ITO Vs Vaibhav Gattani (ITAT Jaipur)
Search Surrender Is Not Automatically “Undisclosed Income”: Jaipur ITAT Deletes ₹1.41-Crore Penalty Under Section 271AAB
Summary:
The Revenue challenged the order of the Commissioner of Income Tax (Appeals), Jaipur-4, which had deleted penalty under section 271AAB(1)(a) of the Income-tax Act, 1961 in respect of ₹14,15,00,000 surrendered by the assessee during search proceedings. The appeal concerned Assessment Year 2016-17.
The assessee, an individual and constituent of the K.K. Gattani Group, Jaipur, was subjected to a search and seizure action under section 132 of the Act on 07.01.2016. A diary marked Annexure A-2 was seized from his business premises. In his statement recorded under section 132(4), the assessee surrendered additional income of ₹14,23,05,000, comprising ₹8,05,000 in unaccounted cash found at his residence and ₹14,15,00,000 referable to notings in the seized diary. The surrender was reaffirmed by letter dated 25.09.2017 and the entire amount was included in the return filed under section 139(1).
Assessment was completed under section 143(3) read with section 153B(1)(b) on 18.12.2017. The Assessing Officer accepted the surrendered sum as forming part of the returned income and made a separate addition of ₹16,500 towards unexplained cash. Importantly, in respect of ₹14,15,00,000, the Assessing Officer did not invoke sections 68 or 69 and did not treat the amount as income from an undisclosed source. The ₹16,500 addition was subsequently deleted by the CIT(A).
Penalty proceedings were thereafter pursued under section 271AAB. The Assessing Officer levied penalty at 10% on the entire surrendered amount of ₹14,23,05,000, amounting to ₹1,42,30,500, primarily relying upon the assessee’s admission under section 132(4), subsequent reaffirmation and disclosure in the return. However, the Assessing Officer did not separately examine whether the ₹14,15,00,000 represented by the diary notings independently satisfied the statutory definition of “undisclosed income”.
The CIT(A) partly allowed the assessee’s appeal. He deleted penalty of ₹1,41,50,000 attributable to ₹14,15,00,000 but confirmed penalty relating to ₹8,05,000 cash. In respect of the diary notings, the CIT(A) found that they did not disclose the recipient, payer, date of payment, purpose or terms of the advances and were not corroborated by any material or statement establishing the transactions. No corresponding undisclosed tangible asset or source from which such earnings could have accrued was found during the search. The CIT(A) relied, inter alia, on decisions of the Jaipur Bench in Padam Chand Pungliya, Rajendra Kumar Gupta and Nikhil Madan.
Before the Tribunal, the Revenue contended that the assessee’s admission under section 132(4) constituted substantive evidence and that the diary was an incriminating document found during search. Reliance was placed on MAK Data (P.) Ltd. v. CIT. The assessee, on the other hand, submitted that the diary contained only loose notings of advances without particulars or corroboration, that no corresponding asset had been found, and that the Department had not established the underlying transactions. Reliance was also placed on the decision of the Supreme Court in K. Krishnamurthy v. DCIT.
The Tribunal identified the short question as whether ₹14,15,00,000 surrendered under section 132(4) and reflected as notings of advances in the seized diary constituted “undisclosed income” under the Explanation to section 271AAB so as to attract penalty under section 271AAB(1)(a).
The Tribunal emphasised that the charge under section 271AAB is imposed not merely on an amount surrendered but on “undisclosed income” of the specified previous year. The statutory definition therefore forms the jurisdictional foundation of the penalty. Since the provision is penal and contains an exhaustive definition, it must be strictly construed. The mere admission or surrender of an amount under section 132(4) does not, by itself, establish that the amount is undisclosed income for section 271AAB purposes.
The Tribunal relied particularly upon the Supreme Court’s decision in K. Krishnamurthy, which concerned the analogous section 271AAA. The Supreme Court held that penalty provisions must be strictly construed, that surrender of income during search is not by itself sufficient to fasten penalty, and that the Assessing Officer bears the onus of establishing that undisclosed income satisfying the statutory definition was found during the search.
