- Introduction
The Penalty u/s 271(1)(c) of the Act has been probably one of the most litigated provision of the Income Tax Act. However, to rationalize the same, Legislation has revamped the entire penalty provisions from shifting the defaults of ‘concealment or furnishing inaccurate particulars of income’ to new concepts of ‘Underreporting or Misreporting of the Income’ vide newly inserted Section 270A with effect from 01/04/2017. As the new penalty provisions is applicable from AY 2017-18 onwards, for which the Assessments are presently completed. The levy of penalty for the concealment of income in respect of the assessment year prior to assessment year 2017-18 would continue to be governed by the earlier provision, that is, section 271(1)(c) of the Act. This is also evident from the amendment in section 271 of the Act by insertion of sub-section (7), which reads as follows:
"The provisions of this section shall not apply to and in relation to assessment for the assessment year commencing on or after the 1st day of April 2017".
- Tax Penalty rates
The penalty in case of under reporting income is at the rate of 50% of amount of tax payable on under reported income and penalty in case of under reported income in consequence of misreporting of income is @ 200% of amount of tax payable on under reported income.
- Satisfaction vis-a-vis mentioning separate charge as done in earlier regime.
Earlier, the penalty was for provided for two separate charges viz concealing the particulars of income or furnishing of inaccurate particulars of income. These two charges were understood to be distinct from each other. The Assessing Officer therefore was required to identify the specific charge with satisfaction and record the same in the assessment order. This enabled the assessee to know the specific charge framed against him. The new penalty now has only one charge ie under-reporting, and therefore no satisfaction is required which is evident from Section 270A(2). The same is evident from the fact that in the first instance every income is underreported income and misreporting income is out of the underreporting income. The AO may not have to arrive at a specific satisfaction in the assessment proceedings about under-reporting nonetheless the application of mind would be inevitable while initiating penalty proceedings. Therefore, the earlier ground taken by the assesse that the penalty was issued without mentioning any charge will not hold good in the new provision.
- The bare act of the section 270A has been reproduced in colored form and the section wise analysis has been given in normal manner in the subsequent paragraph. The interesting issue which has not been taken care in Section 270A has been separately highlighted in the analysis part.
Note 1 The section employs language "may direct" implies that the power conferred is discretionary. The same has been clarified by the Supreme court in the case of Hindustan Steel Ltd. v. State of Orissa 1969 (8) TMI 31 - SUPREME COURT Section 270 of the Income-tax Act, 1961 - Penalty - General - Penalty is not to be imposed if there is no conscious breach of law. "An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or guilty of conduct, contumacious or dishonest, or acted in conscious disregard to its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute" Note 2 The Penalty can be levied either by A.O. or C.I.T. (Appeals) or by Pr. C.I.T/C.I.T and the proceedings may be any assessment proceeding before A.O. or proceedings before C.I.T.(Appeals) or revisionary proceedings U/s 263 before Pr. C.I.T/C.I.T. |
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Note 3 :- 270A(2) The section, as such, does not define 'underreported'; however, it provides for the circumstances in which a person shall be considered to have underreported his income. The base of penalty is finding to the effect that person has 'underreported' his income. Thus, it is only a guiding factor in the form of a fiction. Having regard to that, prima facie, the intention of the legislature is to consider the applicability of penalty proceedings automatically and merely on the basis of the difference. To put it differently, for considering initiation of penalty proceedings, the difference would be starting point. However, that may not be necessarily conclusive, as it would be subject to other provisions of the section. One significant departure noted from the earlier provision is that recording of satisfaction by the authority, for initiating the penalty, is absent. Does this really make a difference? The authority has to find underreporting of income and based thereon take the appropriate action. That would naturally necessitate application of mind to the facts and accordingly initiate the action as well as record the same in proceedings and/or the notice to be issued to the assessee and the like. Note 4 :-
