A search and seizure operation was conducted at the assessee’s premises on 25 November 2010, during which the assessee admitted to undisclosed income. Another income, which was not accepted during the course of the search proceedings, was also discovered subsequently during the assessment proceedings, which the assessee accepted. The assessee substantiated the manner in which said undisclosed income was derived and paid tax, together with interest belatedly. The Assessing Officer imposed a penalty under section 271AAA on the ground that the assessee had not paid the tax and penalty within the prescribed period, which was upheld by the CIT (A), the Bangalore Tribunal, and the Karnataka High Court. On further appeal, the Supreme Court observed that the assessing officer has the discretion to levy a penalty, but such discretion must be exercised in a fair and reasonable manner. The Supreme Court held that if the conditions under section 271AAA (2) are satisfied even belatedly, then the penalty under section 271AAA (1) is not applicable in respect of income disclosed in the search in respect of income disclosed during the search. However, for income which was not disclosed during the search, penalty under section 271AAA(1) was held to be applicable since this income was not declared at the time of search but was uncovered based on subsequent evidence and qualified as ‘undisclosed income’ under section 271AAA(1).(AY. 2011-12)