Default in complying with provisions of or with conditions prescribed under the Income-tax Act would attract certain penalty and in critical cases prosecutions as well. There are three modes built in the fiscal legislation for encouraging tax compliance:
(a) Charge of Interest;
(b) Imposition of penalty;
(c) launching of prosecution against tax delinquents.
While charging of interest is compensatory on character, the imposition of penalty and institution of prosecution proceedings act as strong deterrents against potential tax delinquents. Chapter XXI of Income-tax Act, 1961, contain various provisions empowering an Income-tax Authority to levy penalty in case of certain defaults in search cases.
The following types of penal provisions are applicable in cases where a search is initiated
Penalty in case of Search
At present, the penalty provisions existing in Income-tax Act relating to search and seizure action carried out under section 132 of the Act are summarised as under:—
| S. No. | Section | Applicability |
| (1) | 271AAB(1A) | Section 271AAB (1A) is applicable to the cases, wherein, the undisclosed income was found during the search being initiated on or after 15.12.2016.
KEY NOTE (i) Applicable for the year of Search & the year for which due date to file return under section 139(1) is not expired on date of search. (ii) In specified year even additions made Section 68, 69, 69A, 69B, 69C or 69D, penalty will be levied under section 271AAB(1A), as Section 271AAC does not override the provisions Section 271AAB(1A). |
| (2) | 271AAB(1) | Section 271AAB (1) is applicable to the cases, wherein, the undisclosed income was found during the search which had been initiated on or after 01.07.2012 but before 15.12.2016 [i.e. date on which the Taxation Laws (Second Amendment) Bill, 2016 received the President’s assent]. |
| (3) | 271AAA | Section 271AAA is applicable to the cases where search has been initiated under section 132 on or after 01.06.2007 but before 01.07.2012. |
| (4) | 270A | Section 270A is applicable from assessment year 2017-18 for other Six years immediately prior to year of Search to the cases where undisclosed asset/income is found during the course of search initiated under section 132 on or after 01.04.2017.
KEY NOTE The under-reported income, for the purposes of this section, shall not include the amount of undisclosed income referred to in section 271AAB. |
| (5) | Explanation 5A below to Section 271(1)(c) | Where undisclosed asset/income is found during the course of search initiated under section 132 on or after 01.06.2007 on or after 01.06.2007 but before 01.04.2017. [Applicable up to assessment year 2016-17]
KEY NOTE No penalty under the provisions of section 271(1)(c) shall be imposed upon the assessee in respect of the undisclosed income referred to in section 271AAA(1). |
| (6) | Explanation 5 below to section 271(1)(c) | Explanation 5 to Section 271(1)(c) incorporated into the Act by the Taxation Laws (Amendment) Act, 1984 with effect from 01.10.1984 which governed the issue of levy of penalty in cases of a search initiated under section 132 prior to 01.06.2007. Section 271AAA of the Act is a replacement for the earlier Explanation 5 to Section 271(1)(c). |
Specified previous year
which has ended before the date of search, but the date of furnishing the return of income under sub-section (1) of Section 139 for such year has not expired before the date of search and the assessee has not furnished the return of income for the previous year before the date of search; or in which search was conducted
Types of penal provisions
[1] Penalty where search has been initiated on or after 15.12.2016 [Section 271AAB(1A)]
The following types of penal provisions are applicable in cases where a search is initiated :
Penalty provisions of section 271AAB (1A) apply under the following situation –
(i) The search proceedings have been initiated, against the assessee, under section 132 of the Income Tax Act.
(ii) Such a search has been undertaken on or after 15.12.2016.
(iii) Undisclosed income has been recorded during the search proceedings.
(iv) The Assessing Officer has directed the assessee for payment of penalty under section 271AAB (1A) of the Income Tax Act.
If all the above conditions are satisfied and the Assessing Officer directs the assessee, then, the assessee would be liable to pay the penalty under section 271AAB (1A).