Applying that principle, the Tribunal held that the ₹14,15,00,000 did not qualify as undisclosed income. The diary contained notings of advances given to various persons. Such advances were not money, bullion, jewellery or other valuable article or thing found during the search. Nor could they be treated as income represented by an entry or transaction found during search because an advance represented an outflow of funds from the assessee, whereas the statutory definition contemplated undisclosed income represented by an inflow of funds not recorded or otherwise disclosed. The second limb relating to false expenditure entries in regular books was also inapplicable.
The Tribunal further considered the manner in which the Assessing Officer had treated the amount in the quantum proceedings. Sections 68 and 69 had not been invoked to bring ₹14,15,00,000 to tax as income from an undisclosed source. The Tribunal held that deeming provisions such as sections 69 and 69B cannot automatically be imported into section 271AAB, which contains its own self-contained definition of undisclosed income. TaxGuru has separately discussed sections 68, 69, 69A, 69B, 69C and 69D.
The Tribunal also rejected the Revenue’s reliance on MAK Data. It held that MAK Data arose in the context of section 271(1)(c) and concerned the evidentiary effect of voluntary surrender for concealment penalty. It did not dilute the specific statutory definition contained in section 271AAB. The relevant question was not whether the surrender was voluntary or retracted, but whether the surrendered amount satisfied the statutory definition of undisclosed income.
The Tribunal found that the CIT(A)’s differential treatment of ₹8,05,000 cash and ₹14,15,00,000 diary notings was justified. The cash constituted money found during search and satisfied the definition, whereas the diary notings represented vague advances lacking particulars and corroboration. The factual findings of the CIT(A) had not been displaced by the Revenue.
Accordingly, the Tribunal held that ₹14,15,00,000 did not fall within the definition of undisclosed income in the Explanation to section 271AAB. The penalty of ₹1,41,50,000 imposed under section 271AAB(1)(a) was therefore rightly deleted by the CIT(A). The Revenue’s grounds were rejected and the appeal was dismissed.
Cases Discussed
- K. Krishnamurthy v. DCIT — Supreme Court
- MAK Data (P.) Ltd. v. CIT — Supreme Court
- Padam Chand Pungliya v. ACIT — ITAT Jaipur
- Rajendra Kumar Gupta v. DCIT — ITAT Jaipur, IT Appeal No. 359/JP/2017, dated 18.01.2019
- Nikhil Madan — ITAT Jaipur, ITA No. 117/JP/2018, dated 27.07.2020
FULL TEXT OF THE ORDER OF ITAT JAIPUR
1. This appeal by the Revenue is directed against the order of the learned Commissioner of Income Tax (Appeals), Jaipur- 4 [hereinafter referred to as “the CIT(A)”] dated 21.02.2025 arising out of the penalty order dated 23.03.2020 passed by the Assessing Officer (hereinafter referred to as “the AO”) under section 271AAB(1)(a) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for the assessment year 2016-17.
2. The grounds of appeal raised by the Revenue before us in the memorandum of appeal in Form No. 36 read as under:
“1. Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) is justified in ignoring the fact that the assessee has admitted in his statement under section 132(4) of the Act the undisclosed income of Rs. 14.15 Crore on account of incriminating document found and seized from his office premises on which penalty amounting to Rs. 1,41,50,000 under section 271AAB of the Act is imposed.
2. Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) is justified in ignoring the fact that the assessee declared the same income in the return of income for AY 2016-17 after the department unearthed the same. It is important to mention here that had there been no search in this case, such undisclosed income would not have been detected and no taxes would have been paid. Therefore, penalty amounting to Rs. 1,41,50,000 under section 271AAB of the Act is imposed.
3. Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) is justified in ignoring the fact that the additional income offered by the assessee was not on his own volition but was on the basis of incriminating material found and seized during the search. Therefore, penalty amounting to Rs. 1,41,50,000 under section 271AAB of the Act is imposed.
4. The appellant craves leave or reserves the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.”
3. Briefly stated, the facts of the case are that the assessee is an individual and a constituent of the K.K. Gattani Group, Jaipur. A search and seizure action under section 132 of the Act was carried out on 07.01.2016 in the case of the K.K. Gattani Group, of which the assessee forms part. In the course of the search, a diary marked as Annexure A-2 was seized from the business premises of the assessee. In the statement recorded under section 132(4) of the Act, the assessee surrendered additional income of Rs 14,23,05,000 for the year under consideration, comprising unaccounted cash of Rs 8,05,000 found at the residence and a further sum of Rs 14,15,00,000 referable to the notings in the seized diary. The surrender was reaffirmed by the assessee’s letter dated 25.09.2017, and the entire sum was included in the return of income filed under section 139(1) of the Act on 16.10.2016 declaring total income of Rs 15,11,35,560.
