of Rs.2,49,90,000/- during the course of
assessment proceedings under the head income from
other sources (income from assignment of rights)
being the difference between the cost of lands which
he has acquired on behalf of the brothers and cost of
lands at which it is transferred to society.”
(emphasis supplied)
8. On 30th September, 2013, an order imposing penalty under Section
271AAA of the Act 1961 was passed against the Appellant for AY
2011-2012. The Respondent imposed penalty on the Appellant solely
on the ground that the Appellant did not make payment of tax and
penalty in terms of Section 271AAA(2) of the Act 1961 after receipt
of Show Cause Notice and considering the entire received income
as the undisclosed income.
[2025] 2 S.C.R. 563
K. Krishnamurthy v.
The Deputy Commissioner of Income Tax
9. On the same day, another order imposing penalty under Section
271AAA of the Act 1961 was passed in respect of AY 2010-2011.
Penalty at the rate of 10% (Ten per cent) was imposed on the entire
returned income i.e. Rs.4,78,02,616/- (Rupees Four Crores Seventy
Eight Lakhs Two Thousand Six Hundred Sixteen Only) amounting to
Rs.47,80,261/- (Rupees Forty Seven Lakhs Eighty Thousand Two
Hundred Sixty One Only).
10. The CIT (Appeals)-4 Bangalore allowed ITA No.119 preferred against
the Penalty Order dated 30th September, 2013 in respect of AY 2010-
2011 while accepting the submission of the Appellant that 2009-10
cannot be the ‘specified previous year’ for the purpose of Section
271AAA of the Act 1961 and observing:-
“5.1 It is very evident from the facts of the case that the
penalty cannot be levied for AY 2010-11 and the action
of the AO struck down”
11. ITA No.120 preferred against the Penalty Order dated 30th September,
2013 in respect of AY 2011-2012 was however rejected while solely
relying on Section 271AAA(2) of the Act 1961 to hold:
“8. With respect to penalty for AY 2011-12, it is very clear
that the basic condition existing in the section has not
been fulfilled i.e. to say the assessee has not met up with
the liability prescribed under the section despite the time
limits set by the AO……..since the basic requirement of
section 271AAA has not been satisfied, as the assessee
has not met the liability after notices were issued and
sufficient opportunities were granted. If the contention of
the assessee is accepted then the penalty will never be
leviable and the section 271AAA will have no meaning at
all. Thus, I hold that the assessee is liable to be penalized
u/s.271AAA of the Act”.
12. The Income Tax Appellate Tribunal (‘ITAT’) vide order dated 17th
October, 2016 rejected the Appellant’s appeal against the order
dated 04th March, 2013 again on the ground of non-compliance with
Section 271AAA(2) of the Act 1961.
13. The Appellant preferred an appeal under Section 260A of the Act
1961, on the following substantial questions of law:-
564 [2025] 2 S.C.R.
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“1. Whether the compliance with all the three conditions
mentioned in Sub-section (2) of Section 271AAA mandatory
or not?
2. Whether penalty prescribed @ 10% of undisclosed
Income under Section 271AAA of the Act can be reduced
if the tax together with interest on the undisclosed income
as declared by the Assessee in the course of search in a
statement under Section 132(4) is partly complied with,
with a delay, in the absence of specific period for such
compliance specified in the Sub-clause (iii) of Section
271AAA of the Act?”
14. Vide the impugned judgment dated 02nd August, 2022, the High Court
dismissed the appeal of the Appellant. The relevant portion of the
impugned judgment is reproduced hereinbelow:-
“10. Undisputed facts of the case are, according to the
learned advocate for the assessee, the assessee had
admitted an undisclosed income of 2,27,65,580/- and
filed returns showing income of Rs.4,78,02,616/-. The
principal argument is that nothing was found during the
course of search; assessee had voluntarily filed return of
income more than what he had admitted before the DDIT.
According to him, machinery Section has thus failed and
therefore, penalty cannot be imposed.
11. Sub-section (1) of Section 271-AAA of the Act reads
as follows:
“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 June, 2007
[but before the 1st day of July, 2012], the assessee
shall pay by way of penalty, in addition to tax, if any,
payable by him, a sum computed at the rate of ten
per cent of the undisclosed income of the specified
previous year.”
