Synopsis Penalty under section 271(1)(c)
has been a bone of contention between tax payers and Income-tax
Department. In this Article, the author has tried to bring out an
anomaly wherein a person who has not furnished a return of Income at all
may receive a more favorable treatment than someone who has actually
furnished a return but has failed to include a particular income
therein. He has explained this with a simple and lucid live example.
Introduction
Penalty
u/s. 271(1)(c) of the Income-tax Act, 1961 is for concealment of
particulars of income or furnishing inaccurate particulars of income.
The Income-tax Department treats the relevant income as ‘concealed’ or
‘escaping assessment’. For brevity, it will be referred to as ‘escaped
income’ in this article. Penalty is equivalent to 100% to 300% of the
‘tax sought to be avoided.’
Relevant provision
Explanation 4 to section 271(1)(c) defines the expression ‘Amount of Tax Sought to be Avoided’ (ATSA) as follows:
“(a)
in any case where the amount of income in respect of which particulars
have been concealed or inaccurate particulars have been furnished has
the effect of reducing the loss declared in the return or converting
that loss into income, means the tax that would have been chargeable on
the income in respect of which particulars have been concealed or
inaccurate particulars have been furnished had such income been the
total income;
(b) in any case to which Explanation 3 applies,
means the tax on the total income assessed [as reduced by the amount of
advance tax, tax deducted at source, tax collected at source and
self-assessment tax paid before the issue of notice u/s. 148];
(c)
in any other case, means the difference between the tax on the total
income assessed and the tax that would have been chargeable had such
total income been reduced by the amount of income in respect of which
particulars have been concealed or inaccurate particulars have been
furnished.”
Clause (a) deals with a situation of loss vis-à-vis escaped income.
Clause
(b) is relevant for this article – It refers to Explanation 3 which
deals with a situation where no return has been filed.
Explanation 3 —
“Where
any person fails, without reasonable cause, to furnish within the
period specified in sub-section. (1) of section 153 a return of his
income which he is required to furnish u/s. 139 in respect of any
assessment year commencing on or after the 1st day of April, 1989, and
until the expiry of the period aforesaid, no notice has been issued to
him under Clause (i) of sub-section (1) of section 142 or section 148
and the Assessing Officer or the Commissioner (Appeals) is satisfied
that in respect of such assessment year such person has taxable income,
then such person shall, for the purposes of Clause (c) of this s/s., be
deemed to have concealed the particulars of his income in respect of
such assessment year, notwithstanding that such person furnishes a
return of his income at any time after the expiry of the period
aforesaid in pursuance of a notice u/s. 148.”
The unfairness
In
terms of Explanation 3 – where the assessee has not filed or furnished
the IT return and any escaped income is detected then the prepaid taxes
like TDS, advance tax, tax collected at source and self assessment tax
are to be deducted from the tax on the total income for the purposes of
calculating ATSA. This is logical and fair. However, Clause (b) does not
deal with a situation where the return was duly furnished but a
particular item remained to be included in the income. This is a more
common situation particularly if the income is in the nature of only
accrual and not actually received. Sometimes there could be TDS on the
said escaped income which also remains to be claimed. It is grossly
unjust and unfair not to consider this TDS while calculating ATSA on
escaped income.
It is a different story if such inadvertent
escapement is accepted by the income tax department as non concealment.
Otherwise, it leads to an anomaly that a person who has not furnished a
return at all receives more favourable treatment than the one who
actually furnishes the return but fails to include a particular item.
Needless
to state that the particulars in Form 26AS are not necessarily complete
and reliable. Otherwise, an assessee would get a hint that some income
has remained to be included.
Live Example
An
individual’s services were transferred from Company A to Company B
within the same group. Company A credited ESOPs to his demat account and
duly deducted tax on the perquisite value. Since, it was only a
notional income, it did not occur to the assessee to obtain salary
certificate from Company A, hence purely out of oversight and ignorance,
the income remained to be included. It was revealed in the course of
assessment from Form 26AS. Therefore, although full tax @ 30% was
deducted on the perquisite value – escaped income – the definition of
ATSA does not permit the deduction of this TDS for penalty u/s.
271(1)(c).
Suggestion
The scope of Clause (b) of
Explanation 4 should be enlarged so as to cover both the situations
namely non furnishing of return as well as non inclusion of particular
income in the return filed.