4. The assessment was completed under section 143(3) read with section 153B(1)(b) of the Act on 18.12.2017 at a total income of Rs 15,11,52,060. The AO accepted the surrendered sum of Rs 14,23,05,000 as forming part of the returned income and made a single addition of Rs 16,500 on account of unexplained cash found during the search. It is material to note that, in dealing with the sum of Rs 14,15,00,000, the AO accepted the same as the assessee’s income of the year and did not invoke section 68 or section 69 of the Act, nor did he treat it as income from any undisclosed source. The addition of Rs 16,500 was subsequently deleted by the CIT(A) vide order dated 01.11.2018, whereupon the assessed income stood reduced to the returned figure of Rs 15,11,35,560.
5. Penalty proceedings under section 271AAB of the Act had been initiated during the course of the assessment. After the quantum addition was deleted by the CIT(A), the AO issued a fresh show cause notice and, upon considering the assessee’s reply, passed the impugned penalty order dated 23.03.2020 under section 271AAB(1)(a) of the Act. In that order the AO reproduced the provisions of section 271AAB of the Act, set out the essential ingredients of the section, and held that all of them were satisfied. The AO reasoned that the undisclosed income of Rs 14,23,05,000 had been admitted in the statement under section 132(4) of the Act, reaffirmed by the letter dated 25.09.2017, declared in the return and the tax thereon paid, and that the surrender rested upon incriminating documents found in the search and could not be explained away as having been made merely to buy peace. On that basis the AO levied penalty at the rate of ten per cent on the entire surrendered sum of Rs 14,23,05,000, computed at Rs 1,42,30,500. The AO did not undertake any separate examination of whether the sum of Rs 14,15,00,000 referable to the diary notings independently fell within the statutory definition of undisclosed income.
6. On appeal, the CIT(A), by the impugned order dated 21.02.2025, partly allowed the appeal, deleting the penalty referable to the sum of Rs 14,15,00,000 and confirming the penalty referable to the cash of Rs 8,05,000.
7. In deleting the penalty of Rs 1,41,50,000 referable to the sum of Rs 14,15,00,000, the CIT(A) undertook a detailed examination of the seized material and recorded a series of findings. He found that the notings in the seized diary did not disclose the name of the recipient, the name of the payer, the date of payment, the purpose of the advance, the term of the advance or the rate of interest, and that there was no reference to any material or statement corroborating such large unaccounted transactions. He further found that no matching undisclosed tangible asset, and no source from which such earnings could be said to have accrued, had been found in the course of the search and seizure action. Placing reliance on the decisions of this Bench in the cases of Padam Chand Pungliya(ITA No. 112/JP/2018, dated 05.04.2019), Rajendra Kumar GuptaGupta (IT Appeal No. 359/JP/2017, dated 18-1-2019), and Nikhil Madan (ITA No. 117/JP/2018, dated 27.07.2020), the CIT(A) held that the admission in the statement recorded under section 132(4) of the Act does not, by itself, constitute incriminating material or undisclosed income in the absence of any corresponding asset or entry representing such income, that the burden lay upon the Department to establish the existence of the persons named and of the underlying transactions or assets, and that, in the absence of such particulars, the entries were vague and might well relate to persons who were not shown to exist. On that reasoning he concluded that the notings did not represent real transactions, that they lacked sufficient particulars, and that the sum of Rs 14,15,00,000 did not answer the definition of undisclosed income given in the Explanation to section 271AAB of the Act, so that the penalty levied on that amount could not be sustained and was liable to be deleted.
8. As regards the cash of Rs 8,05,000, the learned CIT(A) confirmed the penalty, holding that such cash was represented by money, was not recorded in the books of account, and could be detected only on account of the search and seizure action, so that the conditions of the definition of undisclosed income under section 271AAB of the Act stood satisfied. It is the deletion of penalty of Rs 1,41,50,000 that is assailed by the Revenue in the present appeal.
