The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that where an assessee admits undisclosed income during a search but fails to substantiate the manner in which such income was derived, the case would fall under the residuary clause of Section 271AAB(1)(c) of the Income Tax Act, 1961, thereby attracting a penalty ranging from 30% to 90%.
However, the bench of Sandeep Singh Karhail (Judicial Member) and Bijayananda Pruseth (Accountant Member) clarified that imposition of the maximum penalty rate of 90% requires justification, and in the absence of exceptional circumstances, the penalty should be restricted to 30%.
The appeal was filed against the order of the Commissioner of Income Tax (Appeals), which had upheld a penalty of ₹9.94 lakh imposed under Section 271AAB.
The matter arose from a search and seizure operation conducted under Section 132 of the Act on November 8, 2012, at the assessee’s premises in Mumbai. During the search, cash amounting to ₹33.19 lakh was discovered. In his statement recorded under Section 132(4), the assessee admitted that the cash belonged to him and constituted undisclosed income, which he subsequently offered to tax in his return.
Despite the disclosure, the Assessing Officer imposed a penalty at the rate of 90% of the undisclosed income under Section 271AAB, invoking the residuary clause. The CIT(A) upheld this penalty, prompting the assessee to approach the Tribunal.
Before the ITAT, the assessee contended that since the disclosed income was ultimately accepted and there was no variation between returned and assessed income after appellate proceedings, no penalty should be levied. Alternatively, it was argued that the penalty rate of 90% was excessive.
Rejecting the argument that absence of variation in assessed income eliminates penalty exposure, the Tribunal observed that the disclosure was not voluntary but was made only after the search action. Therefore, the assessee could not escape penalty merely because the income was later accepted in assessment proceedings.
The Tribunal further analysed the statutory framework of Section 271AAB(1), noting that a lower penalty rate of 10% applies only when the assessee not only admits undisclosed income but also specifies and substantiates the manner in which such income was derived. In the present case, although the assessee admitted the undisclosed income, he failed to explain its source.
The Tribunal held that the case does not fall under clauses (a) or (b) of Section 271AAB(1), but squarely falls under clause (c), which prescribes a penalty between 30% and 90% of the undisclosed income.
The ITAT found fault with the Assessing Officer’s decision to impose the maximum penalty of 90% without providing any justification or demonstrating exceptional circumstances. The Tribunal emphasised that while the statute permits a higher penalty, such discretion must be exercised judiciously.
The Tribunal directed that the penalty be restricted to 30% of the undisclosed income, holding that this would meet the ends of justice given that the assessee had admitted the income and declared it in the return, albeit without substantiating its source.
Case Details
Case Title: Jasraj Changalal Jain Versus Deputy Commissioner of Income Tax
Citation: JURISHOUR-1062-ITA-2026(MUM)
Case No.: ITA No. 5680/Mum./2025
Date: 30/04/2026
Counsel For Appellant: Vimal Punmiya
Counsel For Respondent: Rajesh Sakhardande, SR. DR
