I told the search party the money was my unaccounted income. Is that enough to escape s.271AAA penalty?
No, not by itself. The Delhi High Court held that all three conditions in s.271AAA(2) must be fulfilled before the escape route opens. The assessee had said the amounts advanced were her unaccounted income for the year, but did not specify how she had derived that income or what head it fell under - rent, capital gain, professional income, business income out of money lending, or the source of the money. Unless such facts are given with some specificity the requirement of substantiating the manner is not met. The appellate authorities had misdirected themselves and the penalty was restored.
Decided by the High Court (S. Ravindra Bhat J and A.K. Chawla J) on 2018-03-12, reported as ITA 672/2016 (High Court of Delhi at New Delhi). It bears on section 271AAA, section 271AAA(2), section 132, section 132(4), section 271(1)(c), section 143(2), section 143(3), section 260A of the Income Tax Act 1961, in Penalty and Search, Survey & Block Assessment matters.
This is the case the Revenue relies on when an assessee has answered a question about the source and answered it in one line. It sets the standard for what an answer in a s.132(4) statement has to contain: a head of income and a source, not a label. Read it together with PCIT v Mukeshbhai Ramanlal Prajapati, which deals with the different situation where no question was ever put.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The Bhushan Steel group was searched under s.132 on 3 March 2010 and the assessee was covered by the search. She filed a return for AY 2010-11 on 31 July 2010 declaring income of Rs. 20,47,14,190, and an order under s.143(3) was passed on 30 December 2011 assessing the total income at the returned figure. During the assessment the Assessing Officer noticed that the assessee had reported undisclosed income earned during the financial year 2009-10 to the extent of Rs. 20 crores during and after the search, relating to material found and seized in the search, and that s.271AAA applied to it. He initiated penalty proceedings on the ground that she had not specified the manner in which the undisclosed income was earned and had failed to substantiate it, and imposed penalty of Rs. 2 crore by order dated 27 June 2012. The CIT (Appeals) deleted the penalty by order dated 5 July 2013, following a Tribunal order in the case of Sh. Neeraj Singal of the same group, in which the Tribunal had held that no specific query had been raised by the authorised officer about the manner of deriving the income. The Tribunal affirmed the CIT (Appeals). The Revenue appealed on the question whether the Tribunal had erred in deleting the penalty of Rs. 20,000,000.
The appeal was allowed and the substantial question of law answered in favour of the Revenue. Where an assessee seeks the escape route in s.271AAA(2), all three conditions in that sub-section must necessarily be fulfilled. A statement that the sums advanced were undisclosed income, without specifying how that income was derived or what head it fell in, does not satisfy the requirement of substantiating the manner in which the undisclosed income was derived, and the lower appellate authorities misdirected themselves in holding that the conditions were satisfied. No costs.
The Court applied the Supreme Court's construction of the pari materia Explanation 5 to s.271 in Gebilal Kanhaialal, under which the immunity has three conditions and the third, payment of tax with interest, carries no time limit. Turning to s.271AAA, it noted the provision's purpose: penalty at 10 per cent of the undisclosed amount declared where the conditions in sub-section (2) are not met, which is a markedly lighter treatment than s.271(1)(c), and Parliament having given a different treatment to income disclosed during a search, an assessee who wishes to take the escape route must satisfy all three conditions. It also referred to the Supreme Court's decision in MAK Data (P) Ltd, set out as an extract, on the weight to be given to a plea of voluntary disclosure. On the facts, the assessee had merely stated that the sums advanced were undisclosed income and had not said how she derived that income or under what head it fell, whether rent, capital gain, professional income, business income out of money lending, or the source of the money. Without such specificity the substantiation requirement was not met.
Unless such facts are mentioned with some specificity, it cannot be said that the assessee has fulfilled the requirement that she, in her statement (under Section 132 (4)) "substantiates the manner in which the undisclosed income was derived".
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Handle my notice → Ask a CA on WhatsAppNo, not by itself. The Delhi High Court held that all three conditions in s.271AAA(2) must be fulfilled before the escape route opens. The assessee had said the amounts advanced were her unaccounted income for the year, but did not specify how she had derived that income or what head it fell under - rent, capital gain, professional income, business income out of money lending, or the source of the money. Unless such facts are given with some specificity the requirement of substantiating the manner is not met. The appellate authorities had misdirected themselves and the penalty was restored. This was decided by the High Court (S. Ravindra Bhat J and A.K. Chawla J) and bears on section 271AAA, section 271AAA(2), section 132, section 132(4), section 271(1)(c), section 143(2), section 143(3), section 260A of the Income Tax Act 1961. It is reported as ITA 672/2016 (High Court of Delhi at New Delhi). This is the case the Revenue relies on when an assessee has answered a question about the source and answered it in one line. It sets the standard for what an answer in a s.132(4) statement has to contain: a head of income and a source, not a label. Read it together with PCIT v Mukeshbhai Ramanlal Prajapati, which deals with the different situation where no question was ever put. If it applies to you, the first step is this: Treat the s.132(4) answer as the document that decides the penalty. If you are advising during a search, the answer should name the activity, the head of income and the source, not simply describe the money as unaccounted.