9. The learned Departmental Representative (hereinafter referred to as “the DR”), supporting the grounds of appeal, submitted that the sum of Rs 14,15,00,000 was admitted by the assessee in the statement under section 132(4) of the Act on the basis of the incriminating document found and seized in the search, that the admission is substantive evidence which was never retracted and was reaffirmed by the letter dated 25.09.2017 and offered to tax in the return, and that but for the search the income would not have been detected. It was urged by the learned DR that the seized diary is “other documents” within the definition of undisclosed income and that the additional income was not offered on the assessee’s own volition but on the basis of the incriminating material found in the search. Reliance was placed by the learned DR on MAK Data (P.) Ltd. v. CIT [2013] 358 ITR 593 (SC).
10. The learned Authorised Representative (hereinafter referred to as “the AR”) supported the impugned order and submitted that the sum of Rs 14,15,00,000 was recorded merely as loose notings of advances in a diary found during the search, without any date, name, address, mode of payment or particulars of the persons concerned, and without any corresponding asset having been found in the course of the search. It was submitted by the learned AR that the surrender was made to buy peace and to avoid litigation, that no enquiry was made by the Department to establish the existence of the persons named or the transactions, that the AO did not invoke section 68 or section 69 of the Act and, on the contrary, accepted the amount as the assessee’s income of the year, and that an advance represents an outflow of funds, whereas undisclosed income as defined in section 271AAB of the Act envisages an inflow of funds. The learned AR placed reliance on the consistent decisions of this Bench that are relied upon by the learned CIT(A) in his order, and also on the recent decision of the Hon’ble Supreme Court in K. Krishnamurthy v. DCIT [2025] 473 ITR 557 (SC).
11. We have heard the rival contentions and perused the material available on record. The short and the only question that falls for our determination is whether the sum of Rs 14,15,00,000 surrendered in the statement recorded under section 132(4) of the Act and reflected as notings of advances in the seized diary constitutes undisclosed income within the meaning of the Explanation to section 271AAB of the Act so as to attract penalty under clause (a) of sub-section (1) thereof.
12. Before dealing with the rival contentions, it is useful to notice the scheme of section 271AAB of the Act. The relevant portion reads as under:
“271AAB. (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 July, 2012 but before the date on which the Taxation Laws (Second Amendment) Bill, 2016 receives the assent of the President, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him,—
(a) a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year, if such assessee— (i) 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; (ii) substantiates the manner in which the undisclosed income was derived; and (iii) 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;
(b) a sum computed at the rate of twenty per cent of the undisclosed income of the specified previous year, if such assessee— (i) in the course of the search, in a statement under sub-section (4) of section 132, does not admit the undisclosed income; and (ii) 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;
(c) 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, if it is not covered by the provisions of clauses (a) and (b).
…..
(3) The provisions of sections 274 and 275 shall, as far as may be, apply in relation to the penalty referred to in this section.
Explanation.—For the purposes of this section,—
…..
(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.”
13. The charge in every clause of the section is levied not upon the amount surrendered as such, but upon the undisclosed income of the specified previous year. The existence of undisclosed income, as defined in clause (c) of the Explanation, is thus the jurisdictional foundation of the levy. The use of the word “may”, read with the mandate of section 274 of the Act, indicates that the AO is required to apply his mind and record a finding that the surrendered amount answers the statutory definition, rather than to treat the levy of penalty as an automatic consequence of the disclosure.
14. Being a penal provision which carries its own exhaustive definition of the very income on which it operates, section 271AAB of the Act must be construed strictly, and the amount sought to be penalised must be shown to fall squarely within one or the other limb of the definition. It follows, and this Bench has consistently held, that the mere admission or surrender of an amount in a statement recorded under section 132(4) of the Act does not, by itself, clothe that amount with the character of undisclosed income for the purposes of the section. The disclosure under section 132(4) of the Act is made during the course of the enquiry and not at its conclusion. The AO remains obliged to examine the facts and to record a finding that the surrender-ed sum answers the definition before penalty can be fastened upon it.