The point to be noted is that in case of first assessment, the additions are being seen not with reference to the return filed by the assessee but with reference to the income determined after processing of return u/s. 143(1)(a). This means that in respect of any additions which occur between returned filed by the assessee and its processing u/s. 143(1)(a), no penalty is leviable. For Example XYZ Ltd had filed Return for ₹ 10 Lakh after claiming exemption U/s 80IAB for say ₹ 25 lakh. The return was filed in December 2017 for A.Y. 2017-18. The processing was completed on 15th April 2018 at ₹ 35 Lakh by disallowing deduction as return was filed late. The assessment U/s 143(3) was completed at ₹ 50 lakhs. The under reported income is ₹ 15 lakhs (50-35) and not ₹ 40 Lakh. Note 5 :- a) Section 270A(2)(b) r.w.t. Section 270A(3)(i)(b)Assessment made and where no return is filed. 1) In case of firm/company/AOP/Local authority quantum of under reported income shall be income assessed. 2) In any other case the difference between the amount of income assessed and maximum amount not chargeable to tax. For Example Mr. X (Senior Citizen) has not furnished the return of income for AY 2017-18 and the assessment has been framed u/s 144 at ₹ 10 Lakh. In this case the under reporting income shall be ₹ 7 Lakh (i.e. ₹ 10 lakh – ₹ 3 Lakh Basic exemption limit). Note 5A:- However, the tax payable on the under reported income has been discussed in section 270A(10). As per the said section where the assessee has not furnished the return for the first time in that case the tax shall be calculated by increasing the under reporting income by exemption limit. Therefore, in the given case the tax payable on under reporting income shall be (₹ 7 lakh + ₹ 3 Lakh) ₹ 123600/- The quantum of penalty will depend upon the nature i.e. under reporting income/misreporting income. Note 5B:- Under the earlier provisions of law penalty in search cases for non-specified years were covered u/s 271(1)(c). However, Section 271AAB deals with penalty for specified previous year being the year of search or the year which has ended before the date of search and the due date of filing of return of income u/s.139(1) has not expired. Section 271(1)(c) covered cases of penalty in search cases for the year prior to the specified years. These provisions are covered by Explanation (5A) of section 271(1)(c). However, it is interesting to note that the newly inserted section 270A, substituting the entire section 271(1)(c), there is no corresponding deeming fiction created for search cases for non-specified years. The specified years has duly been excluded in 270A(6) (e) therefore, the penalty for specified year of undisclosed income as referred in Section 271AAB in case of search will be covered by Section 271AAB and not by Section 270A. For Example if the search took place on 4th July 2019, the specified Assessment year will be AY 2019-20 and AY 2020-21. The assessee has not filed the return for AY 2017-18 and filed the return u/s 153A and has declared the income in his 153A return. Now the larger question arise that the said case will be covered in clause (a) or clause (b) of Section 270A(3)(i). It is important to know that the amendment was made ibid in Section 270A(3)(i)(b) and the word added was that where the return was filed u/s 148 for the first time in that case it will be covered in clause (b) and not under clause (a). It is important to note that the case where return u/s 153A for non specified year is filed for the first time is not covered in clause (b).Therefore, the amount of underreported income in that case will be assessed income minus the returned income. In that case no penalty will be levied if income assessed is same as income declared in first ROI filed u/s 153A. Note 5C:_ The next situation can be that in case of non specified year of search where return in response to notice u/s 153A was filed at ₹ 10 lakh and the original return was filed at ₹ 4 lakh. The additional income offered in the return filed u/s 153A was accepted by the AO. In the given case the question arise whether the penalty shall be invoked. As per author view the AO will levy the penalty under Clause (a) of Section 270A(3)(i)(a). Note 6 :- The analysis of Section 270A(2)(d)/(e)/(f) r.w.t. 270A(3)(ii). For Example XYZ Limited has filed the return and the case was completed u/s 143(3) for AY 2017-18. The tax applicable is 31.20%.
