ORDER

Khettra Mohan Roy, Accountant Member. – This appeal filed by the assessee is directed against the order of Learned Commissioner of Income Tax (Appeals)-3, Nagpur, (for short, “CIT(A)”), dated 31/07/2025 passed under section 250 of the Income Tax Act, 1961 (for short, “Act”) which is emanating from the penalty order dated 06.08.2019 passed u/s. 271AAB of the Act by the ACIT, Central Circle-2(1), Nagpur, for the Assessment Year (AY) 2013-14.

2. The sole issue raised in this appeal is whether Ld.CIT(A) was justified in sustaining the penalty of Rs.2,50,000/- u/s. 271AAB of the Act, out of the total penalty of Rs. 10,00,000/- levied by the Ld. AO.

3. Facts of the case in brief are that assessee, a company, had filed its return of income for A.Y. 2013-14 on 30.03.2014 declaring total loss (-) of Rs.17,01,039/-. Search and seizer operations u/s 132 of the Act was conducted at the office premises of the assessee on 27.08.2013. A notice u/s. 153A was issued and served upon the assessee. In response thereto, assessee filed return of income declaring total income of Rs.80,38,053/- which includes surrendered income of Rs.1,02,00,000/-. Assessment was completed u/s 143(3) r.w.s. 153A accepting returned income of Rs.80,38,053/-. However, Ld. AO levied penalty of Rs.10,20,000/- u/s 271AAB being 10% of the amount offered for taxation during the course of search vide penalty order dt.06.08.2019.

4. Aggrieved by the order of penalty, assessee preferred an appeal before the Ld. CIT(A), who vide order dated 31.07.2025 partly allowed the appeal confirming the penalty to the extent of Rs.2,50,000/- relating to one item of fees for technical services of Rs. 25,00,000/- holding that “the expenditure was recorded but later surrendered due to non-verifiability”.

5. Assailing the order of penalty, assessee is in appeal before this Tribunal. Learned counsel for the assessee submitted that the fees for technical services to the tune of Rs.25,00,000/- was incurred during the course of business and the entry for such expenditure was duly found recorded in the regular books of accounts. The payments were made from bank and duly supported by bills, TDS was deducted according to the provisions of the Act. He further submitted that declaration/surrender of income was made as the explanation furnished in the course of search was not upto the satisfaction of the Authorised Officer and therefore in order to avoid litigation, the declaration was made. Referring to the declaration which is reproduced at page No.3 of the penalty order learned counsel vehemently contented that the offer was not because of any incriminating document found, as a result of search nor there was any specific mistake or falsity in the entry or the expenditure claimed was found. It is contended that the provisions of section 271AAB of the Act are applicable to the “undisclosed income” found as a result of search, however, the income surrendered is outside the purview of definition of undisclosed income as provided in explanation to section 271AAB. In support of his contentions, learned counsel placed reliance on the following case-laws:-

5.1 Learned counsel pointed out that there was no falsity found either in the entries recorded or the documents maintained in the normal course of business for the impugned item of expenditure. Referring to the penalty order of the Ld. AO, learned counsel strongly objected to the conclusion drawn by the Ld. AO that the surrender of income was made on the basis of incriminating document which is factually incorrect. The presumption drawn by the Ld. AO that the surrender of income in the return itself is acceptance of the fact that it was based on incriminating documents, is misplaced. The Ld. AO misconstrued the fact and therefore the observation that the income is disclosed when the assessee was unable to prove the source of income and not able to confirm the entries in books of accounts is incorrect as there is no such whisper in the letter of the assessee or in the assessment order. He further contented that penalty u/s 271AAB is not consequential to the surrender of income unless the case falls under the four corners of law mandating the penalty. Referring to the definition of undisclosed income provided in the explanation to section 271AAB, it was reiterated that there was no falsity found in the expenditure on fees for technical services recorded in the books of accounts.

6. Per contra, Ld.Departmental Representative (DR) relied upon the order of Ld. CIT(A) and submitted that the expenditure was though recorded but later-on surrendered due to nonverifiability, it falls squarely within the definition of “undisclosed income” as per clause (ii) of Explanation to section 271AAB. Ld.DR strongly submitted that the surrender was made pursuant to the infirmities pointed out by the department and it was not a voluntary act but consequent to search action.