12. Sub-section (2) makes it clear that Sub-section (1)
shall not apply if three conditions mentioned therein are
fulfilled.
[2025] 2 S.C.R. 565
K. Krishnamurthy v.
The Deputy Commissioner of Income Tax
13. Admittedly, as recorded by the Tribunal, third condition
namely, the payment of tax, together with interest, if any,
has not been fulfilled by the assessee.
14. In view of the above, first substantial questions raised
by the appellant is answered in favour of the Revenue
holding that compliance of all three conditions in Sub-
clause (2) of Section 271AAA of the Act are mandatory.
15. Second question with regard to reduction of penalty
commensurate with quantum of tax which the appellant has
deposited, is also answered against the assessee and in
favour of the revenue, because, admittedly, appellant had
not disclosed the income at all. But for search, the same
could not have been unearthed. Having filed the returns,
the assessee did not comply with condition No.3 in Sub-
Section (2). If the second question were to be answered
in favour of assessee, it will amount to placing premium
on a person w ho does not abide by law.
16. In view of the above, this appeal must fail and it is
accordingly dismissed.”
15. On 06th January, 2023, this Court was pleased to issue notice confined
to the second question urged before the High Court.
ARGUMENTS ON BEHALF OF THE APPELLANT
16. Learned counsel for the Appellant submitted that the Revenue
Authorities as well as the High Court, without expressly stating
so, have proceeded on the erroneous presumption that the levy
of penalty under Section 271AAA(1) of the Act 1961 is automatic
and that the only exception thereto was sub-clause (2) of Section
271AAA of the Act 1961.
17. He stated that the Revenue Authorities without satisfying themselves
as to the satisfaction of ‘undisclosed income’ as stipulated in Section
271AAA(1) of the Act 1961, levied the penalty. He pointed out
that in a similar situation, in Ajay Kumar Sood Engineers And
Contractors K N Kandla & Co. vs. DCIT [MANU/IG/0095/2024]
the ITAT Chandigarh Bench has held as under:-
“9. ……It seems to us that the ld CIT(A) was swayed
by the contention of the assessee in seeking immunity
566 [2025] 2 S.C.R.
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from levy of penalty u/s 271AAA(2) of the Act and in that
context, he apparently held that it is for the assessee
to demonstrate that income so surrendered falls in the
definition of undisclosed income as so defined. As we
have held earlier, it is for the Assessing Officer to record
a specific finding that undisclosed income as so defined
has been found based on tangible verifiable material found
during the course of search and the onus is thus on the
Assessing officer (and not on the assessee) to satisfy the
conditions before the charge for levy of penalty is fastened
on the assessee. The assessee might be seeking immunity
under section 271AAA(2) but before that the charge for levy
of penalty has to be satisfied by the AO and for that, it for
the AO to record a specific finding as to the fulfillment of
conditions specified therein and which apparently has not
been fulfilled in the instant case….” (emphasis supplied).
18. He submitted that the authorities and the High Court ignored the
law laid down by this Court in Dilip N. Shroff vs. CIT [(2007) 6
SCC 329], wherein it was held that the imposition of penalty is not
mandatory. He pointed out that in the context of Section 271AAB,
analogous to the provision in question, i.e. Section 271AAA, the
aforesaid proposition of law was applied by the ITAT, Kolkata Bench
in DCIT vs. Aryan Mining & Trading Corporation Ltd. [2019 SCC
OnLine ITAT 4649]. The use of the word ‘may’ in the provision (as
is the case in Section 271AAA) was held critical in that decision.
19. He further submitted that Section 271AAA(1) of the Act 1961 enables
the Assessing Officer to issue a direction for imposition of penalty
being a sum “computed at the rate of ten per cent of the undisclosed
income of the specified previous year”. According to him, the two terms
‘undisclosed income’ and ‘specified previous year’ are defined in the
Explanation appended to Section 271AAA. Therefore, he submitted
that unless there is undisclosed income in terms of the said provision
in the specified previous year an order of levy of penalty cannot be
issued by the Assessing Officer.
