Section 270A: Penalty for under-reporting and misreporting of income

• Section 115WD
• Section 115 WE
• Section 142(1)
• Section 143(2)
• Section 142(2A)

> has concealed the particulars of his income or furnished inaccurate particulars of such income

> has concealed the particulars of the fringe benefits or furnished inaccurate particulars of such fringe benefits

• Sub section (1) lists down a few instances which include concealment of income
• The section covers beyond income related issues like non-compliance with notices, returns etc
• The concealment is determined in the course of any proceedings

• Sub section (2) defines what is under-reported income
• The focus is only on under reporting and not relating to other non-compliances
• The section itself defines the list of under reporting
• The under reporting is determined during the course of any proceedings under this Act,

• Does not cover as I see the section 132 as it is covered u/s 271AAB
• No action us 270A

• in the cases referred to in clause (b), (failure to respond to notices) in addition to tax, if any, payable by him, a sum of ten thousand rupees for each such failure
• for concealment of income etc covered under clauses (c)&(d) –
  • Minimum of the amount of tax sought to be evaded by reason of the concealment of particulars of his income or fringe benefits or the furnishing of inaccurate particulars of such income or fringe benefits.
  • Maximum three times amount of tax sought to be evaded by reason of the concealment of particulars of his income or fringe benefits or the furnishing of inaccurate particulars of such income or fringe benefits.

• 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.
• 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.

 This shall get assessed in the AY when the concealment is discovered

This shall get assessed in the AY when the under reporting is discovered

(b) Covers international & SDT Transactions under sub section Explanation 7.—Where in the case of an assessee who has entered into an international transaction or specified domestic transaction defined in section 92B, any amount is added or disallowed in computing the total income under sub-section (4) of section 92C

(a) misrepresentation or suppression of facts; Section 69A – Unexplained Money etc

(b) failure to record investments in the books of account; Section 69 – Unexplained Investments

(c) claim of expenditure not substantiated by any evidence; Section 69C Unexplained Expenditure

(d) recording of any false entry in the books of account; Section 69B Not fully disclosed in books

(e) Failure to record any receipt in books of account having a bearing on total income; and Cash credits. Section68.

(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. Maintenance, keeping and furnishing of information and document by certain persons. Section 92D

(a) Person acts to offer an explanation or offers an explanation which is found by the Assessing Officer

(b) Offers an explanation which he is able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him,

(a) the Assessing Officer as the case may be, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered;

(b) the amount of under-reported income determined on the basis of an estimate but the method employed is such that the income cannot properly be deduced therefrom;

(c) the amount of under-reported income determined on the basis of an estimate, if the assessee has, on his own, estimated a lower amount of addition or disallowance

(d) where the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X, and, disclosed all the material facts relating to the transaction

(e) The amount of undisclosed income referred to in section 271AAB (Penalty where search has been initiated.)

(X–Y)

where,

X = the amount of tax calculated on the under-reported income as increased by the total income determined under clause (a) of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order as if it were the total income; and

Y = the amount of tax calculated on the total income determined under clause (a) of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order.

Thus as per FM’s speech in the LS, the remission for already paid tax is available to the assessee

(a) So, as per para 87, though the court preliminarily opines that deliberate concealment is required to be shown, however the issue will be decided in some other case. So, court did not give any conclusive finding whether “deliberate” act is required to be shown or not

(b) “One of the questions which arises for consideration is as to whether Explanation 1 is applicable in respect of both the parts or in respect of the first part only.” Meaning whether the assessee has not provided response or his response does not satisfy the AO

(c) “37. The legal history of section 271(1)(c) of the Act traced from the 1922 Act prima facie shows that Explanations were applicable to both the parts. However, each case must be considered on its own facts.” (dealing with explanation 1)

(d) Para 40:“Explanation appended to section 271(1) (c) is an exception to the general rule. It raises a legal fiction by reason whereof a presumption is raised against an assessee as a result whereof the burden of proof shifts from the department to the assessee. Legal fiction, however, as is well-known must be given its full effect when the conditions precedent therefor are satisfied and not otherwise.” (dealing with explanation 1)

(e) “42. If the ingredients contained in the main provisions as also the Explanation appended thereto are to be given effect to, despite deletion of the word ‘deliberate’, it may not be of much significance.”

(f) “44. It signifies a deliberate act or omission on the part of the assessee. Such deliberate act must be either for the purpose of concealment of income or furnishing of inaccurate particulars.”

