Topic: Penalties under
Income Tax Act – Recent Developments
Speaker: Mr. Hiro Rai, Advocate
Date: 22nd
March 2017
Venue: Walchand Hirachand Hall, Indian Merchants Chamber
The speaker commenced the lecture
meeting, by dealing with the penalty u/s.
271(1)(c) of the Income-tax Act, 1961 (‘The Act’). Section 271(1)(c) has
two limbs, concealment of particulars of income and furnishing of inaccurate
particulars of income. The very first argument to be taken, in a penalty u/s.
271(1)(c) is of whether the penalty that has been levied is on the concealment
of income or furnishing inaccurate particulars of income, provided the facts
and circumstances of the case permit such an argument. It is an established
proposition that penalty provisions should be strictly construed. Therefore, if
the show-cause notice is in the printed form where the AO has not ticked the
relevant provisions or has not marked what he wants the assessee to respond to,
then the inference can be drawn that there is failure on the part of the AO to
apply his mind. In such a scenario, the assessee is deprived of knowing what
charge he is required to answer to. The courts have taken the position that, in
such cases, the penalty proceeding itself is bad in law.
In this regard, the speaker
referred to two rulings given by the Karnataka High Court (‘HC’) viz., CIT
vs. Manjunatha Cotton & Ginning Factory (359 ITR 565) and CIT vs.
SSA’s Emerald Meadows (73 taxmann.com 241). In SSA’s Emerald Meadows case,
the Karnataka HC followed the decision of Manjunatha Cotton & Ginning
Factory (supra), and the Supreme Court (‘SC’) dismissed the Special
Leave Petition (‘SLP’) filed by the department. However, mere dismissal of an
SLP, in the absence of a speaking order does not mean that the SC has given the
stamp of approval to the decision of the Karnataka High Court. The speaker mentioned that, the SC decision
in case of T. Ashok Pai vs. CIT (245 ITR 360) also discusses the above
proposition.
In a recent case, Mumbai Income
Tax Appellate Tribunal (‘ITAT’) followed the above mentioned 2 decisions of the
Karnataka High Court and observed that “If penalty is initiated on one limb
of the section 271(1)(c) of the Act and levied on another limb, then the
penalty is bad in law.” In a recent case, reported in 392 ITR 4, the Bombay
HC noted the fact that since the notice did not strike out irrelevant portion,
the AO had not applied his mind.
As regards penalty u/s. 270A, the
memorandum explaining the Finance Bill as well as the circular on the Finance
Act both include the words “In order to rationalise provisions relating to
penalty and bring clarity, certainty …”. However, the speaker was of the
view that it was doubtful whether there would be clarity and certainty.
Sub-section (1) of section 270A
lists down the authorities who may impose penalty in case of an under reporting
of income. The inclusion of the words “… may, … direct that..” indicates
that the levy is not mandatory. The speaker suggested that, when an opportunity
of being heard is given to the assessee, he should completely bring out all the
relevant facts.
Sub-section (2) to section 270A
lays down the 7 situations where a person can be considered to have
under-reported the income. In all the situations, the AO has to prove that
there is under-reporting of income. The first 3 clauses of sub-section (2) to
section 270A i.e. (a) to (c), deal with non – MAT additions. In case of clause
(a), there must be processing of return of income u/s. 143(1) of the Act. No
return case is mentioned in clause (b), where the income assessed is greater
than maximum amount not chargeable to tax. Clause (c) covers the cases relating
to reassessment. Clauses (d) to (f) deal with additions to MAT profits. The
speaker mentioned that, at bill stage, clause (f) was not present. At the Act
stage, clause (f) was inserted and the earlier proposed clause (f) was shifted
to clause (g). However, the lawmakers failed to amend clause (d), while
inserting clause (f). Clause (g) covers a situation where loss is reported in
the return of income and the assessment or reassessment has effect of
converting such loss into income. A Loss to Loss situation is not covered in
clause (g) as it contains the words “the income assessed …”.
Section 270A(3) provides for the
computation of under-reported income. The speaker was of the view that, in 90%
of the cases the AO would sustain penalty in case of addition to the income,
causing a lot of harassment to the assessee. In case the difference between
returned and assessed income is on account of the income as per normal
provisions of the Act and not on account of book profits computed u/s. 115JB,
then section 270A(3)(ii) will not apply. Then, the speaker threw light on the
formula (A–B) + (C–D) mentioned in the proviso to section 270A(3). The proviso
is applicable where under-reporting of income arises out of determination of
book profits as per MAT provisions. However, in the formula, ‘A’ is the total
income assessed as per normal provisions of the Act. But, when book profits are
deemed to be total income, then there is no assessment of income as per normal
provisions, but mere computation of such income. Therefore, in the view of the
speaker, the formula (A–B) + (C–D) fails, and hence no penalty could be levied
in such a situation.