7. We have heard rival submissions and perused the material available on record. The Ld. AO has levied penalty u/s 271AAB of the Act in respect of income surrendered by the assessee in the return of income holding that the undisclosed income has been disclosed only due to search action when infirmities were pointed out. Ld. CIT(A) sustained the addition holding that the surrender was due to non-verifiability of the expenditure. On examination of return of income available at page No.33 of the paper book, we find that the declaration is made under the head profits and gains of business and profession under the nomenclature “amount declared” Rs.1,02,00,000/-. Thus, there is no declaration accepting the nature of disclosure as “undisclosed income”. We have also perused the extracts of letter of surrender reproduced at page No. 3 of the penalty order and find that there was no specific defect / mistake resulting into falsity is mentioned in the letter and it was a general surrender “additional income” during the course of survey. More-so, the items mentioned therein really raise doubt as to whether there was any need to surrender income when the items mentioned therein are not claimed as expenditure in the books of accounts. For example, item No. 2 “advance paid to M/s Samiksha Jewellers” Rs.50,00,000/- is an entry for advance and not for expenditure. Ld. CIT(A) has also found that it was never claimed as an item of expense and therefore, the same cannot be treated as undisclosed income. Consequently, the penalty u/s 271AAB levied by Ld. AO on this item was deleted by Ld. CIT(A). For the other two items of surrender, Ld. CIT(A) recorded that in absence of clarity or concrete finding, such a generic offer cannot be categorised as “undisclosed income” within the strict framework of Explanation (c) and consequently deleted the penalty on such surrender as well, however, confirmed the penalty on first item of fees for technical services Rs.25,00,000/-.

7.1 The question arises whether the surrender made by the assessee in the letter/statement recorded at the time of search will be regarded as undisclosed income without testing the same within the definition as provided under clause (ii) of Explanation (c) to section 271AAB of the Act. There is no dispute that in the letter furnished during the course of search, assessee has disclosed the income under consideration as additional income on account of fees for technical services of Rs.25,00,000/-. However, for the purpose of levying penalty u/s. 271AAB, the primary condition is that assessee shall pay the penalty depending upon the satisfaction of the condition as provided u/s. 271AAB. The term “undisclosed income” has been defined in the Explanation to section 271AAB and, therefore, the penalty under the said provision has to be levied only when the income surrendered by the assessee falls in the ambit of undisclosed income as defined under this section. The mere disclosure of income in the statement recorded u/s. 132(4) or letter in the instant case would not ipso facto be regarded as undisclosed income unless and until it is tested as per the definition provided in the Explanation to section 271AAB of the Act. In the case at hand, there is no dispute that assessee has duly recorded the expenditure on fees for technical services in the books of account and thus duly disclosed. There is no material found during search or brought on record to establish that the entry or the document is false. There is no incriminating material found as a result of search. Here it is pertinent to refer to the definition of undisclosed income as per clause (c) of Explanation to section 271AAB which reads as under: —

(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.

Sub-clause (ii) in the definition of undisclosed income contemplates that the entry in the books of accounts or other documents maintained in the normal course is found to be false consequent to search. In the instant case, there is no finding as a result of search or subsequent verification that the documents in support of expenditure like bills etc., are forged or false. Further, there is no finding that the invoice/bill in respect of services are without actual services being provided. There is also no charge that the person in whose name the bills are received does not exist. Ld. AO at page No. 6 of the penalty order held that surrender of the income in return by the assessee, is itself acceptance of the fact that the income disclosed and accepted by the assessee was based on incriminating documents. However, we find that there is no incriminating document brought on record by both the lower authorities. Penalty u/s 271AAB is attracted on undisclosed income but not on the admission made by the assessee. The Ld. AO must establish that there is undisclosed income on the basis of incriminating material. Thus, we hold that there is no satisfaction recorded by the Ld. AO or Ld. CIT(A) with regard to the entry or transaction that the same is false. Ld. CIT(A) himself found and observed in para (c) at page 7 of the CIT(A)’s order that such a generic offer cannot be categorised as undisclosed income within the strict framework of Explanation (c). Of course, we are aware that was for other item of expenditure, but in our opinion the same will be applicable in the case of fees for technical services also. The Ld. CIT(A) confirmed the penalty holding that the surrender was due to “non-verifiability” which in our opinion by itself does not prove that the transaction/expenditure was false. In such circumstances we hold that the impugned item of expenditure of fees for technical services surrendered does not satisfy the condition of undisclosed income as defined in the explanation 2 to section 271AAB. In view of the facts of the case as discussed above there is no undisclosed income found during the course of search and therefore, we hold that there is no case of penalty u/s 271AAB of the Act. Thus, in our considered opinion, Ld.CIT(A) erred in sustaining the penalty of Rs.2,50,000/-, the same is directed to be deleted. Grounds of appeal of the assessee are allowed.

8. In the result, appeal of the assessee is allowed.