Rohan M. Thakkar, Legal Heir of Late Mahesh N. Thakkar v. DCIT (ITAT Mumbai)
Where unreconciled jewellery is admitted as undisclosed income during search, the concessional penalty rate under Section 271AAB(1)(a) may apply when the disclosure is substantively complied with, even though the income was omitted from the original return but included in a revised return before completion of assessment.
Summary: The ITAT Mumbai considered whether jewellery valued at ₹29,75,000 found during a search under Section 132 constituted undisclosed income under Section 271AAB and, if so, whether penalty was leviable at 10% under Section 271AAB(1)(a) or at 30% under Section 271AAB(1)(c). During the search on 18 November 2015, jewellery aggregating to ₹3,71,28,639 was found at residential premises and bank lockers, of which jewellery weighing approximately 1,250 grams and valued at ₹29,75,000 could not be reconciled with wealth-tax returns, valuation reports or other contemporaneous records. In his statement under Section 132(4), the assessee admitted that the jewellery was unrecorded and offered ₹29,75,000 as income. Although the amount was inadvertently omitted from the original return, it was included in a revised return filed on 30 November 2017 before completion of assessment on 29 December 2017, and the corresponding tax was paid. The Assessing Officer levied penalty at 30% under Section 271AAB(1)(c), amounting to ₹8,92,500, which was confirmed by the CIT(A). The Tribunal held that the jewellery constituted undisclosed income because it was found during the search, remained unreconciled and was specifically admitted under Section 132(4). However, it found substantive compliance with Section 271AAB(1)(a), noting that the asset and undisclosed income were specifically identified, the income was admitted during the search, tax was paid and the amount was subsequently included in the revised return before completion of assessment. The Tribunal held that the residuary clause could not be invoked mechanically merely because of the initial omission from the original return. The penalty was therefore restricted to 10%, reducing it from ₹8,92,500 to ₹2,97,500, and the appeal was partly allowed.
Core Issue: The core issue before the Tribunal was whether jewellery valued at ₹29,75,000, found during a search and not reconcilable with disclosed wealth records, constituted “undisclosed income” under Section 271AAB and, if so, whether penalty was leviable at the concessional rate of 10% under Section 271AAB(1)(a) or at the higher residuary rate of Section 271AAB(1)(c).
Facts: A search under Section 132 was conducted on 18 November 2015 in the Modi Group cases, covering Late Shri Mahesh Nanji Thakkar. Jewellery aggregating to ₹3,71,28,639 was found at his residential premises and bank lockers. A substantial portion was reconciled with wealth-tax returns and valuation reports; however, jewellery weighing approximately 1,250 grams and valued at ₹29,75,000 could not be reconciled with any contemporaneous record. In the statement recorded under Section 132(4), the assessee admitted that the jewellery was unrecorded and offered ₹29,75,000 as income. Although the amount was inadvertently omitted from the original return, it was subsequently included in a revised return filed before completion of the assessment, and the corresponding tax was paid.
AO/CIT(A) Finding: The Assessing Officer held that the unreconciled jewellery constituted undisclosed income within the meaning of Section 271AAB. Since the amount was not included in the original return and the AO considered that the assessee had not properly specified and substantiated the manner in which the income was derived, penalty was levied under Section 271AAB(1)(c) at 30%, amounting to ₹8,92,500. The CIT(A) confirmed the penalty.
ITAT Finding: The Tribunal held that the jewellery valued at ₹29,75,000 clearly constituted undisclosed income because it was found during the search, was not recorded in the wealth-tax returns or other contemporaneous records, and was specifically admitted by the assessee in his statement under Section 132(4). However, while determining the applicable penalty rate, the Tribunal held that substantive compliance with the conditions of Section 271AAB(1)(a) had been established. The disclosure specifically identified the unreconciled jewellery, the income was admitted during the search, the tax was paid, and the amount was included in the revised return before completion of the assessment. The Tribunal observed that where the identified asset itself explained the nature and manner in which the undisclosed income arose, and no further query was raised by the authorised officer, the requirement regarding specification and substantiation of the manner of earning the income could not be applied mechanically. Clause (c), being residuary in nature, could not be invoked merely because there was an initial omission from the original return when the substantive conditions for concessional treatment were otherwise fulfilled.
The Tribunal primarily interpreted the statutory scheme of Section 271AAB and the graded penalty structure contained in clauses (a), (b) and (c), emphasizing that the residuary clause should not be mechanically invoked where the substantive requirements for concessional penalty are satisfied.
Outcome: The appeal was partly allowed. The Tribunal upheld the finding that ₹29,75,000 represented undisclosed income liable to penalty under Section 271AAB but restricted the penalty from 30% under Section 271AAB(1)(c) to the concessional rate of 10% under Section 271AAB(1)(a), granting consequential relief to the assessee.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The aforesaid appeal has been filed by the assessee against the impugned order passed by the learned Commissioner of Income-tax (Appeals), arising from the penalty order dated 29.06.2018 passed under section 271AAB(1)(c) of the Income-tax Act, 1961 for the assessment year 2016–17. The Assessing Officer levied penalty of ₹8,92,500, being 30% of the undisclosed income of ₹29,75,000, which has been confirmed by the learned CIT(A). The assessee has challenged the applicability of section 271AAB to the amount in question and, alternatively, the levy of penalty under the residuary clause (c) at 30% instead of clause (a) at 10%. Thus, the issues which require our consideration are, first, whether the jewellery valued at ₹29,75,000 constitutes “undisclosed income” within the meaning of the Explanation to section 271AAB and, secondly, if it does, the clause and the corresponding rate at which penalty is exigible.
