Section 270A inserted to provide for levy of penalty in case of under reporting of income and misreporting of income- Issues to be addressed
a) Penalty order under section 270A be made an order appealable before Commissioner (Appeals) under section 246A
The Finance Act, 2016 has inserted a new section 270A providing for penalty in case of under-reporting and misreporting of income. As per the provisions, the said penalty order under section 270A has not been made appeal able under section 246A i.e., no appeal would lie against the penalty order under section 270A before the first appellate authority i.e., Commissioner (Appeals). Although an amendment has been made in section 253 providing for appeal to Tribunal against such penalty order, no such amendment has been made in section 246A.
In a case where the said penalty order is imposed by an Assessing Officer below the rank of Commissioner, it is desirable that an appeal may be filed against the same to Commissioner (Appeals). It may be noted that the penalty order under the erstwhile section 271 is an appeal able order under section 246A. There appears to be an inadvertent omission in not including an order under section 270A as an order appeal able before Commissioner (Appeals) under section 246A.
It is suggested that section 246A may be suitably amended so as to provide that penalty order under section 270A passed by Assessing Officer below the rank of Commissioner may be made appeal able under section 246A before Commissioner (Appeals).
b) Penalty for under reporting of income
There are certain concerns arising out of the provisions of new section 270A, due to which it is likely that the implementation may not yield the desired result and fresh litigation is likely to arise while interpreting the new provision.
Without prejudice thereto, with regard to the newly introduced methodology of levying penalty, the following suggestions may be considered.
- By way of express requirement, the Assessing Officer may be required to initiate the proceedings prior to or concurrently with the closure of assessment proceedings. Unless this is done, there may be initiation of penalty several years after the assessment proceedings are completed. The time limit under section 275(c) is, unfortunately, linked with the date of initiation of proceedings.
- Unlike Explanation 3 of section 271(1)(c), in the new provision, where return of income is not furnished, penalty will be calculated with reference to tax on income assessed without considering the impact of tax deducted or advance tax paid by taxpayer. For example, in case of a person who is not required to furnish return of income under section 115A(5), tax may have been paid, but, as per new methodology, the whole of the income, as assessed, may be considered as unreported income. Such would also be the case in a situation where there is no revenue loss since the whole of the tax was already paid up and yet, the return may not have been furnished.
- There may be some concern on resolution of the formula specified in the section
if, intimation under section 143(1)(a) is not available. It may be good to clarify that, in such a case, returned income will be the substituted basis.
- If immunity is granted under section 270A, the immunity holds valid against
initiation of prosecution under section 276C. The reference may also be made to section 276CC which can be invoked in a case where there is failure to furnish return of income.
- Penalty proceedings may be permitted only when specific conditions are satisfied. e.g. the adjustment made exceeds a minimum threshold or say 10% of taxable income, etc.
c) Order to specify the specific clause of under- reported or misreported income for levy of penalty under section 270A
The newly inserted section 270A has done away with the undue discretion in the hands of Assessing Officer by imposing penalty at the rate of either 50% or 200% depending on whether the income is under reported or misreported. Certain controls may be required in the effective implementation of the new section.
In order to reduce the practice of Assessing Officers treating every concealed income as misreported as well as the fact that the new section does not require recording of satisfaction before imposition of penalty proceedings (as was required under the erstwhile section 271), it is desirable that a suitable control mechanism may be put in place. Certain measures like making it mandatory for the Assessing Officers to mention in the Order that every dis allowance or addition be specified as either under- reported or misreported.
Further, measures like specifying the exact clause from sub-section (2) or (9) of section 270A ,in case of under-reporting or misreporting of income respectively in the order would go a long way in reducing disputes and litigation. The said measures would also make it clear to the assessee in time whether he could opt for immunity from penalty and prosecution under section 270AA in case order specifies that he has not misreported the income.
It is suggested that suitable amendments be introduced or alternatively administrative instructions may be issued so that each order contains the specific fact of either misreported income or under reported income or both along with the mention of specific clause of section 270A(2)/(9) against each dis allowance/ addition. Such measures would act as a suitable control mechanism in the absence of recording of satisfaction to initiate penalty proceedings and would also enable assessee to opt for section 270AA providing for immunity from penalty and prosecution in case income is not misreported.
d) Clarification when tax increases due to re characterization of income under a different head of income but assessed income equals the returned income
Another issue in this regard is that section 270A is not providing clarity in a situation when assessed income is determined to be equal to returned income during the assessment proceedings but tax amount increased due to change/increase in tax rate. This may happen when a certain income returned by an assessee as a long term capital gain but the said income is assessed as income from other sources thereby leading to increase in tax amount. At present, the different clauses under sub-section (2) and (9) of section 270A does not cover the said situation. It is not clear whether the said increase in tax amount would be treated as under-reported income or misreported income.
It is suggested that suitable clarification may be issued regarding the situation when tax amount is increased due to rate increase (on account of, say, change of head of income from long term capital gain income to profits and gains of business or profession or income from other sources) although the returned income and assessed income are exactly same.
e) Mere making of a claim which is not sustainable in law would not tantamount to furnishing inaccurate particulars for attracting levy of penalty
Scope of penalty under section 270A has been widened and it would now include within its scope, claims made by the assessee but disallowed by the Assessing Officer. Where no information given in the return is found to be incorrect or inaccurate, and the assessee has disclosed all material facts relevant for assessment, he cannot be held guilty of furnishing inaccurate particulars. This principle of law has been settled by the Apex Court ruling in Reliance Petro Products’ case. Therefore, mere making of a claim which is not sustainable in law would not tantamount to furnishing of inaccurate particulars for attracting levy of penalty. However, such cases are now to be included within the ambit of under reported income under the new section 270A and penalty would be attracted @ 50%.
It is suggested that section 270A may be suitably amended so that penalty is not automatically attracted for merely making of a claim which is not sustainable in law.