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.