20. He submitted that the MOU dated 19th January, 2009 at the highest
set out payments of Rs.10,00,000/- (Rupees Ten Lakhs Only) to the
Appellant and therefore by itself could not have formed the basis for
the Penalty Order dated 30th September, 2013.
[2025] 2 S.C.R. 567
K. Krishnamurthy v.
The Deputy Commissioner of Income Tax
21. He further submitted that the declaration before the DDIT(Inv.)
during search proceedings was made voluntarily. There was no
demonstrable, direct co-relation between the declaration in paragraph
4 of the Assessment Order and the MOU dated 19th January, 2009.
Moreover, paragraph 5 of the Assessment Order also most certainly
has no co-relation with the MOU dated 19th January, 2009 since as
recorded in paragraph 5.2 itself, the transactions referred to therein
have been found in “copies of sale deeds collected from the Society”
and not the Appellant. Therefore, on both counts, he stated that a
sum of Rs.4,78,02,616/- (Rupees Four Crores Seventy Eight Lakhs
Two Thousand Six Hundred Sixteen Only) was not the undisclosed
income of the Appellant for Financial Year (‘FY’) 2010-2011.
22. In the context of the meaning of ‘undisclosed income’, the Appellant
relied upon DCIT vs. Aryan Mining & Trading Corporation Ltd.,
2019 SCC Online ITAT 4649 wherein it has been held:-
“21. …..From bare perusal of the definition of the word
“undisclosed income” we find that in order to bring a
receipt or specie of income within the meaning of the
said expression, it is obligatory for the AO to demonstrate
and prove that the income is represented either wholly or
partly by any money, bullion, jewellery or other valuable
article or thing found in the course of search u/s 132 and
which was not recorded on or before the date of search
in the books of accounts or other documents maintained
in the normal course relating to such previous year or
otherwise not disclosed to the Commissioner before the
date of search…..
22. We however find that nothing has been brought on
record by the AO which in any manner even suggested
let alone proved with cogent material that the said income
was actually represented either wholly or partly by any
sum of money, bullion, jewellery or other valuable article
or thing and which was found as a result of search......”
23. Without prejudice to the above submissions, he stated that the penalty
could not have been imposed on the entire returned income for FY
2010-2011. At the highest, and without prejudice to the submission
that the Declaration in paragraph 4 of the assessment order had no
co-relation to the documents seized during search, he submitted that
568 [2025] 2 S.C.R.
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penalty could have been imposed on the alleged undisclosed income
of Rs.2,27,65,580/- (Rupees Two Crores Twenty Seven Lakhs Sixty
Five Thousand Five Hundred Eighty Only) referred to in the said
declaration at paragraph 4 of the Assessment Order.
ARGUMENTS ON BEHALF OF THE RESPONDENT
24. Per contra, learned counsel for Respondent-Income Tax Department
submitted that there were concurrent findings of all the authorities
below against the Appellant upholding the Penalty amount on the
entire income returned as he had failed to meet the conditions of
the section.
25. He emphasised that there was a search and the assessment was
completed at Rs.4,78,02,616/- (Rupees Four Crores Seventy Eight
Lakhs Two Thousand Six Hundred Sixteen Only). He submitted that
the charging section is attracted as the assessee/Appellant had
failed to comply with the mandatory conditions of Section 271AAA
(2) of the Act 1961.
26. He submitted that the assessee had failed to adhere to any of the
conditions specified under the aforesaid Section as the assessee
had never admitted to any undisclosed income and the income was
detected only after a search and the assessee never disclosed or
explained the manner in which that income was derived/earned and
lastly, he did not pay the tax and the interest thereon until 2016 i.e.
after three years of the assessment order.
27. He pointed out that the Delhi High Court in the case of PCIT vs.
Amul Gabrani (ITA No.1251 of 2018 dated 24th July, 2024) has held
that to claim the benefit of the Section 271AAA(2) of the Act 1961,
the assessee has to satisfy the requirements/conditions of the said
sub-Section. He pointed out that the judgment of the Delhi High Court
in Amul Gabrani (supra) was carried in Appeal before this Court
by the assessee vide Special Leave Petition (Civil) Dy. No.43696
of 2024, wherein this Court upholding the High Court judgment and
while dismissing the Special Leave Petition observed as under:-
“We concur with the view taken by the Delhi High Court
about the interpretation of sub-section 2 of Section 271AAA
of the Income Tax Act, 1961”.