2. Brief facts are that a search and seizure action under section 132 was carried out in the Modi Group cases on 18.11.2015, in which the assessee, Late Shri Mahesh Nanji Thakkar, was also covered. During the search, the residential premises of the assessee and various bank lockers operated by him and the members of his family were searched. Jewellery valued at ₹1,24,12,034 was found at the residential premises, whereas jewellery valued at ₹2,47,16,605 was found in the bank lockers. Thus, jewellery aggregating to ₹3,71,28,639 was found and inventorised. The assessee was called upon to explain its source and ownership with reference to the wealth-tax returns and valuation reports of the family members. A substantial portion of the jewellery stood reconciled with the jewellery previously disclosed in the wealth-tax records. However, jewellery weighing approximately 1,250 grams and valued at ₹29,75,000 could not be reconciled with any existing declaration or contemporaneous record. In the statement recorded under section 132(4), the assessee categorically admitted that jewellery to the extent of ₹29,75,000 was not recorded in the wealth-tax returns of the assessee or his family members, offered the said amount as income and agreed to pay tax thereon.
3. The assessee filed his return of income on 01.10.2016 declaring total income of ₹2,25,32,440. The amount of ₹29,75,000 admitted in the statement under section 132(4) was, however, omitted from the said return. The assessee thereafter filed a revised return on 30.11.2017 declaring total income of ₹2,55,07,440, wherein the amount of ₹29,75,000 was included and offered to tax under the head “Income from other sources”. The corresponding tax was also paid. The assessment was subsequently completed under section 143(3) on 29.12.2017. The disclosure of ₹29,75,000 was accepted, though penalty proceedings under section 271AAB were initiated. In the penalty proceedings, the assessee contended that nearly the entire jewellery found during the search had been reconciled and only a relatively small portion could not be immediately matched; that the jewellery had been acquired in earlier years; and that the disclosure was made to avoid prolonged controversy. The Assessing Officer held that the jewellery was found during the search, was not recorded in the wealth-tax returns or any other documents maintained before the search and its source remained unexplained. He further held that although the amount was admitted under section 132(4), it was not included in the return initially filed and was offered only in the revised return. He therefore invoked section 271AAB(1)(c) and levied penalty at 30%, amounting to ₹8,92,500. The learned CIT(A) concurred with this reasoning and confirmed the penalty.
4. Before us, the learned counsel submitted that the jewellery had been acquired in earlier years and, therefore, its value could not be treated as the undisclosed income of the specified previous year merely because it was found during the search. Alternatively, it was contended that the assessee had made a categorical admission in the statement under section 132(4), identified the income with the unreconciled jewellery, paid the corresponding tax and declared the amount in the revised return before completion of the assessment. Thus, even if section 271AAB were held applicable, the case fell within clause (a), attracting penalty at 10%, and not within the residuary clause (c). The learned DR, on the other hand, relied upon the findings of the Assessing Officer and the learned CIT(A) and submitted that the conditions prescribed in clause (a) had not been fulfilled.
5. We have heard the rival submissions and carefully perused the material placed on record. Section 271AAB, as applicable to the search in the present case, constitutes a special penalty regime for undisclosed income detected during a search under section 132. It does not prescribe a single uniform rate. Instead, it creates graded consequences depending upon the conduct of the assessee during and after the search. Clause (a) prescribes penalty at 10% where the assessee, in the course of search, admits the undisclosed income in a statement under section 132(4), specifies and substantiates the manner in which it was derived, pays the tax together with interest and declares the income in the return furnished for the specified previous year. Clause (b) applies where the income is not admitted during the search but is subsequently declared and the prescribed conditions are fulfilled. Clause (c) is residuary and governs cases not falling within clauses (a) or (b). Thus, before determining the applicable rate, it is necessary to ascertain, first, whether the amount answers the statutory description of “undisclosed income” and, thereafter, which of the graded clauses is attracted by the facts.
6. The Explanation to section 271AAB defines “undisclosed income”, insofar as relevant, to mean any income of the specified previous year represented, wholly or partly, by money, bullion, jewellery or other valuable article or thing, or by an entry in the books, documents or transactions found in the course of a search under section 132, which had 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 that previous year, or had otherwise not been disclosed to the prescribed income-tax authority before the date of search. The definition, therefore, has three essential constituents: there must be income of the specified previous year; such income must be represented by money, bullion, jewellery, valuable article, an entry, document or transaction found during the search; and it must not have been recorded in the regular books or documents or otherwise disclosed to the Department before the search. It is the conjunction of these statutory ingredients and not the mere physical discovery of an asset which brings an amount within the ambit of section 271AAB.
