Issue of Imposition of Penalty u/s 270A of Income Tax Act,1961

The demonetization of Indian High Value Currency Notes is creating havoc and sheer chaos in the Indian Markets. Amidst such a scenario, rumours are spreading on imposition of 200% penalty by the Income Tax Department on the cash deposited in banks by the assessee’s.

It has been rumoured and spread vigorously that the 200% penalty shall be imposed on the cash deposits in the bank accounts, thus you need to pay more than your income! This kind of unwarranted interpretations has led to sheer panic among the Indian masses.

The bare reading of Section 270 A divulges the fact the penalty under the newly inserted section 270A (be it 50 % or 200%) can only be levied on difference between assessed income and returned income.

Lets us examine the taxability of the unaccounted cash deposits in bank accounts. Brevity may be the soul of wit, but unfortunately, not of The Income Tax Act, 1961.

It is very pertinent to mention here four very important statements, which are to be analyzed both logically and legally keeping in view the relevant sections of the Income Tax Act’1961.

The statements are as follows.

1. “We would be getting reports of all cash deposited during 10th Nov to 30^th 2016 above threshold of Rs. 2.50 lacs in each A/C.”

2. “Income Tax department would do matching of this with income returns filled by the And suitable action may follow.”

3. “If cash amount of above Rs. 10 lacs is deposited in a bank a/c not matching with declared income, same will be treated as tax evasion”

4. “In such case, tax amount plus a penalty of 200% of the tax payable would be levied as per Section 2 70(A) of the income tax Act”

The levy of penalty for concealment or furnishing of inaccurate particulars of income under the erstwhile 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.

With a view to reduce the litigation and remove the discretion of tax authority, the Finance Act, 2016, w.e.f 01-04-2017 has inserted new provisions in the form of new Sections 270A and 270AA in the Act which replaced the existing provisions of section 271(1)(c).

Imposition of penalty under sections 270A and 270AA will apply to cases pertaining to A.Y. 2017-18 onwards and provisions of section 271(1)(c) will continue to be applicable to all cases up to A.Y. 2016-17.

Under the new scheme, the penalty matters are categorized in two parts —

(1) Under reporting of income and

(2) Misreporting of income.

Under reported income has been defined in S. 270A(2) which is to be read with sub-section (6) while misreporting of income is defined in sub sections (8) & (9) of this section.

With a view to remove the discretion of the Assessing Officer, Section 270A imposed fixed % of the amount of penalty under the new scheme.

Hence, penalty for under reported income will be at fixed rate of 50% of the tax payable on unreported income while it will be @ 200% of the tax payable on the misreported income as against 100% to 300% of concealed income under the erstwhile provisions of section 271 ( now applicable for A.Y. 2016-17 and earlier assessment years).

The provisions of Section 270A of the Income Tax Act’1961 are reproduced herein under:-

“Penalty for under reporting and misreporting of income 270A

(1) The Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner may, during the course of any proceedings under this Act, direct that any person who has under-reported his income shall be liable to pay a penalty in addition to tax, if any, on the under-reported income.

(2) A person shall be considered to have under-reported his income, if the income assessed is greater than the income determined in the return processed under clause (a) of sub­section (1) of section 143; or

the income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished;

(3) The penalty referred to in sub-section (1) shall be a sum equal to fifty per cent of the amount of tax payable on under-reported income.

Now, where under-reported income is in consequence of any misreporting thereof by any person, the penalty referred to in sub-section (1) shall be equal to two hundred per cent of the amount of tax payable on under-reported income.

(4) The cases of misreporting of income referred to in sub-section (8) shall be the following, namely:—

(a) Misrepresentation or suppression of facts;

(b) Failure to record investments in the books of account;

(c) Claim of expenditure not substantiated by any evidence;

(d) Recording of any false entry in the books of account;

(e) Failure to record any receipt in books of account having a bearing on total income; and

(f) Failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.

The bare reading of Section 270 A divulges the fact the penalty under the newly inserted section 270A (be it 50 % or 200%) can only be levied on difference between assessed income and returned income.

Therefore, if unaccounted cash is deposited into bank and applicable tax (maximum 30% plus surcharge/Cess) is paid on this additional income, no penalty for under reporting or misreporting can be imposed by assessing officer u/s 270A of Income tax Act.

This is because penalty for concealment can be levied only on difference between assessed income and returned income.

So in my considered opinion, as rumoured, penalty of 200% under no circumstances can be levied on such income disclosed in return of current year with due payment of taxes on the same.

If, however, the case is such that you have intentionally suppressed facts, deposited the unaccounted cash and didn’t declare the same in your return of income u/s 139 of the act, than surely it is a fit case for imposition on penalty u/s 270A of the act.

Let us illustrate the aforementioned contention –

If an assessee deposits Rs. 10 cr., unaccounted cash, in its bank account, show it in its income tax return for the FY 2016-17, and pay tax on its income as per applicable slab tax rate, there can’t be any imposition of penalty, because it is not misreported or underreported income. The tax authorities will see that the assessee have declared it and paid tax on it, thus making the deposit a legitimate credit.

If, on the other hand, the assessee deposit this Rs. 10 Cr. in its bank account, omit it from its declaration of income (and therefore not pay any tax on it), it will be considered misreported income, and it shall be a fit case for imposition of penalty u/s 270A of the act.

To conclude, the demonetization of currency notes is a positive, historic and game-changing move for the Indian economy and also a good lesson to those who are playing with Indian taxation policy so far.

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