Text of Section 271AAB
PENALTY WHERE SEARCH HAS BEEN INITIATED
271AAB. (1) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section 132 on or after the 1st day of July, 2012 but before the date on which the Taxation Laws (Second Amendment) Bill, 2016 receives the assent of the President, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him,—
(a) a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year, if such assessee—
(i) in the course of the search, in a statement under sub-section (4) of section 132, admits the undisclosed income and specifies the manner in which such income has been derived;
(ii) substantiates the manner in which the undisclosed income was derived; and
(iii) on or before the specified date—
(A) pays the tax, together with interest, if any, in respect of the undisclosed income; and
(B) furnishes the return of income for the specified previous year declaring such undisclosed income therein;
(b) a sum computed at the rate of twenty per cent of the undisclosed income of the specified previous year, if such assessee—
(i) in the course of the search, in a statement under sub-section (4) of section 132, does not admit the undisclosed income; and
(ii) on or before the specified date—
(A) declares such income in the return of income furnished for the specified previous year; and
(B) pays the tax, together with interest, if any, in respect of the undisclosed income;
(c) a sum computed at the rate of sixty per cent of the undisclosed income of the specified previous year, if it is not covered by the provisions of clauses (a) and (b).
(1A) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section 132 on or after the date on which the Taxation Laws (Second Amendment) Bill, 2016 receives the assent of the President, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him,—
(a) a sum computed at the rate of thirty per cent of the undisclosed income of the specified previous year, if the assessee—
(i) in the course of the search, in a statement under sub-section (4) of section 132, admits the undisclosed income and specifies the manner in which such income has been derived;
(ii) substantiates the manner in which the undisclosed income was derived; and
(iii) on or before the specified date—
(A) pays the tax, together with interest, if any, in respect of the undisclosed income; and
(B) furnishes the return of income for the specified previous year declaring such undisclosed income therein;
(b) a sum computed at the rate of sixty per cent of the undisclosed income of the specified previous year, if it is not covered under the provisions of clause (a).
(2) No penalty under the provisions of section 270A or clause (c) of sub-section (1) of section 271 shall be imposed upon the assessee in respect of the undisclosed income referred to in sub-section (1) or sub-section (1A).
(3) The provisions of section 274 and 275 shall, as far as may be, apply in relation to the penalty referred to in this section.
Explanation.—For the purposes of this section,—
(a) “specified date” means the due date of furnishing of return of income under sub-section (1) of section 139 or the date on which the period specified in the notice issued under section 153A for furnishing of return of income expires, as the case may be;
(b) “specified previous year” means the previous year—
(i) which has ended before the date of search, but the date of furnishing the return of income under sub-section (1) of section 139 for such year has not expired before the date of search and the assessee has not furnished the return of income for the previous year before the date of search; or
(ii) in which search was conducted;
(c) “undisclosed income” means—
(i) any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has—
(A) not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or
(B) otherwise not been disclosed to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner before the date of search; or
(ii) any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted.
Section 271AAB contains two sub-section (1) and (1A). The applicability of both the sub-sections are explained hereunder –
(a) Section 271AAB (1) is applicable to the cases, wherein, the undisclosed income was found during the search which had been initiated on or after 1st July 2012 but before 15th December 2016 [i.e. date on which the Taxation Laws (Second Amendment) Bill, 2016 received the President’s assent].
(b) Section 271AAB (1A) is applicable to the cases, wherein, the undisclosed income was found during the search being initiated on or after 15.12.2016.
Conditions
Where search has been initiated on or after 15.12.2016 [Section 271AAB (1A)]
| Section | Conditions for applicability of the penalty | Quantum of Penalty as % of Undisclosed income of specified previous year |
| 271AAB(1A)(a) | If the following conditions are satisfied:
(a) Assessee must have admitted the undisclosed income in statement recorded under section 132(4) (b) Assessee specifies & substantiates the manner in which such undisclosed income was derived (c) Pays Tax & Interest on such undisclosed income before the specified date; (d) Files the Return of Income for specified previous year declaring such undisclosed income therein |
30% of undisclosed income of specified previous year |
| 271AAB(1A)(a) | 60% of undisclosed income of the specified previous year in any other case. | 60% of undisclosed income of the specified previous year |
[2] Penalty where search has been initiated on or after 01.07.2012 but before 15.12.2016 [Section 271AAB(1)]
Section 271AAB (1) is applicable to the cases, wherein, the undisclosed income was found during the search which had been initiated on or after 01.07.2012 but before 15.12.2016 [i.e. date on which the Taxation Laws (Second Amendment) Bill, 2016 received the President’s assent].
