The levy of penalty for concealment or furnishing of inaccurate particulars of income under the existing provisions of section 271(1)(c) of Income Tax Act 1961 has always been a matter of litigation between the revenue authorities and the taxpayers. The discretion regarding quantum of penalty led to corruption. The scope of such provisions was always a subject matter of litigation since tax authorities always levied the penalty whenever there was an addition or disallowance made by the assessing officer, may be because of pressure of higher authorities, even in cases where there was no prima facie case against the taxpayer. With a view to reduce the litigation and remove the discretion of tax authority, the Finance Bill 2016 has proposed the insertion of new provisions in the form of new sections 270A and 270AA in the Act which will replace the existing provisions of section 271(1)(c).
The salient features of the new provisions are discussed below.
- The new provisions of sections 270A and 270AA will apply to cases pertaining to A.Yrs 2017-18 onwards and existing provisions of section 271(1)(c) will continue to be applicable to all cases up to A.Yrs 2016-17;
- Further, the proposed scheme will not be applicable to cases where assessment is made u/s 153A in pursuance of search u/s 132 in view of clause (e) of sub section (6) of section 270A. Comment: Thus, assessment u/s 153C will be governed by the new provisions.
- Under the new scheme, penalty will be levied with reference to under reported income and misreporting of income;
- Penalty for under reported income will be @ fixed rate of 50% of the tax payable on under reported income while it will be @ 200% of the tax payable on the misreported income;
- (a) The difference between the amount of income assessed u/s 143(3) or u/s 147 and the amount of income determined u/s 143(1)(a). Thus, under reported income would not include the amount of adjustment made in determining the income u/s 143(1)(a);
- (b) Where no return is filed by the assessee—(i) entire amount of income assessed where the assessee is a company, firm or local authority (ii) in case of other assessees, the difference between the amount of income assessed and the maximum amount not chargeable to tax;
- (c) Where the income is assessed as a result of reassessment or recomputation (not being assessed for the first time), it will mean the difference between the amount of income re-assessed or re-computed and the amount of income assessed, re-assessed or re-computed in a preceding order. The preceding order has been defined as the order passed immediately preceding the order during the course of which penalty proceeding is initiated;
- (d) Where the income is assessed by way of deemed assessment u/s 115JB/115JC, it will mean the amount determined as per the formula given in the proviso to sub section 3(ii) of section 270A which is similar to Explanation 4 to section 271(1)(c). The only difference is that under the said Explanation the formula defines the tax sought to be evaded while under the new scheme it is with reference to amount of under reported income; and
- (e) Where the loss is reduced or loss is converted into income, it will mean the difference between the amount of loss claimed by the assessee and the income or loss assessed or reassessed.
- However, under reported income shall not include---
- (a) The additions or disallowances in respect of which assessee offers a bona fide explanation to the satisfaction of the tax authority and proves that he had disclosed all material facts to substantiate the explanation;
- (b) The additions or disallowances determined on estimate basis, if the accounts maintained by assessee are correct and complete to the satisfaction of tax authority but the method employed is such that the income cannot properly be deduced there from;
- (c) The additions or disallowances determined on estimate basis, where the assessee had, suo moto, made a lower amount of disallowance on the same issue in computation of income but had disclosed all material facts in respect of such additions or disallowances;
- (d) The amount of addition made in conformity of arm's length price determined by TPO if the assessee had maintained information and documents as prescribed u/s 92D and declared the international transactions and disclosed all material facts relating to such transactions;
- (e) The amount of undisclosed income referred to in section 271AAB.
Misreporting of income means where under reported income is in consequence of-
- Misrepresentation or suppression of facts;
- Failure to record investments in the books of account;
- Claim of expenditure not substantiated by any evidence;
- Recording of false entry in the books of account;
- Failure to record any receipt in the books of account having a bearing on the total income;
- Failure to report any international transaction or deemed international transaction or any specified domestic transaction to which provisions of chapter X applies.
For the purpose of levy of penalty, the amount of tax payable on under reported income as per sub section (10) shall be computed as under---
- (a) Tax payable on such income as if it were the total income in case of company, firm or local authority; and
- (b) At the rate of 30% of under reported income, in any other case.
The distinction and similarity between the existing provisions and the new scheme--
- Under the existing provisions, the tax authority has to record his satisfaction in the assessment proceeding to the effect that assessee had concealed the particulars of income or furnished inaccurate particulars of income. Failure to record such satisfaction rendered the penalty order as nullity. Under the new scheme, there is no such statutory requirement. Mere initiation of penal proceeding would be sufficient which may be by issuing direction in the order or by issue of penalty notice.
- Under the existing provisions, the tax authority has to prove the fact that assessee has concealed the particulars of income or furnished the inaccurate particulars of income. Under the new scheme, there is no such requirement in case of under reporting of income since difference between the assessed income and income determined u/s 143(1)(a) is presumed to be under reporting of income or difference between the assessed income and maximum amount not chargeable to tax. However, in case of misreporting of income, the tax authority will have to prove or demonstrate that case of assessee falls within the criteria mentioned in sub section(9).
- Under the existing provisions, a discretion is vested with the AO to impose penalty between 100% to 300% of the tax but under the new scheme, the AO has no such discretion. He is required to impose penalty at flat rate of 50% of tax payable on unreported income and 200% of tax payable on misreported income.
- Under the existing as well as new scheme, no penalty order can be passed without giving an opportunity of being heard in view of the provisions of section 274.
- The limitation period specified in section 275 will apply to order passed under both the scheme.