(g) “48. Primary burden of proof, therefore, is on the revenue. The statute requires satisfaction on the part of the Assessing Officer. He is required to arrive at a satisfaction so as to show that there is primary evidence to establish that the assessee had concealed the amount or furnished inaccurate particulars and this onus is to be discharged by the department.”

(h) “51. The order imposing penalty is quasi-criminal in nature and, thus, burden lies on the department to establish that the assessee had concealed his income. Since burden of proof in penalty proceedings varies from that in the assessment proceeding, a finding in an assessment proceeding that a particular receipt is income cannot automatically be adopted, though a finding in the assessment proceeding constitute good evidence in the penalty proceeding. In the penalty proceedings, thus, the authorities must consider the matter afresh as the question has to be considered from a different angle.”

(i) “53. Before, thus, a penalty can be imposed, the entirety of the circumstances must reasonably point to the conclusion that the disputed amount represented income and that the assessee had consciously concealed the particulars of his income or had furnished inaccurate particulars thereof.”

(j) “67. ‘Concealment of income’ and ‘furnishing of inaccurate particulars’ are different. Both concealment and furnishing inaccurate particulars refer to deliberate act on the part of the assessee. A mere omission or negligence would not constitute a deliberate act of suppressio veri or suggestio falsi. Although it may not be very accurate or apt but suppressio veri would amount to concealment, suggestio falsi would amount to furnishing of inaccurate particulars.”

(k) “We, therefore, do not accept the submissions of the learned Additional Solicitor General that concealment or furnishing of inaccurate particulars would overlap each other, the same would not mean that they do not represent different concepts.”

(l) “82. A duty may be enjoined on the assessee to make a correct disclosure of income but if such disclosure is based on the opinion of an expert, who is otherwise also a registered valuer having been appointed in terms of a statutory scheme, only because his opinion is not accepted or some other expert gives another opinion, the same by itself may not be sufficient for arriving at a conclusion that the assessee has furnished inaccurate particulars.”

(m) “Thus, the Assessing Officer himself was not sure as to whether he had proceeded on the basis that the assessee had concealed his income or he had furnished inaccurate particulars”

(n)“87. The learned Additional Solicitor General, however, submitted that although on the facts of the case the decision rendered is correct but the view of the court that unless there is some evidence to show or some circumstances found from which it can be gathered that the omission was attributable or the part of the assessee to conceal his income so as to evade income tax thereon may not correct. As at present advised, we do not intend to go into the said question; as in the facts and circumstances of the case, there are enough material to show that the action on the part of the appellant may not be said to be such which would attract the penal provision under section 271(1)(c) of the Act.”

(a) Highlights

(b) Division bench of SC referred the matter to larger bench to consider whether Dilip Shroff is correctly decided or not. (para 2)

(c) Willful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under section 276C of the Income tax Act. (para 24 & 25)

(d) Para 2:“2. A Division Bench of this Court has referred the controversy involved in these appeals to a Larger Bench doubting the correctness of the view expressed in Dilip N. Shroff v. Jt. CIT [2007] 291 ITR 5791. The question which arises for determination in all these appeals is whether section 11AC of the Central Excise Act, 1944 (in short the ‘Act’) inserted by Finance Act, 1996 with the intention of imposing mandatory penalty on persons who evaded payment of tax should be read to contain mens rea as an essential ingredient and whether there is a scope for levying penalty below the prescribed minimum.”

(e) “The assessee on the other hand referred to section 271(1) (c) of the Income tax Act, 1961 (in short the ‘IT Act’) taking the stand that section 11AC of the Act is identically worded and in a given case it was open to the Assessing Officer not to impose any penalty. The Division Bench made reference to rule 96ZQ and rule 96ZO of the Central Excise Rules, 1944 (in short the ‘Rules’) and a decision of this Court in Chairman, SEBI v. Shriram Mutual Fund [2006] 5 SCC 361 and was of the view that the basic scheme for imposition of penalty under section 271(1) (c) of IT Act, section 11AC of the Act and rule 96ZQ (5) of the Rules is common. According to the Division Bench the correct position in law was laid down in Chairman, SEBI’s case (supra) and not in Dilip N. Shroff’s case (supra). Therefore, the matter was referred to a Larger Bench.”

(f) Para 24. It is of significance to note that the conceptual and contextual difference between section 271(1) (c) and section 276C of the Income-tax Act was lost sight of in Dilip N. Shroff’s case (supra).