The Bhushan Steel group was searched under s.132 on 3 March 2010 and the assessee was covered by the search. She filed a return for AY 2010-11 on 31 July 2010 declaring income of Rs. 20,47,14,190, and an order under s.143(3) was passed on 30 December 2011 assessing the total income at the returned figure. During the assessment the Assessing Officer noticed that the assessee had reported undisclosed income earned during the financial year 2009-10 to the extent of Rs. 20 crores during and after the search, relating to material found and seized in the search, and that s.271AAA applied to it. He initiated penalty proceedings on the ground that she had not specified the manner in which the undisclosed income was earned and had failed to substantiate it, and imposed penalty of Rs. 2 crore by order dated 27 June 2012. The CIT (Appeals) deleted the penalty by order dated 5 July 2013, following a Tribunal order in the case of Sh. Neeraj Singal of the same group, in which the Tribunal had held that no specific query had been raised by the authorised officer about the manner of deriving the income. The Tribunal affirmed the CIT (Appeals). The Revenue appealed on the question whether the Tribunal had erred in deleting the penalty of Rs. 20,000,000. The matter was decided on 2018-03-12 by the High Court (S. Ravindra Bhat J and A.K. Chawla J). On those facts the High Court held as follows. The appeal was allowed and the substantial question of law answered in favour of the Revenue. Where an assessee seeks the escape route in s.271AAA(2), all three conditions in that sub-section must necessarily be fulfilled. A statement that the sums advanced were undisclosed income, without specifying how that income was derived or what head it fell in, does not satisfy the requirement of substantiating the manner in which the undisclosed income was derived, and the lower appellate authorities misdirected themselves in holding that the conditions were satisfied. No costs.
The Court applied the Supreme Court's construction of the pari materia Explanation 5 to s.271 in Gebilal Kanhaialal, under which the immunity has three conditions and the third, payment of tax with interest, carries no time limit. Turning to s.271AAA, it noted the provision's purpose: penalty at 10 per cent of the undisclosed amount declared where the conditions in sub-section (2) are not met, which is a markedly lighter treatment than s.271(1)(c), and Parliament having given a different treatment to income disclosed during a search, an assessee who wishes to take the escape route must satisfy all three conditions. It also referred to the Supreme Court's decision in MAK Data (P) Ltd, set out as an extract, on the weight to be given to a plea of voluntary disclosure. On the facts, the assessee had merely stated that the sums advanced were undisclosed income and had not said how she derived that income or under what head it fell, whether rent, capital gain, professional income, business income out of money lending, or the source of the money. Without such specificity the substantiation requirement was not met. In the words reproduced by the source cited on this page: "Unless such facts are mentioned with some specificity, it cannot be said that the assessee has fulfilled the requirement that she, in her statement (under Section 132 (4)) "substantiates the manner in which the undisclosed income was derived"." The decision followed or applied ACIT v. Gebilal Kanhaialal (HUF) - applied, on the three conditions of the pari materia immunity in Explanation 5 to s.271; MAK Data (P) Ltd v. CIT 358 ITR 539 (SC) - referred to and extracted on the weight of a plea of voluntary disclosure.
It was decided by the High Court on 2018-03-12 and is reported as ITA 672/2016 (High Court of Delhi at New Delhi). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 271AAA, section 271AAA(2), section 132, section 132(4), section 271(1)(c), section 143(2), section 143(3), section 260A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was allowed and the substantial question of law answered in favour of the Revenue. Where an assessee seeks the escape route in s.271AAA(2), all three conditions in that sub-section must necessarily be fulfilled. A statement that the sums advanced were undisclosed income, without specifying how that income was derived or what head it fell in, does not satisfy the requirement of substantiating the manner in which the undisclosed income was derived, and the lower appellate authorities misdirected themselves in holding that the conditions were satisfied. No costs. It arises in Penalty and Search, Survey & Block Assessment matters, on section 271AAA, section 271AAA(2), section 132, section 132(4), section 271(1)(c), section 143(2), section 143(3), section 260A of the Income Tax Act 1961, and was decided by S. Ravindra Bhat J and A.K. Chawla J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the statement is already recorded and thin, look first at whether any question about the manner was in fact put; if none was, Mukeshbhai Ramanlal Prajapati is the better line. Do not rely on a rider in the surrender letter asking for no penal action. The assessee here had said the surrender was subject to no penal action under s.271(1)(c) and it did not help. Check whether tax with interest was paid; on the authority the Court applied, no time limit is prescribed for that third condition, so late payment does not by itself defeat the immunity.
Validity check could not be completed. No decision doubting or reversing this judgment was located, but no dedicated search of its subsequent history, including any SLP, was carried out. It construes s.271AAA, which governs searches initiated under s.132 on or after 1 June 2007 but before 1 July 2012. It is not in conflict with K. Krishnamurthy v DCIT (Supreme Court, 13 February 2025), also in this library, which held that s.271AAA penalty is not automatic and applied the immunity to the part of the income that had been admitted, explained and taxed; Ritu Singal decides what an explanation must contain, not whether the immunity exists. On the different question of an officer who never asked about the manner, see PCIT v Mukeshbhai Ramanlal Prajapati (Gujarat High Court). No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Two things in the report do not hold together and should be checked against a certified copy before the case is cited on facts. First, para 2 records the search as having taken place on 03.03.2010 while para 13 refers to the statement being made 'during the course of the search on 4 March, 2010'. Second, para 2 records undisclosed income of Rs. 20 crores reported during and after the search, while para 13 refers to the assessee having stated that Rs. 16 crores lent to three individuals was her unaccounted income; the judgment does not reconcile the two figures and no arithmetic should be done on them. Third, the sentence in para 13 reading 'However, the requirement of the assessee having to (ii) substantiates the manner in which the undisclosed income was derived was satisfied' reads against the rest of the judgment and against para 16, and appears to be a slip for 'was not satisfied'. For that reason para 16, not para 13, is used as the key quote. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was allowed and the substantial question of law answered in favour of the Revenue. Where an assessee seeks the escape route in s.271AAA(2), all three conditions in that sub-section must necessarily be fulfilled. A statement that the sums advanced were undisclosed income, without specifying how that income was derived or what head it fell in, does not satisfy the requirement of substantiating the manner in which the undisclosed income was derived, and the lower appellate authorities misdirected themselves in holding that the conditions were satisfied. No costs.
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