Where search has been initiated on or after 01.07.2012 but before 15.12.2016 [Section 271AAB (1)]
| Section | Conditions for applicability of slab of the penalty | Quantum of Penalty as % of Undisclosed income of specified previous year |
| 271AAB(1)(a) | If the following conditions are satisfied:
(a) Assessee must have admitted the undisclosed income in statement recorded under section 132(4) (b) Assessee specifies & substantiates the manner in which such undisclosed income was derived (c) on or before the specified date— (i) pays the tax, together with interest, if any, in respect of the undisclosed income; and (ii) furnishes the return of income for the specified previous year declaring such undisclosed income therein. |
10% of undisclosed income of specified previous year, |
| 271AAB(1)(b) | If the following conditions are satisfied:
(a) Assessee does not admit the undisclosed income in statement recorded under section 132(4) (b) on or before the specified date— (i) declares such income in the return of income furnished for the specified previous year; and (ii) pays the tax, together with interest, if any, in respect of the undisclosed income. |
20% of undisclosed income of specified previous year, |
| 271AAB(1)(c) | in any other case
i.e. where undisclosed income of specified previous year , if it is not covered by the provisions of clauses (a) and (b) of section 271AAB(1). |
30% to 90% – (Flat 60% w.e.f. 01.04.2017) of undisclosed income of specified previous year, |
[3] Penalty where search has been initiated on or after 01.07.2012 but before 01.07.2012 [Section 271AAA]
Section 271AAA is applicable to the cases where search has been initiated under section 132 on or after 01.06.2007 but before 01.07.2012. As per section 271AAA(1) of the Act, the Assessing Officer may, notwithstanding anything contained in any other provision of this Act, direct that, in a case where search has been initiated under section 132 on or after 01.06.2007 but before 01.07.2012, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him, a sum computed at the rate of 10% of the undisclosed income of the specified previous year.
Text of Section 271AAA
PENALTY WHERE SEARCH HAS BEEN INITIATED.
271AAA. (1) The Assessing Officer may, notwithstanding anything contained in any other provisions of this Act, direct that, in a case where search has been initiated under section 132 on or after the 1st day of June, 2007 but before the 1st day of July, 2012, the assessee shall pay by way of penalty, in addition to tax, if any, payable by him, a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year.
(2) Nothing contained in sub-section (1) shall apply if the assessee,—
(i) in the course of the search, in a statement under sub-section (4) of section 132, admits the undisclosed income and specifies the manner in which such income has been derived;
(ii) substantiates the manner in which the undisclosed income was derived; and
(iii) pays the tax, together with interest, if any, in respect of the undisclosed income.
(3) No penalty under the provisions of clause (c) of sub-section (1) of section 271 shall be imposed upon the assessee in respect of the undisclosed income referred to in sub-section (1).
(4) The provisions of section 274 and 275 shall, so far as may be, apply in relation to the penalty referred to in this section.
Explanation.—For the purposes of this section,—
(a) “undisclosed income” means—
(i) any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has—
(A) not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or
(B) otherwise not been disclosed to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner before the date of search; or
(ii) any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted;
(b) “specified previous year” means the previous year—
(i) which has ended before the date of search, but the date of filing the return of income under sub-section (1) of section 139 for such year has not expired before the date of search and the assessee has not furnished the return of income for the previous year before the said date; or
(ii) in which search was conducted.