(g) Para 25. The Explanations appended to section 272(1) (c) of the Income-tax Act entirely indicates the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing return. The judgment in Dilip N. Shroff’s case (supra) has not considered the effect and relevance of section 276C of the Income-tax Act.

(h) Object behind enactment of section 271(1) (e) read with Explanations indicate that the said section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability.

(i) Wilful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under section 276C of the Income-tax Act.”

(j) So even if there is concealment of income Penalty need not be imposed

(a) Willful concealment/ deliberate furnishing of inaccurate particulars are not to require to be proved for imposing penalty u/s 271(1)(c)

(b) By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars. (para 7)

(c) “There can be no dispute that everything would depend upon the Return filed because that is the only document, where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise.” (para 8)

(d) “A mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee.”(para 9)

Observations:

(a) Para 7:- “By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars.”

(b) Para 8:- “There can be no dispute that everything would depend upon the Return filed because that is the only document, where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise.” The meaning on concealment and inaccurate as explained in Dilip Shroff 291 ITR 519 (SC).

(c) Para 9:- “We must hasten to add here that in this case, there is no finding that any details supplied by the assessee in its Return were found to be incorrect or erroneous or false. Such not being the case, there would be no question of inviting the penalty under section 271(1) (c) of the Act. A mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such claim made in the Return cannot amount to the inaccurate particulars.”

(d) Para 10:- “We do not agree, as the assessee had furnished all the details of its expenditure as well as income in its Return, which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the Return or not. Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the revenue, that by itself would not, in our opinion, attract the penalty under section 271(1)(c).

(e) If we accept the contention of the revenue then in case of every Return where the claim made is not accepted by Assessing Officer for any reason, the assessee will invite penalty under section 271(1)(c).

(f) That is clearly not the intendment of the Legislature.”

(g) [It indirectly approves that mens rea is not required, confirming Dharmendra & Rajasthan Spinning]

Highlights

(a) Confirms the principle that if disclosure is made (even in audit report) then there is no scope of concealment.

Facts –

(a) The audit report indicated that the provision for payment of gratuity is not allowable as per section 40A (7).

(b) However the person filing the return inadvertently missed out the observation in return. The return was processed. Subsequently notice was issue u/s 148. Assessee filed return in response to notice.

(c) Then sought a copy of reasons recorded. In the reasons recorded the mistake was mentioned. Assessee immediately filed revised return. However penalty u/s 271(1) (c) was imposed.

Observations:

(a) Para 17 – 20

(b) “17. Having heard learned counsel for the parties, we are of the view that the facts of the case are rather peculiar and somewhat unique. The assessee is undoubtedly a reputed firm and has great expertise available with it.

(c) Notwithstanding this, it is possible that even the assessee could make a “silly” mistake and, indeed this has been acknowledged both by the Tribunal as well as by the High Court

(d) 18. The fact that the Tax Audit Report was filed along with the return and that it unequivocally stated that the provision for payment was not allowable under section 40A(7) of the Act indicates that the assessee made a computation error in its return of income.

(e) Apart from the fact that the assessee did not notice the error, it was not even noticed even by the Assessing Officer who framed the assessment order. In that sense, even the Assessing Officer seems to have made a mistake in overlooking the contents of the Tax Audit Report.

(f) 19. The contents of the Tax Audit Report suggest that there is no question of the assessee concealing its income. There is also no question of the assessee furnishing any inaccurate particulars.

(g) It appears to us that all that has happened in the present case is that through a bona fide and inadvertent error, the assessee while submitting its return, failed to add the provision for gratuity to its total income. This can only be described as a human error which we are all prone to make.

(h) The calibre and expertise of the assessee has little or nothing to do with the inadvertent error. That the assessee should have been careful cannot be doubted, but the absence of due care, in a case such as the present does not mean that the assessed is guilty of either furnishing inaccurate particulars or attempting to conceal its income.

(i) 20. We are of the opinion, given the peculiar facts of this case, that the imposition of penalty on the assessee is not justified. We are satisfied that the assessee had committed an inadvertent and bona fide error and had not intended to or attempted to either conceal its income or furnish inaccurate particulars.”

(j) [Note – See Explanation 6 to section 271(1) read with section 143(1)(a)]

Highlights

(a) If assessment is under MAT (in return as well as in assessment order) and addition does not add to MAT income, then no penalty u/s 271(1) (c).

