Penalty in Search u/s 271AAB of Income Tax Act

Penalty where search has been initiated.

Section 271AAB of the Act provides that in case of any assessee, where search is initiated on or after 1-7-2012, in respect of the undisclosed income of the specified years, the penalty would be payable at different rates depending on the nature and extent of disclosure of the undisclosed income as follows:

i) 10% of the undisclosed income of the specified previous year, if such assessee

a)  in the course of the 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;

b)  substantiates the manner in which the undisclosed income was derived; and

c) 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;

ii) 20% of the undisclosed income of the specified previous year, if such assessee

a)  in the course of the search, in a statement under sub-section (4) of section 132, does not admit the undisclosed income; and

b) on or before the specified date—

(A) declares such income in the return of income furnished for the specified previous year; and

(B) pays the tax, together with interest, if any, in respect of the undisclosed income;

iii) 30% to 90% of undisclosed income  in other cases. (Finance Act, 2016 amends, with effect from assessment year 2017-18,the penalty in other cases shall be Flat @ 60%)

Meaning of Specified Date ,specified previous year and undisclosed income in case of  Penalty in Search u/s 271AAB of Income Tax Act

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 undersection 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

(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.

Note on Clause  (Finance Bill 2016 ) relating to Penalty in Search cases

Clause 101 of the Bill seeks to amend section 271AAB of the Income-tax Act relating to penalty where search has been initiated.

Clause (c) of sub-section (1) of the aforesaid section provides that a penalty of a sum which shall not be less than thirty per cent. but which shall not exceed ninety per cent. of the undisclosed income of the specified previous year shall be levied in case where search has been initiated under section 132 on or after the 1st day of July, 2012, and such case is not covered under the provisions of clauses (a) and (b) of sub-section (1) of section271AAB.

It is proposed to amend the said clause (c) so as to provide for levy of penalty on such undisclosed income at a flat rate of sixty per cent.

Sub-section (2) of the aforesaid section provides for non-levy of penalty under clause (c) of sub-section (1) of section 271, in respect of undisclosed income referred to in sub-section (1) of section 271AAB.

It is proposed to amend the said sub-section (2) so as to provide that no penalty shall be levied under section 270A also in respect of the undisclosed income referred to in sub-section (1) of section 271AAB.

These amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-2018 and subsequent years.

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