- The right to appeal is available under section 246A under both the scheme. Though there appears to be an inadvertent mistake in not making specific amendment in section 246A but hopefully will be there in the said section. It may be pointed out that the existing clause (q) of section 246A permits the right to appeal against any penalty order passed under any section falling under chapter XXI. Since penalty orders under the new provisions falls under chapter XXI, right to appeal is not lost even if no specific amendment is made in section 246A. Whether penalty proceedings can be initiated after completion of assessment proceedings? In my view, the answer is NO for the reason given hereafter.
- Though there is no specific provisions to this effect, the inference can be drawn from the Explanation below sub section(3) which refers to initiation of penalty under sub section(1) of section 270A. • Since for availing the immunity u/s 270AA, the assessee is required to make an application within 30 days from the end of month in which the order of assessment is received, he must be aware from such order that penalty proceeding u/s 270A has been initiated or not.
- Further, immunity u/s 270AA is available only in case of under reporting of income. Hence, A.O must demonstrate whether penalty is initiated for under reporting of income or misreporting of income. This can be done only through initiating the same in the assessment order or by issuing the notice.
- Section 274 provides that no order of penalty can be passed without providing an opportunity of being heard to the assessee. The assessee is entitled to know from the order whether penalty proceedings are initiated or not and also whether for under reporting of income or misreporting of income.
- Last but the most important reason is that section 275 provides the period of limitation. According to section 275(1)(c), no penalty order can be passed after the expiry of financial year in which the proceedings, in the course of which action for imposition for penalty has been initiated, are completed, OR 6 months from the end of the month in which action for imposition of penalty is initiated, whichever is later. Similar language is there in S, 275(1)(a). So, unless the penalty proceedings are initiated in the course of assessment proceedings, the period of limitation cannot be worked out.
Scope of the expression “misreporting of income”
“Misreporting of income” is considered to be more stringent as compared to “under reported income” since penalty in case of misreporting of income is to be imposed @ 200% of the tax payable as against 50% in case of under reported income. It is to be noted that it is not an independent expression. A combined reading of sub sections (8) & (9) shows that it is the under reported income which is to be treated as misreporting of income if under reported income is in consequence of items specified under subsection (9). So, firstly, under reported income is to be computed and then A.O has to give a finding that such under reported income is in consequence of the items specified under sub section (9). So, if any addition or disallowance does not fall within the scope of “under reported income” then question of treating the same as misreporting of income does not arise.
Burden of proof-
- As far as under reported income is concerned, it is simply a case of calculation and therefore, the element of mens rea is absent.
- As far as misreporting of income is concerned, in my opinion, the onus is on the revenue to prove that under reported income is in consequence of the circumstances mentioned in sub section (9).
Let us have a look at these items---
The first item in sub section (9) is misrepresentation or suppression of fact which certainly involves the element of mens rea i.e. the guilty mind on the part of assessee. Hence, the A.O will have to prove this aspect. This aspect will always be a subject matter of litigation.
The second item is failure to record investment in the books of account while the fifth item refers to failure to record receipt in the books of account which has a bearing on the total income. Such facts can be proved by A.O just by referring to books of account of the assessee. But where assessee is not required to maintain books of account, these sub sections would become inapplicable.
Fourth item refers to recording of false entry in books of account. The word 'false' also involves mens rea on the part of assessee. Hence, onus will be on revenue to prove the mens rea on the part of assessee.
The second item in the list refers to claim of assessee regarding expenditure not substantiated by any evidence. The word 'any' is important which can be read as no evidence. So, where evidence has been filed by the assessee, it will not be a case of misreporting of income merely because it is not believed by the tax authority. This aspect of the matter shall be a matter of litigation.
The sixth and last item is failure to report international transaction or specified domestic transaction. The A.O can prove this just by referring to such failure.
How the penalty is to be computed?
As already stated, the penalty shall be computed @ 50% of the tax payable on under reported income AND 200% of tax payable in case of under reported income falling under sub section (9) i.e. misreported income.
Tax payable is to be computed as per the provisions of sub section (10) of section 270A i.e. 30% of the under reported income and not as per normal rate as per finance Act so far as assessees (other than company, firm and local authority) are concerned. In case of company, firm or local authority, it will be tax as if the under reported income would have been the total income.
For example, an individual declaring income of Rs.5 lakhs is assessed at Rs.7 lakhs. In such case, under reported income would be Rs.2 lakhs on which tax payable would be Rs.60,000/-(30%) and penalty would be Rs.30,000/-and if such income falls under subsection (9) then penalty would be Rs.1,20,000/-. However, if such assessee had not filed the return at all for any reason then, under reported income will amount to Rs.4.5 lakhs (7 lakhs-2.5 lakhs) on which tax payable would be Rs.1,35,000/-(30%) on which penalty would be Rs.67,500/-and if such income falls under subsection (9) then penalty would be Rs.2,70,000/-.
In my opinion, the provisions are too harsh and drastic in those cases where an assessee fails to file the return for bonafide reasons beyond his control. In my opinion, suitable amendment needs to be made in this behalf. In order to avoid hardship, the only option with the assessee is avail the immunity by paying tax and interest in accordance with the provisions of section270AA.
Immunity from penalty and prosecution
The new scheme provides complete immunity from penalty and prosecution in respect of under reported income if two conditions are fulfilled namely-(a) Tax and interest payable as specified in the notice of demand has been paid within the time specified in such notice of demand and (b) no appeal is filed against the order of assessment or reassessment. The procedure specified is simple. The assessee is required to file an application in the prescribed form within one month from the end of the month in which such order of assessment or reassessment is received by the assessee. The assessing officer, if conditioned fulfilled, shall grant immunity (9).The A.O shall pass an order within one month from the end of the month in which such application is received. If the A.O decides to reject the application, he shall give an opportunity to the assessee of being heard before rejection.