Observations

(b) Para 12:“In the present case, we shall have to proceed on the basis that the order of Commissioner has become final. It is, thus, binding both on the Revenue as well as the assessee. Such order in effect was that addition for normal computation sustained, for the purpose of computation of book profit deleted.

(c) The result of this decision of the Commissioner would be that the tax that the assessee would pay before and after additions would remain exactly the same. In other words, since the Commissioner did not permit any increase in the assessee’s book profit computation under section 115JB of the Act, even after unearthing the concealed income, the assessee ended up paying the same amount of minimum alternative tax under section 115JB of the Act even after the concealments were unearthed and accepted by the assessee.

(d) It is in this background, our discussion on the implication of Explanation 4 to section 271(1) of the Act must be seen. When in facts of the case, the assessee’s tax liability did not change despite unearthing of concealed income, no penalty could have been levied. We may clarify that our conclusions should not be seen as laying down, that simply because before and after the additions the assessee remained a MAT company and paid tax under section 115JB of the Act or such similar provision, that by itself would mean that no penalty could be imposed.

(e) If the effect of the addition of the concealed income results into higher minimum alternative tax by increasing the book profit also, penalty could as well be imposed. With this clarification, we answer the question against the Revenue.

Highlights – No time limit to pay tax, so whenever paid the immunity to be granted.

(a) Para 8. We have perused the order of assessment and found that entire amount of Rs.2.06 crores pertained to on-money receipts by the assessee. There was no money, bullion, jewellery or other valuable article or thing of such value found during the search and the additional income was based on materials collected during the search. Prior to 1st June 2007, therefore, by applying explanation 5, penalty could not have been levied. Looked from this angle, we do not find any error in the view of the Tribunal.”

 (b) s.271(1B) Satisfaction whether “furnishing of inaccurate particulars” or “concealment of particulars of income”

(a) AO did not specify under which limb of section 271(1)(c) penalty proceedings had been initiated, i.e., whether for concealment of particulars of income or furnishing of inaccurate particulars of income

(a) Para 4.2 ,” It cannot be disputed that while imposing the penalty under Section 271(1)(c) of the Act, two conditions are required to be satisfied i.e. (i) the assessee has concealed the particulars of his income (ii) the assessee has furnished incorrect particulars of such income.

(b) As held by the Division Bench in the case of Manu Engineering Works (Supra) the Assessing Officer is required to give clear finding whether the assessee is guilty of concealing the income and/or furnishing incorrect particulars of income.”

(a) Held- Penalty order cannot sustain. It follows CIT v. Manu Engineering Works [1980] 122 ITR 306 (Guj.) and New Sorathia Engineering Co. v. CIT [2006] 282 ITR 642/155 Taxman 513 (Guj.)

(a) The AO while passing penalty order u/s 271(1) (c) concluded “concealment or furnishing inaccurate particulars of income”.(b) Held – In absence of clear finding, the order of penalty is not sustainable.

31. We are further constrained to observe that even the assessment orders fail to base the direction for initiation of proceedings under Section 270A on any considered finding of the conduct of the petitioner being liable to be placed within the sweep of sub-section (9) of that provision.

The order of assessment as well as the SCNs’ clearly fail to meet the test of ―specific limb‖ as propounded in Minu Bakshi and Schneider Electric. A case of misreporting, in any case, cannot possibly be said to have been made out bearing in mind the fact that the petitioner had questioned the taxability of income asserting that the same would not constitute royalty.

The issue as raised was based on an understanding of the legal regime which prevailed. The contentions addressed on that score can neither be said to be baseless nor specious. In fact, that stand as taken by the petitioner was based on a judgment rendered by the jurisdictional High Court which was indisputably binding upon the AO who, for reasons unfathomable, thought it fit to base its decision on a judgment rendered by the Karnataka High Court.

The AO, it would be pertinent to recall, chose to distinguish the judgment of the Supreme Court in Engineering Analysis itself. In any event, the position which the petitioner sought to assert and canvass clearly stood redeemed in light of the decision rendered by the Supreme Court.

Para 34. We also and for reasons afore noted issue a writ quashing the SCNs’ dated 16 November 2021 on finding that the same would not sustain in light of our judgment in Schneider Electric. The petitioner shall be entitled to consequential reliefs. Since the SCNs’ themselves stand quashed, there exists no justification for the immunity applications being either pursued or remitted for further consideration.