7. Tested on these parameters, the jewellery valued at ₹29,75,000 falls within the statutory definition. It was physically found during the search and could not be reconciled with the wealth-tax returns, valuation reports or any other contemporaneous record maintained by the assessee or his family members. The assessee himself admitted in the statement recorded under section 132(4) that this portion of the jewellery was unrecorded and offered its value as income for the year under consideration. The very same amount was subsequently included in the revised return for the assessment year 2016–17 and assessed as such. The contention that the jewellery had been acquired in earlier years remains unsupported by any purchase evidence, valuation report, wealth-tax declaration, family record or other material identifying the actual period and source of its acquisition. A bare assertion regarding earlier acquisition cannot displace the assessee’s categorical admission under section 132(4), followed by his own declaration of the same amount as income for this assessment year. The fact that a substantial portion of the jewellery stood explained does not, by osmosis, explain the remainder. Each portion must be tested with reference to its own record and disclosed source. We therefore hold that the jewellery valued at ₹29,75,000 represents undisclosed income within the meaning of the Explanation to section 271AAB.
8. The next question is whether the penalty is exigible at 30% under clause (c), as held by the authorities below, or at 10% under clause (a). The material facts relevant to this determination are that the assessee made a clear admission of the undisclosed income during the search in the statement recorded under section 132(4); the income was specifically identified with the unreconciled jewellery valued at ₹29,75,000; the assessee agreed to pay tax and the corresponding tax was paid; the amount was included in the revised return filed on 30.11.2017; and the revised return preceded the completion of assessment on 29.12.2017. The disclosure was accepted in the assessment without any further addition on this account. The admission was never retracted, nor was the ownership or taxability of the disclosed amount contested in the quantum proceedings.
9. The Assessing Officer invoked clause (c) principally on two grounds: that the assessee had not specified and substantiated the manner in which the undisclosed income was derived, and that the amount was not declared in the return initially filed. Insofar as the first ground is concerned, the disclosure was not an amorphous or ad hoc surrender unconnected with any identifiable asset. It was directly referable to a specifically identified quantity and value of jewellery found during the search which could not be reconciled with the disclosed wealth-tax records. The nature of the undisclosed income and the manner in which it manifested itself were therefore apparent from the statement and the search material: it represented unexplained acquisition or investment in the unreconciled jewellery. There is nothing on record to show that the authorised officer called upon the assessee to furnish any further particulars regarding the manner of derivation and that the assessee failed or declined to furnish them. Where the statement identifies the precise asset and the income embedded therein, and no further question is raised by the authorised officer, the requirement cannot subsequently be treated as unfulfilled merely because the assessee did not employ a particular formulation or separately repeat what was already implicit and evident in the disclosure.
10. As regards the omission from the return initially filed, it is undisputed that the amount was subsequently incorporated in the revised return on 30.11.2017, before the assessment was completed on 29.12.2017, and the tax relating thereto stood paid. The revised return disclosed the same income which had been admitted during the search and was acted upon by the Assessing Officer while completing the assessment. The initial omission is undoubtedly a lapse and is sufficient to repel the assessee’s plea for complete immunity from penalty. Nevertheless, while determining which of the graded clauses applies, the subsequent statutory compliance cannot be ignored altogether. Section 271AAB differentiates between an assessee who admits the undisclosed income during the search, pays the tax and declares it in the return, and an assessee whose income is established dehors such admission or remains undeclared. The assessee before us falls materially within the former category: he admitted the income at the search stage, identified it with the unreconciled jewellery, paid tax, incorporated the amount in the revised return before completion of assessment and never resiled from the admission.
11. Clause (c) is residuary in character and should apply where the factual conditions bringing the case within the preceding clauses are absent. It cannot be invoked mechanically merely because the compliance under clause (a) is considered imperfect in form, when its substantive ingredients stand fulfilled. Here, the Department did not have to independently determine the amount of undisclosed income dehors the assessee’s statement; the assessee did not retract the admission or dispute the ownership of the jewellery in the assessment; and the income was ultimately brought into the return and accepted before the assessment attained finality. Viewed in the totality of these facts, the omission to include the amount in the first return does not justify fastening the residuary rate of 30%, though it equally does not warrant deletion of the penalty. The conduct of the assessee is appropriately visited by the rate prescribed under clause (a), which is designed for cases where the undisclosed income is candidly admitted during the search and thereafter brought to tax.
12. Accordingly, we hold that the jewellery valued at ₹29,75,000 constitutes undisclosed income within the meaning of the Explanation to section 271AAB; however, the penalty thereon is leviable under section 271AAB(1)(a) at the rate of 10% and not under the residuary clause (c) at 30%. The penalty is therefore restricted to ₹2,97,500 as against ₹8,92,500 levied by the Assessing Officer and confirmed by the learned CIT(A). The Assessing Officer is directed to grant consequential relief.
13. In the result, the appeal of the assessee is partly allowed.
Order pronounced on 31st August, 2026.