Section 271AAA was inserted into the Income-tax Act, 1961 by the Finance Act, 2007, with effect from 01.04.2007 as a replacement to the erstwhile Explanation 5 of section 271(1)(c) by the Finance Act, 2007. The scope and ambit of the same was explained and dealt by paragraph 68 of Circular No. 3 of 2008, dated 12.03.2008 issued by the Central Board of Direct Taxes as follows:-
“68.1 A new section 271AAA has also been inserted so as to provide that, in a case where search has been initiated under section 132 on or after 1st June, 2007, the assessee shall be liable to pay by way of penalty, in addition to tax, if any, payable by him, a sum computed at the rate of ten per cent of the undisclosed income of the specified previous year. However, provisions of this section shall not be applicable if the assessee –
1. in a statement under sub-section (4) of section 132 in the course of the search, admits the undisclosed income and specifies the manner in which such income has been derived;
2. substantiates the manner in which the undisclosed income was derived; and
3. pays the tax, together with interest, if any, in respect of the undisclosed income. It is further provided that no penalty under the provisions of clause (c) of sub-section (1) of section 271 shall be levied or imposed upon the assessee in respect of the undisclosed income referred to in this section. It is also provided that the provisions of section 274 and section 275 shall, so far as may be, apply in relation to the penalty leviable under the new section.
68.2 For the purposes of this section, undisclosed income has been defined to mean –
(i) any income of the specified previous years represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or which has otherwise not been disclosed to the Chief Commissioner or Commissioner before the date of the search; or
(ii) any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted.
68.3 For the purposes of this section, specified previous year has been defined, so as to mean the previous year-
(i) which has ended before the date of search, but the date of filing the return of income under sub-section (1) of section 139 for such year has not expired before the date of search and the assessee has not furnished the return of income for the previous year before the said date; or
(ii) in which search was conducted.
68.4 An appeal to the Commissioner against levy of penalty under the proposed new section 271AAA has also been provided.”
Where search has been initiated on or after 01.07.2012 but before 01.07.2012
| Section | Conditions for applicability of the penalty | Quantum of penalty |
| 271AAA |
|
10% of undisclosed income |
Condition for immunity or concessional rate of penalty
(i) In statement under section 132(4), admits the undisclosed income and specifies the manner in which such income has been derived.
(ii) Substantiates the manner in which the undisclosed income was derived.
(iii) Pays the tax, together with interest, if any, in respect of the undisclosed income.
If all of the above conditions are satisfied then no penalty will be levied. If any of the above is not satisfied then penalty will be 10% of undisclosed income.
[4] Penalty for under – reporting and misreporting of income – Cases where undisclosed asset/income is found during the course of search initiated under section 132 on or after 01.04.2017. [Section 270A]
Section 270A is applicable with effect from assessment year 2017-18 to the cases where undisclosed asset/income is found during the course of search initiated under section 132 on or after 01.04.2017. The under-reported income, for the purposes of this section, shall not include the amount of undisclosed income referred to in section 271AAB.
Section 270A has been inserted by the Finnce Act, 2016, with effect from 01.04.2017 i.e. from the assessment year 2017-18. Under this section, the Assessing Officer, CIT (Appeals) or Principal CIT or CIT may, during the course of any proceedings under the Act, levy penalty if a person has underreported his income. The penalty may range from 50% to 200%.
Under-reported income [Section 270A(2)]
A person shall be considered to have under-reported his income, if—
(a) the income assessed is greater than the income determined in the return processed under clause (a) of sub-section (1) of section 143;
(b) the income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished or where return has been furnished for the first time under section 148
(c) the income reassessed is greater than the income assessed or reassessed immediately before such reassessment;
(d) the amount of deemed total income assessed or reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income determined in the return processed under clause (a) of sub-section (1) of section 143;
(e) the amount of deemed total income assessed as per the provisions of section 115JB or section 115JC is greater than the maximum amount not chargeable to tax, where no return of income has been filed or where return has been furnished for the first time under section 148;
(f) the amount of deemed total income reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income assessed or reassessed immediately before such reassessment;
(g) the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.