S. 270A: Penalty for under-reporting and misreporting of income-Income tax refund-Offered in the course of assessment-Non-declaration of interest cannot be said to be under-reporting of Income. [S. 143(3), 274]

S. 270A : Penalty for under-reporting and misreporting of income-Change of head of income-Rental income-Explanation is not found to be false-Penalty is deleted.[S. 22, 23,24(a), 270A(6)]

S. 270A : Penalty for under-Reporting and misreporting of income-Immunity from imposition-Furnished all details of transactions-Disallowance cannot be considered misreporting-In absence of details as to which limb of section 270A was attracted and how ingredient of sub-section (9) of section 270A was satisfied, mere reference to word misreporting by revenue in penalty order to deny immunity from imposition of penalty and prosecution makes impugned order manifestly arbitrary-Penalty was quashed-Revenue was directed to grant immunity under section 270AA of the Act. [S. 14A, 270A (9), 270AA, Art. 226]

S. 270A: Penalty for under-Reporting and misreporting of income-Pendency of appeal before Commissioner (Appeals)-Oder imposing the penalty was not valid-The concerned Assessing Officer may take further steps in accordance with law after the appeal is disposed by CIT (A) as far as it relates to penalty provisions under Section 270A of the Act-Faceless Assessment Officer was directed to pay a sum of Rs 10,000 from his personal account to ‘PM Care Fund ‘. [S. 144(C) (3), 246A, 275, Art. 226] 

S. 270A : Penalty for under-reporting and misreporting of income-Grant of immunity from penalty and prosecution-Voluntary computation of income filed to buy peace and avoid litigation-Failure to specify in penalty notice whether proceedings initiated for under-reporting or misreporting-Granted immunity. [S. 270AA (4), Art. 226] 

S. 270A: Penalty for under-reporting and misreporting of income-Change of head of income-Rental income-Explanation is not found to be false-Penalty is deleted. [S. 22, 23, 24(a), 270A (6)] 

 Gopal Soundararaj v. PCIT (2023) The Chamber’s Journal – May -P. 111. Chennai) (Trib)

(a) The case of the assessee was selected for scrutiny under CASS for mismatch in interest income offered to tax and reported in form 26AS. The assessment order was passed u/s. 143(3) by making some addition of interest income on Fixed Deposits. The cash deposited was also discussed in the assessment order.

(b) Penalty notice was also issued u/s. 270A for under reporting of income after passing the assessment order. Notice u/s. 263 was issued by PCIT to assessee on the grounds that since AO has not recorded any reasons for initiation of penalty u/s. 270A, the order. Is prejudicial to the interest of revenue. The penalty later on was not levied u/s. 270A.

(c) Another reason quoted was that the source of fixed deposit was not examined. On appeal the Tribunal held that the AO has not mechanically issued notice u/s. 270A without recording reasons in the assessment order and second that the source of Fixed deposits with two banks was not questioned upon during the assessment.

(d) It was held by the ITAT that on grounds of penalty u/s. 270, the notice was very clear so as to mention as to why there should be no penalty levied for under -reporting of income. Therefore, it could not be said that there was no proper satisfaction in initiating the penalty proceedings. On the second issue for source of FDs, it was held that very purpose of assessee was to verify interest income.

(e) The AO has verified the interest income and made addition on interest income. Though the AO has not specifically not discussed about the source of fixed deposits in its assessment order, however the details of source were submitted during the assessment proceedings and the same were accepted by the AO.

(f) There was abundant enquiry made by the AO, only the same not being recorded in the assessment order, cannot be reason to presume jurisdiction u/s. 263 to invoke revisionary provisions. Revision order was quashed. (ITA No. 181/Chny/2023) DT. .6-4 -2023) AY. 2017 -18)

S.270AA: Immunity from imposition of penalty ,etc- Object of the section to encourage / incentivize a tax payer to fast -track settlement of issue and to recover tax demand and reduce protracted litigation – Order set aside and directed the Department to grant immunity under the Act .[ S. 270A, 274, Art . 226 ]

Allowing the petition the Court held that the Assessing Officer’s omission to pass a draft assessment order under section 144C was not merely a procedural oversight, but a substantive lapse, which rendered the final assessment order, the demand notice under section 156 and the penalty proceedings under section 270A devoid of jurisdiction.

S. 270AA: Immunity from imposition of penalty, etc- Order was set aside-Directed to grant immunity. [S. 270A, 270AA (2), Art. 226]