Computation of Penalty)
Note 7:- Adjustment of brought forward loss with underreporting income. Section 270A(2)(g) r.w.t. explanation clause (b) of Section 270A(3). It may a case where there is opening brought forward loss and the addition has been suggested by the AO during the current year. The interesting issue fall out would be if due to carry forward losses, despite of additions made during assessment year under consideration, income assessed remains Nil, nothing would get quantify as unreported income due to methodology prescribed u/s 270A(2). Note 8 :- The one more which has not been plugged u/s 270A(2) in that if the assessee addition is made and subsequently income is exempt due to deduction as referred in chapter VI(A) under heading C. If the addition has been made under normal provision and the same has been exempt due to deduction linked with heading C under chapter VI then despite of additions made during assessment year under consideration, income assessed remains Nil, nothing would get quantify as unreported income due to methodology prescribed u/s 270A(2). |
Note:-9 This provision takes care of what is typically called “intangible additions in earlier years” i.e. any additions in earlier years, which have not been peanlised then and now used to explain source of any receipt/deposit/investment etc. in any subsequent year.” This is akin to the provisions of Expl. 2 to sec. 271(1). Example – The AO has found unexplained investment of ₹ 30 lakh in AY 2019-20, which the Assessee explained to be made out of the earlier intangible additions of ₹ 30 lakh as under: – AY 2018-19 – ₹ 15 Lakh AY 2017-18 – ₹ 10 Lakh AY 2016-17 – ₹ 5 Lakh Implications of above – No further addition can be made in AY 2019-20 towards unexplained investment as source of the same is duly explained out of the earlier intangible additions. However, Penalty will now be initiated on the earlier intangible additions in the chronological reverse manner starting from AY 2018-19 unless and until the amount of unexplained investment found in AY 2019-20 is fully covered up – Penalty u/s 270A(5) in AY 2018-19 on – ₹ 15 Lakh Penalty u/s 270A(5) in AY 2017-18 on – ₹ 10 Lakh Penalty u/s 271(1)(c) in AY 2016-17 on – ₹ 5 Lakh (Balance amount) The Sub Section (4) and (5) of new provisions of Section 270A are completely in line with the earlier provisions of Explanation 2 of Section 271(1)(c) of the Act. However, It is important to know that parallel provision of Section 271(1A) is missing in the Section 270A and its implications can be identified only with test of judicial scrutiny. Therefore, the litigation will be as there is no section embedded in the section 270A which says that the penalty proceeding will be initiated for earlier years even if the earlier years assessment has been completed. Note 9A :- The Section 271AAC has been inserted by taxation law (Second Amendment) Act,2016 and is applicable from AY 2017-18. By virtue of this amendment the penalty u/s 270A cannot be imposed if income is taxable u/s 68 to 69D and the tax has been determined u/s115BBE. In the example mentioned in note 9 the AO has not made any addition for AY 2019-20.Therefore, the question of applicability of Section 271AAC is not applicable here. But if AO has made addition u/s 68 to 69D then in that case the penalty u/s 270A cannot be invoked. |
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Note 10:- Section 270A(6)(a) The word Bona fide has been explained in GTO v. Gautam Sarabhai Ltd. 1988 (7) TMI 87 - ITAT AHMEDABAD-C the head notes of the said judgment is as under:-
Note 11:- Section 270A(6)(b) If the underreported income is estimated and accounts are correct and complete but the method employed may not enabled proper determination. The addition is based on estimation of gross profit, as against the declared profits, without rejecting the books of account and/or without finding that the audited financial statements of the assessee are not true and correct. In such a case, the difference attributable to estimated amount of gross profit can be excluded from the underreported income. Note 12:- Section 270A(6)(c) The personal expenditure is estimated on the certain amount and has been disallowed in the computation of income by the assessee himself and the AO during assessment proceeding has increased the said disallowance. In such a case the increase in disallowance may not be treated as a underreported income. The prima facie facts should have been disclosed during the assessment proceeding or during penalty proceeding. Note 13 :- Section 270A(6)(d)
Note 14 :- Section 270A(6)(e) In respect of undisclosed income, in the Act, there is a separate provision for levy of penalty, namely, section 271AAB. The undisclosed income referred in the said provision should be excluded from the amount of under-reported income [determined in terms of the provisions of sub-section (3) and sub-section (6)]. Explanation (c) below section 271AAB defines 'undisclosed income' as follows: '"undisclosed income" means-
Thus, the above referred undisclosed income can be excluded in computing under-reported income. Note 15 :- The penalty in case where assessment or reassessment is made u/s 153C will be covered in 270A itself. The provision of Section 271AAB are not applicable in case whrere assessment is framed u/s 153C. |
Note 16:- The penalty in respect of underreported income is fifty percent of tax payable on underreported income. The tax payable has been discussed in detail in section 270(10). The computation of unreported income has been discussed in detail in above paragraphs. |
Note 17 :-
For example the assessee has filed a return of income for ₹ 10 Lakh and the AO has made addition of ₹ 2 lakh by estimating the disallowance and similarly has also made addition of ₹ 5 lakh on the basis of misrepresentation or suppression of facts which is squally covered by Section 270A(9).Therefore, the assessee shall be entitled for the benefit of 270A(6) even if the penalty is levied u/s 270A(8) r.w.t. section 270A(9).