15. These principles now stand authoritatively settled by the Hon’ble Supreme Court. In K. Krishnamurthy (supra), which arose under section 271AAA of the Act, being the provision analogous to and the immediate predecessor of section 271AAB of the Act, the Hon’ble Supreme Court held that the imposition of penalty is not mandatory and that the discretion conferred upon the AO by the word “may” is not unfettered, unbridled and uncanalised but must be a sound discretion guided by law. Their Lordships further held that such a penalty provision must be strictly construed, that the mere surrender of income in the course of search or in a statement recorded thereunder is not sufficient to fasten the levy, and that the onus lies upon the AO to establish that undisclosed income was found in the course of the search. The Hon’ble Supreme Court observed in paragraphs 34 and 35 of its judgment as under:
“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.”
16. Tested on this touchstone, the sum in question does not qualify as undisclosed income. The seized diary recorded notings of advances given to various persons. Such advances are plainly not money, bullion, jewellery or other valuable article or thing found in the search. Nor can they be said to be income represented by any entry or transaction found in the course of the search, because an advance represents an outflow of funds from the hands of the assessee, whereas the definition contemplates an inflow of funds not recorded before the date of search. The second limb of the definition, which deals with a false entry of an expense recorded in the regular books, has no application. The distinction between an outflow by way of advance and an inflow by way of income goes to the root of the charge, because what the legislature has sought to bring within section 271AAB of the Act is undisclosed income, and not the application of funds. This is precisely the view taken by the coordinate Benches in the decisions relied upon by the learned CIT(A).
17. The point is placed beyond doubt by the manner in which the AO himself dealt with the amount in the quantum proceedings. The AO did not invoke section 68 or section 69 of the Act to bring the sum of Rs 14,15,00,000 to tax as income from an undisclosed source, but accepted the same as the assessee’s income of the year. The deeming fictions of sections 69 and 69B of the Act, being confined to the purposes for which they are enacted, cannot in any event be automatically imported into section 271AAB of the Act, which carries its own self contained definition of undisclosed income.
18. The AO proceeded solely on the strength of the admission, without recording the requisite finding that the sum fell within the definition. As the Hon’ble Supreme Court has held in K. Krishnamurthy (supra), the onus lay upon the AO to demonstrate and prove that the amount represented undisclosed income found in the course of the search, and that onus remained undischarged. The very foundation for the levy on this head was thus found wanting.
19. The reliance by the Revenue on MAK Data (P.) Ltd. (supra) is misplaced. That decision was rendered in the context of section 271(1)(c) of the Act and dealt with the evidentiary effect of a voluntary surrender for the purpose of a concealment penalty. It does not dilute, much less displace, the specific and exhaustive definition of undisclosed income enacted in section 271AAB of the Act. The question before us is not whether the surrender was voluntary or whether it was retracted, but whether the surrendered amount falls within the statutory definition, and for the reasons already recorded, it does not. The contention that the amount must be presumed to be undisclosed income because it would not have surfaced but for the search is, in substance, an invitation to apply the deeming fiction of section 69 of the Act to the penalty provision, which, for the reasons already given, is impermissible. A levy of penalty cannot rest upon a presumption piled upon an inference, in the absence of any material establishing an inflow of undisclosed income.
20.We do not find any inconsistency in the order of the CIT(A) that would warrant interference at the instance of the Revenue. The character of each item has to be tested against the statutory definition on its own facts. The cash of Rs 8,05,000 was money found in the search and answered the definition, whereas the sum of Rs 14,15,00,000 was referable to vague notings of advances which did not. The differential treatment accorded by the CIT(A) is, therefore, not a case of inconsistency but a considered application of the same definition to materially different facts. The specific findings recorded by the CIT(A), namely that the notings were bereft of the particulars of the payer, the recipient, the date, the purpose and the terms, and that no matching undisclosed asset or source was found in the search, are findings of fact borne out by the record and have not been dislodged by the Revenue by pointing to any material to the contrary. Those findings, which we find to be well founded, are sufficient by themselves to take the sum of Rs 14,15,00,000 out of the definition of undisclosed income.
21. In the light of the foregoing discussion, and having regard to the law laid down by the Hon’ble Supreme Court in K. Krishnamurthy (supra), we hold that the sum of Rs 14,15,00,000 does not fall within the definition of undisclosed income given in the Explanation to section 271AAB of the Act, and that the penalty of Rs 1,41,50,000 levied thereon under section 271AAB(1)(a) of the Act was rightly deleted by the CIT(A). We find no reason to interfere with the impugned order. The grounds raised by the Revenue are accordingly rejected.
22. In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the open court on 25-08-2026