Cases of misreporting of income referred to in sub-section (8)
The cases of misreporting of income referred to in sub-section (8) shall be the following, namely:—
(a) Misrepresentation or suppression of facts
Any fact which ought to have been declared in the return of income or during the course of assessments proceedings is either suppressed or facts were misrepresented. For example capital gains income was not at all shown in the return of income, claims of improvement were made but proved to be wrong, incorrect claim of section 54/54F, wrong claims under chapter VIA etc.
(b) Failure to record investments in the books of account
Prima facie unaccounted investments are brought to tax under section 115BBE and penalty is leviable under section 271AAC.
(c) Claim of expenditure not substantiated by any evidence;
When the Assessing Officer asked for specific evidence on expenditure but no evidence is submitted or assessee failed to substantiate the expenditure claim. Here the assessing officer gave finding that assessee failed to produce any evidence on the claim of expenditure (roundsome additions are not covered under this clause). The AO shall clearly give a finding that claim is not proved.
(d) Recording of any false entry in the books of account
Bogus purchases, accommodation entries and any other entry which is proved to be false entry.
(e) Failure to record any receipt in books of account having a bearing on total income; and Suppression of turnover, not recording interest income, rents etc where books of accounts were maintained.
(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 report furnished by the assessee omits certain international transactions and the TPO/Assessing Officer determained arm’s length price on such transactions which results in addition.
(g) Consideration received for issue of share that exceeds the fair market value of such share shall be deemed to be the income of that company chargeable to income-tax for the previous year in which such failure has taken place and, it shall also be deemed that the company has underreported the said income in consequence of the misreporting referred to in sub-section (8) and sub-section (9) of section 270A for the said previous year.
KEY NOTE
Notice should be issued by invoking underreporting due to misreporting which attracts 200% penalty, but later after considering assessee’s reply can the penalty be restricted to 50% considering it as a case of underreporting only not involving misreporting and vis-a-vis.
[5] Penalty under section 271(1)(c) [Explanation 5A to Section 271(1)(c)]
[Applicable upto Assessment year 2016-17]
Penalty under section 271(1)(c) of the Act, is leviable for concealment of income or furnishing inaccurate particulars of such income. Whereas, Explanation 5A creates a deeming fiction in respect of undisclosed income/assets declared during the course of search as follows:
Where undisclosed asset/income is found during the course of search initiated under section 132 on or after 01.06.2007 for any previous year which has ended before the date of search and,—
| (a) | where the return of income for such previous year has been furnished before the said date but such income has not been declared therein; or |
| (b) | the due date for filing the return of income for such previous year has expired but the assessee has not filed the return, |
then, notwithstanding that such income is declared by him in any return of income furnished on or after the date of search, he shall, for the purposes of imposition of a penalty under section 271(1)(c), be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income.
Text of Explanation 5A to Section 271(1)(c)
Explanation 5A : Where, in the course of a search initiated under section 132 on or after the 1st day of June, 2007, the assessee is found to be the owner of—
(i) any money, bullion, jewellery or other valuable article or thing (hereafter in this Explanation referred to as assets) and the assessee claims that such assets have been acquired by him by utilising (wholly or in part) his income for any previous year; or
(ii) any income based on any entry in any books of account or other documents or transactions and he claims that such entry in the books of account or other documents or transactions represents his income (wholly or in part) for any previous year, which has ended before the date of search and,—
(a) where the return of income for such previous year has been furnished before the said date but such income has not been declared therein; or
(b) the due date for filing the return of income for such previous year has expired but the assessee has not filed the return,
then, notwithstanding that such income is declared by him in any return of income furnished on or after the date of search, he shall, for the purposes of imposition of a penalty under clause (c) of sub-section (1) of this section, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income.