28. He, therefore, prayed that the impugned judgment be upheld.
[2025] 2 S.C.R. 569
K. Krishnamurthy v.
The Deputy Commissioner of Income Tax
REASONING
29. Having heard learned counsel for the parties, this Court is of the
view that the present case revolves around the interpretation of
Section 271AAA of the Act 1961. Since the said Section is a complete
code in itself, the relevant portion of the said Section is reproduced
hereinbelow:-
“271AAA. Penalty where search has been initiated.—
(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 June, 2007, [but before the
1st day of July, 2012], the assessee shall pay by way of
penalty, in addition to tax, if any, payable by him, a sum
computed at the rate of ten per cent of the undisclosed
income of the specified previous year.
(2) Nothing contained in sub-section (1) shall apply if
the assessee, —
(i) in the course of 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) pays the tax, together with interest, if any, in respect
of the undisclosed income.”
xxx xxx xxx
Explanation.—For the purposes of this section,—
(a) “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—
570 [2025] 2 S.C.R.
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(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) “specified previous year” means the previous year—
(i) which has ended before the date of search, but the
date of filing 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 said date; or
(ii) in which search was conducted.”
SECTION 271AAA(1)
30. This Court is of the view that Section 271AAA(1) of the Act 1961
stipulates that the Assessing Officer may, notwithstanding anything
contained in any other provisions of the Act 1961, direct the
Assessee, in a case where search has been carried out to pay by
way of a penalty, in addition to the tax, a sum computed at the rate
of 10% (Ten per cent) of the undisclosed income of the specified
previous year. However, the imposition of penalty is not mandatory.
Consequently, penalty under this Section may be levied if there is
undisclosed income in the specified previous year.
31. This Court is of the view that though under Section 271AAA(1)
of the Act 1961, the Assessing Officer has the discretion to levy
penalty, yet this discretionary power is not unfettered, unbridled and
uncanalised. Discretion means sound discretion guided by law. It must
be governed by rule, not by humour, it must not be arbitrary, vague
and fanciful. [See: Som Raj and Others vs. State of Haryana and
Others, (1990) 2 SCC 653].
SECTION 271AAA(2)
32. Section 271AAA(2) of the Act 1961 stipulates that Section 271AAA(1)
shall not be applicable if the assessee–(i) in a statement under
sub-section (4) of Section 132 in the course of the search, admits
the undisclosed income and specifies the manner in which such
[2025] 2 S.C.R. 571
K. Krishnamurthy v.
The Deputy Commissioner of Income Tax
income has been derived; (ii) substantiates the manner in which the
undisclosed income was derived; and (iii) pays the tax, together with
interest, if any, in respect of the undisclosed income. (See: Chaturvedi
& Pithisaria’s Income Tax Law Seventh Edition).
33. Consequently, if the aforesaid conditions (i) and (ii) are satisfied and
the tax together with interest on the undisclosed income is paid upto
the date of payment, even with delay, in the absence of specific period
of compliance, then penalty at the rate of 10% (Ten per cent) under
Section 271AAA of the Act 1961 is normally not leviable.
EXPRESSION ‘UNDISCLOSED INCOME’
34. The expression ‘Undisclosed Income’ has been defined in Explanation
(a) appended to Section 271AAA of the Act 1961. This Court is of
the view that as Section 271AAA is a penalty provision, it has to
be strictly construed. The fact that the assessee has surrendered
some undisclosed income during the course of search or that the
surrender is emerging out of the statements recorded during the
course of search is not sufficient to fasten the levy of penalty. The
onus is on the Assessing Officer to satisfy the condition precedent
stipulated in the said Explanation, before the charge for levy of
penalty is fastened on the assessee.
35. Consequently, it is obligatory on the part of the Assessing Officer
to demonstrate and prove that undisclosed income of the specified
previous year was found during the course of search or as a result
of the search.
