Section 271AAB of Income Tax Act

Section 271AAB is a legal requirement under the Income Tax Act which contains provisions to penalize taxpayers for possessing any undisclosed income. Income tax search is conducted to identify the existence of any undisclosed income at the premises of the taxpayer. Section 271AAB of the Income Tax Act has an association with Section 132, as the latter is connected with search and seizure and the former deals with penalties after conducting a search and seizure operation. According to this section, the Director-General of Income Tax, the Director of Income Tax, the Chief Commissioner of Income Tax, the Commissioner of Income Tax or any Joint Director or Joint Commissioner of Income Tax is authorized to direct any subordinate officers (not below the rank of Income-Tax Officer) to conduct a search, which is performed after procuring a search warrant and producing it before the taxpayer in accordance with the applicable legal procedures.

Undisclosed Income

The term undisclosed income could denote any income of the specified previous year which is represented by any money, bullion, jewellery, other valuables, any entry in the books of account; other documents or transactions discovered during the search, which has not been recorded on or before the date of search in the books of account or other documents maintained in the normal course pertaining to the financial year or have not been communicated to the Chief Commissioner/Commissioner prior to the date of search. Further, undisclosed income could be any income of the particular previous year which is represented by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course in connection with the particular previous year which is found to be incorrect.

Penalties in the Event of Search

Penalties under Section 271AAB will differ according to the date of search, which is described below:

Penalties for a search conducted on or after 1/7/2012 but before 16/12/2016:

If the assessee admits the undisclosed income; establishes the way it was derived; and pays the tax within the stipulated date along with the pertinent interest and furnishes the return of income for the specified previous year declaring such undisclosed income – 10% of the undisclosed income of the particular previous year.
If the assessee abstains from admitting the undisclosed income, and declares such income in the return of income within the stipulated date and remits the necessary taxes along with the pertinent interest – 20% of the undisclosed income of the particular previous year.
Other defaults other than the ones mentioned above – 60% of the undisclosed income of the particular previous year.

Penalties for a search conducted after 16/12/2016:

If the assessee, whether a corporate body or otherwise, admits the undisclosed income, establishes the way it was derived, and pays the tax within the stipulated date along with the pertinent interest and furnishes the return of income for the specified previous year declaring such undisclosed income – 30% of the undisclosed income of the particular previous year
Other defaults which are not covered above – 60% of the undisclosed income of the particular previous year

Section 221AAB of Income Tax Act

The text of the section has been reproduced below for reference:

221AAB: (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, 
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).
(2) No penalty under the provisions of clause (c) of sub-section (1) of section 271 shall be 
imposed upon the assessee in respect of the undisclosed income referred to in sub-section (1).
(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.

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