Section 270A(6) provides the
exclusions from under reporting of income. Clause (a) states that, no penalty
is to be levied in case of under-reporting of income on the legal issues. The
speaker suggested that in case of a legal claim made by the assessee, the facts
should be disclosed properly by the assessee. On clause (c), the speaker gave
an example of disallowance u/s. 14A and disallowance to the extent of say, 25%
of expenses by the AO in the assessment order, where the assessee has suo-moto
disallowed 10% of the expenses. Clause (d) talks about Transfer Pricing
adjustments. As per clause (e), no penalty u/s. 270A can be levied in search
cases.
Section 270A(7) quantifies the
amount of penalty payable on under-reported income i.e. 50% of the amount of
tax payable on under-reported income.
Then, the speaker discussed s/s.
(8), which quantifies the penalty at 200% of the tax payable on under-reported
income, which is as a consequence of misreporting. The speaker clarified that
misreporting of income is a sub-set of under-reporting. Further, the saving
clauses of sub-section (6) to section 270A do not apply in cases of
misreporting of income.
S/s. (9) gives an exhaustive list
of misreporting of income. The speaker gave examples on each clause of the sub-section.
Clause (q) to Section 246A(1)
gives a right to the assessee to appeal before the Commissioner of Income Tax
(Appeals) against an order imposing penalty under Chapter XXI.
U/s. 273A, penalty can be reduced
or waived on satisfaction or certain conditions mentioned therein.
U/s. 270AA(1), where the assessee
pays the tax and interest payable as per the order, the AO may grant immunity
from imposition of penalty for misreporting or under-reporting. In the
speaker’s view, the AO may reject the immunity as mentioned above, stating that
the income is misreported and not under-reported.
As regards section 270AA(2), the
speaker categorically mentioned that the application to the AO to grant
immunity from imposition of penalty u/s. 270A should be made immediately on
receipt of the assessment order u/s. 143(3) or reassessment order u/s. 147, as
the case may be, and one should not wait for the last date i.e. one month from
the end of the month in which the order is received. This is because the period
of limitation as mentioned in section 249 is not adequate.
The inclusion of the word “shall”
in sub-section (3) of section 270AA binds the AO to grant immunity on the
conditions specified in sub-section (1) to section 270AA being satisfied.
However, there will be no benefit granted in case of misreporting of income.
Clause 3 is available only in case of under-reporting of income.
As per section 270AA(4), the AO
should give an opportunity of being heard to the assessee, before rejecting the
application to grant immunity from imposition of penalty u/s. 270A. The speaker
mentioned that in case of mis-reporting of income, when the opportunity of
being heard is given, the assessee should bring out the fact that, the assessee
does not accept that his case is one of misreporting.
In case the application to grant
immunity from imposition of penalty u/s. 270A is rejected, then an appeal
should be filed before the Commissioner of Income Tax (Appeals) against such
rejection.
Later, the speaker threw light on the saving provisions
contained in the section 249 of the Act that, for the purpose of computing the
period of limitation for filing of an appeal to the Commissioner (Appeals),
where an application has been made u/s. 270AA(1). The period beginning from the
date on which application is made, to the date on which the order rejecting the
application is served on the assessee, is to be excluded.
Section 271AAB speaks about the
penalty in cases where search has been initiated. As per clause (a) to s/s.
(1), in case of search initiated on or after 1st July, 2012 but
before 15th December, 2016, the assessee shall pay by way of penalty
at the rate of 10 % of the undisclosed income of the specified previous year on
satisfaction of the conditions mentioned therein.
As per section 271AAB(1A)(a), in
case of search initiated on or after 15th December, 2016, the
assessee shall pay by way of penalty at the rate of 30 % of the undisclosed
income of the specified previous year on satisfaction of the conditions
mentioned therein. As per clause (b) the, assessee shall pay by way of penalty
at the rate of 60 % of the undisclosed income of the specified previous year.
Clause (b) covers the situations which are not covered in clause (a).
Later, the speaker dealt with the
amendment in section 115BBE by the Taxation Laws (Second Amendment) Act, 2016
w. e. f. 1st April, 2017. Section 115BBE prescribes tax at the rate
of 60% on the income referred in sections 68, 69, 69A, 69B, 69C or 69D included
in total income of the assessee computed in return of income or determined by
the Assessing Officer. Section 271AAC of the Act prescribes penalty at the rate
of 10% of the tax payable u/s. 115BBE. The silver lining here is that, the rate
of income tax as per section 115BBE is 60% and as per section 271AAC, the
penalty is computed at the rate of 10% of the tax payable u/s. 115BBE.
Therefore, the total liability towards tax and penalty together amounts to 66%
of the income referred in sections 68, 69, 69A, 69B, 69C or 69D of the Act.
The
meeting ended with a vote of thanks to the speaker.