EXPRESSION ‘SPECIFIED PREVIOUS YEAR’
36. Further, the expression ‘specified previous year’ has been defined in
Explanation (b) appended to Section 271AAA of the Act 1961. Since
in the present case, the search was conducted on 25th November,
2010 and as the year for filing returns under Section 139(1) of the
Act 1961 which ended prior to that date had expired on 31st July,
2010, Explanation b(i) is not applicable so as to make AY 2010-11
the specified previous year. Consequently, by virtue of Explanation
b(ii), AY 2011-12 (the year in which the search was conducted) is
the specified previous year in the present case for the purpose of
Section 271AAA(1) of the Act 1961.
572 [2025] 2 S.C.R.
Digital Supreme Court Reports
NO PENALTY IS ATTRACTED ON Rs.2,27,65,580/-.
37. In the present case, the Appellant admitted Rs.2,27,65,580/-(Rupees
Two Crores Twenty Seven Lakhs Sixty Five Thousand Five Hundred
Eighty Only) as income for AY 2011-12 during the search before
DDIT (Inv.) as well as substantiated the manner in which the said
undisclosed income was derived and paid tax together with interest
thereon, albeit belatedly.
38. Consequently, all the conditions precedent mentioned in Section
271AAA(2) stand satisfied and, therefore, penalty under Section
271AAA(1) is not attracted on the said amount of Rs.2,27,65,580/-
(Rupees Two Crores Twenty Seven Lakhs Sixty Five Thousand Five
Hundred Eighty Only).
HOWEVER, PENALTY AT THE RATE OF 10% IS LEVIABLE ON
Rs.2,49,90,000/-
39. However, in the assessment order dated 15th March, 2013 passed
under Section 143(3) of the Act 1961, which has attained finality,
it is an admitted position that the Appellant had not offered in the
declaration before the DDIT(Inv.) any income on land transactions
belonging to Mr. Sharab Reddy and Mr. NHR Prasad Reddy. From the
assessment order dated 15th March, 2013 (reproduced hereinabove),
it is apparent that the Appellant offered Rs.2,49,90,000/- (Rupees
Two Crores Forty Nine Lakhs Ninety Thousand Only) under the head
income from other sources on account of these land transactions
during the course of assessment proceedings only and not at any
time during the search.
40. The argument that the said transactions had not been found in the
search at the Appellant’s premises but had been found due to ‘copies
of sale deeds collected from the society’ cuts no ice with this Court
as the sale deeds had been collected as a result of the search and
in continuation of the search. This Court is of the view that as the
causation for collecting the sale deeds from the Society was the
search at the Appellant’s premises, it cannot be said that the said
documents were not found in the course of the search.
41. Further, this Court is of the opinion that the expression ‘found in the
course of search’ is of a wide amplitude. It does not mean documents
found in the assessee’s premises alone during the search. At times,
[2025] 2 S.C.R. 573
K. Krishnamurthy v.
The Deputy Commissioner of Income Tax
search of an assessee leads to a search of another individual and/
or further investigation/interrogation of third parties. All these steps
and recoveries therein would fall within the expression ‘found in the
course of search’.
42. Since income of Rs.2,49,90,000/- (Rupees Two Crores Forty Nine
Lakhs Ninety Thousand Only) constitutes undisclosed income found
during the search, penalty under Section 271AAA(1) of the Act 1961
is leviable on the said amount. Also, as the said amount was not
admitted in the declaration before the DDIT(Inv.) during the course of
search but was disclosed by the Appellant only during the assessment
proceedings, and that too, after the Assessing Officer had asked for
copies of the sale deeds from the Society, this Court is of the view
that the exception carved out in Section 271AAA(2) is not attracted
to the said portion of the income.
CONCLUSION
43. Keeping in view the aforesaid, the present appeal is disposed of
with a direction to the Appellant to pay penalty at the rate of 10%
(Ten per cent) on Rs.2,49,90,000/- (Rupees Two Crores Forty Nine
Lakhs Ninety Thousand Only) and not Rs.4,78,02,616/- (Rupees Four
Crores Seventy Eight Lakhs Two Thousand Six Hundred Sixteen
Only). Pending applications, if any, also stand disposed of.
Result of the case: Appeal disposed of.
†
Headnotes prepared by: Nidhi Jain
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