Note 18:- The analysis of word misrepresentation or suppression of facts as dealt in Section 270A(9) clause (a) is as under:-
'The use of the word "Suppression" shows that what the assessing officer found was willful non-disclosure. If it was not a willful non-disclosure, the assessing officer would have state as merely omissions. The use of the word "suppression" clearly brings out the willful nature of the non-disclosure and, therefore, the tribunal was not right in setting aside the penalty merely on the ground that there was no finding of willful non-disclosure. Note 19:- FAILURE TO RECORD INVESTMENTS IN THE BOOKS OF ACCOUNT Section 2(12A) defines books of account inclusively and reads: "Includes ledgers, the books, cash books, account books and other books, with their in the written form or as printouts of data stored in a floppy, disk, tape or any other form of electromagnetic data storage device".
Note 20:- CLAIM OF EXPENDITURE NOT SUBSTANTIATED BY ANY EVIDENCE [CLAUSE (c)] - If claim of expenditure is not substantiated by evidence, it may lead to misreporting
Further, it may also be argued that the user of the language 'claim of expenditure' signifies such expenditure in respect of which, as such, there is no evidence, which could substantiate the actual fact of incurrence of expenditure. In other words, it seeks to cover 'bogus' or 'false' expenditure and not any and every expenditure in respect of which, possibly, direct evidence may not be insisted or kept or led to substantiate the claim of expenditure. Note 21 FAILURE TO RECORD ANY RECEIPT IN BOOKS OF ACCOUNT HAVING A BEARING ON TOTAL INCOME [CLAUSE (e)] - The circumstance specified is quite clear. Suppose, an entry is made about a receipt for fees in the memorandum books of account or a rough cash book; but, not recorded in the books of account from which the financial statements are made and based on which the total income is computed. Can it be said that it may not be considered as under reported income on account of misreporting? In principle, it would depend on whether the failure could be considered as deliberate or not. If the failure could be considered as deliberate, it could be regarded as failure to record any receipt in books of account having a bearing on total income. If the failure cannot be regarded deliberate, it can be argued that it is not a case of failure to record any receipt in books of account having a bearing on total income. In support of the above, the reasoning could be on the following lines : In the context of the provision of the clause, it could be argued by tax department that having regard to the provisions of section 44AA of the Act, books of account means such books of account used for the purposes of computing or ascertaining total income (and not a memorandum books of account used for compiling books of account). Accordingly, it could be regarded as a case of failure to record any receipt in books of account. However, considering the fact that the entry is made in the memorandum books of account used for the purposes of maintaining books of account it could be said that it was only an omission and not a deliberate action of not including the receipt in the books of account. In other words, it was not a wrong reporting but a mistake of not including the receipts in the final books of account. |
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Note 22 :- If any addition or disallowance has suffered or formed the basis for imposition of penalty in the case of the person for the same or any other assessment year, such addition or disallowance cannot be the basis for levying penalty under the section. For Example, the penalty is levied under section 271(1)(c) of the Act in respect of an intangible addition, which is explained as a source for investment in assessment year 2018-19; but, not accepted and an addition is made, apparently, penalty under the section cannot be levied. |