K. Krishnamurthy v. The Deputy Commissioner of Income Tax
Background
K. Krishnamurthy had helped procure land for a housing society and, following a search and seizure operation at his premises in 2010, admitted undisclosed income of about Rs. 2.27 crore. He also separately declared roughly Rs. 2.5 crore during the later assessment proceedings, relating to land deals for two other individuals, which had not been mentioned during the search itself. The tax department imposed a 10% penalty under Section 271AAA on his entire assessed income of about Rs. 4.78 crore, and the Karnataka High Court upheld the penalty. He appealed to the Supreme Court, arguing the penalty was excessive and wrongly based.
Decision Breakdown
The Supreme Court held that Section 271AAA penalty is not automatic. It applies only if the assessee fails to meet three specific conditions (admitting undisclosed income during the search, explaining how it arose, and paying tax with interest). Since Krishnamurthy had admitted the Rs. 2.27 crore during the search itself and later paid the tax and interest (albeit late), no penalty was leviable on that portion. However, the Rs. 2.49 crore relating to the two other individuals' land deals was disclosed only later during assessment, not during the search, so it did not qualify for the exemption and penalty at 10% was rightly leviable on that amount alone.
Lesson Learnt
A search-related tax penalty depends on exactly what was admitted during the search itself, not on the total income eventually assessed: income disclosed voluntarily and promptly at the time of search, with tax duly paid, can escape penalty even if paid with some delay, while amounts revealed only later during assessment remain fully penalizable.