Section 271AAB of the Income Tax Act, 1961, lays down specific provisions for penalties in cases where a search has been conducted under Section 132. This section aims to penalize the concealment of undisclosed income uncovered during search proceedings. Below is a detailed explanation of Section 271AAB, its applicability, penalty rates, procedures, and defenses available to taxpayers.

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1. Applicability of Section 271AAB

Section 271AAB is applicable when:

• A search is initiated under Section 132.
• Undisclosed income is detected during the search.

Definition of Undisclosed Income (As Per Section 271AAB):

• Income not recorded in the books of account.
• Income from transactions or assets that have not been disclosed to tax authorities.
• Any income that is falsely claimed as an expense.

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2. Penalty Rates Under Section 271AAB

The penalties imposed depend on the timing and nature of the disclosure by the taxpayer:

Condition	Penalty Rate
Taxpayer admits undisclosed income during the search, specifies its manner of earning, and pays tax along with interest.	30% of undisclosed income.
Taxpayer does not meet the above conditions but admits the income in the return filed post-search.	60% of undisclosed income.
Taxpayer does not disclose the income or denies its existence.	90% of undisclosed income.

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3. Procedure for Imposing Penalty

1. Show-Cause Notice:
   • Tax authorities issue a notice requiring the taxpayer to explain why the penalty should not be imposed.
2. Opportunity to Respond:
   • The taxpayer can provide explanations, evidence, or defenses.
3. Assessment of Circumstances:
   • The Assessing Officer evaluates whether the conditions for lower penalties (e.g., timely admission) are met.
4. Penalty Order:
   • Penalty is imposed based on the facts and circumstances.

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4. Illustrative Examples

Scenario	Undisclosed Income (₹)	Penalty Rate	Penalty (₹)
Admitted during search and taxes paid promptly	10,00,000	30%	3,00,000
Admitted post-search in return	20,00,000	60%	12,00,000
Not disclosed or denied	15,00,000	90%	13,50,000

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5. Defenses and Relief Under Section 271AAB

Reasonable Cause Defense (Section 273B):

Taxpayers may claim relief from penalties if they demonstrate a reasonable cause for the non-disclosure.

Key Considerations for Lower Penalty Rates:

• Timely admission of undisclosed income.
• Maintenance of transparency in reporting post-search.
• Prompt payment of taxes and interest.

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6. Relevant Case Laws

1. Pr. CIT v. Sandeep Chandak (2018):
   • The court clarified that penalty provisions under Section 271AAB are discretionary and not mandatory. Assessing Officers must evaluate facts before imposing penalties.
2. CIT v. SSA’s Emerald Meadows (2016):
   • Reinforced that proper notices under Section 274 are essential for penalty proceedings.

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7. Key Differences Between Section 271AAB and Other Penalty Provisions

Aspect	Section 271AAB	Other Penalty Provisions (e.g., Section 270A)
Applicability	Triggered by search under Section 132.	Applies in regular assessment or reassessment.
Focus	Penalizes undisclosed income detected during search.	Penalizes under-reporting or misreporting.
Penalty Rate	30% to 90% based on circumstances.	50% to 200% for misreporting under Section 270A.

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8. Appeals Against Penalty Orders

Taxpayers can challenge penalty orders imposed under Section 271AAB:

• Appeals: File under Section 246A to the Commissioner of Income Tax (Appeals).
• Higher Authorities: Approach the Income Tax Appellate Tribunal (ITAT) if necessary.

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Conclusion

Section 271AAB provides a structured approach to penalize undisclosed income discovered during search operations. By offering reduced penalties for timely admission and compliance, it encourages transparency and cooperation. Taxpayers must maintain accurate records, promptly disclose income, and adhere to tax laws to avoid penalties. For genuine errors, reasonable cause defenses can provide relief.

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Additional Resources

Learn more about Tax Provisions on the official Income Tax India website.

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