[6] Penalty under section 271(1)(c) of the Income-tax Act, 1961, read with the Explanation 5 thereof
Section 271AAA of the Act is a replacement for the earlier Explanation 5 to Section 271(1)(c) incorporated into the Act by the Taxation Laws (Amendment) Act, 1984 with effect from 01.10.1984 which governed the issue of levy of penalty in cases of a search initiated under section 132 prior to 01.06.2007 and which read as follows:-
Text of Explanation 5 to Section 271(1)(c)
Explanation 5 – Where in the course of a (search initiated under section 132 before the 1st day of June, 2007), the assessee is found to be the owner of any money, bullion, jewellery or other valuable article or things (hereafter in this Explanation referred to as assets) and the assessee claims that such assets have been acquired by him by utilizing (wholly or in part) his income, –
(a) for any previous year which has ended before the date of the search, but the return of income for such year has not been furnished before the said date or, where such return has been furnished before the said date, such income has not been declared therein; or
(b) for any previous year which is to end on or after the date of search;
then, notwithstanding that such income is declared by him in any return of income furnished on or after the date of the search, he shall, for the purposes of imposition of a penalty under clause (c) of sub-section (1) of this section, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income, unless: –
(1) such income is, or the transactions resulting in such income are recorded, –
(i) in a case falling under clause (a), before the date of the search; and
(ii) in a case falling under clause (b), on or before such date, in the books of account, if any, maintained by him for any source of income or such income is otherwise disclosed to the Chief Commissioner or Commissioner before the said date; or
(2) he, in the course of the search, makes a statement under sub-section (4) of section 132 that any money, bullion, jewellery or other valuable article or thing found in his possession or under his control, has been acquired out of his income which has not been disclosed so far in his return of income to be furnished before the expiry of time specified in sub-section (1) of section 139, and also specifies in the statement the manner in which such income has been derived and pays the tax, together with interest, if any, in respect of such income.
Penalty under section 271AAB or 270A or 271(1)(c)
PROVISIONS ILLUSTRATED
| Assessment Year | Case – 1 | Case -2 |
| Date of search | 24.06.2019 | 17.12.2019 |
| 2020-21 | 271AAB | 271AAB |
| 2019-20 | 271AAB | 270A |
| 2018-19 | 270A | 270A |
| 2017-18 | 270A | 270A |
| 2016-17 | 271(1)(c) | 271(1)(c) |
| 2015-16 | 271(1)(c) | 271(1)(c) |
| 2014-15 | 271(1)(c) | 271(1)(c) |
Time limit for passing the penalty order [Section 275]
| S. No. | Particulars | Time limit for imposing penalty |
| 1. | Where the order of the Assessing Officer is contended before the CIT(A) or ITAT | |
| (a) Where order is passed by CIT(A) and no appeal is made to ITAT | 1 year from the end of Financial Year in which the order of CIT(A) is received | |
| (b) Where order is passed by the ITAT | 6 months from the end of the month in which order of the ITAT | |
| 2. | Where revision application has been made under section 264 | 6 months from the end of the month in which revision order under section 264 is passed |
| 3. | No appeal/ revision application has been made/filed | (a) End of FY in which the assessment proceedings are completed; or
(b) 6 months from the end of the month in which the penalty proceedings are initiated Ø Whichever is later |
Other Penalties
(1) Refusal to answer in contravention of legal obligation [Section 272A(1)(a)]
Text of Section 272A(1)(a)
272A. (1) If any person,—
(a) being legally bound to state the truth of any matter touching the subject of his assessment, refuses to answer any question put to him by an income-tax authority in the exercise of its powers under this Act;
Quantum of penalty
Maximum : Rs. 10,000 for each such default or failure
Maximum : Rs. 10,000 for each such default or failure
Authority by whom leviable [Section 272(3)(a)]
Income tax authority not lower in rank than a Joint Director or a Joint Commissioner, by such income-tax authoritty
No order under this section shall be passed by any income-tax authority referred to in sub-section 272(3)(a) unless the person on whom the penalty is proposed to be imposed is given an opportunity of being heard in the matter by such authority.
(2) Refusal to sign any statement made in the course of income-tax proceedings [Section 272A(1)(b)]
Text of Section 272A(1)(a)
272A. (1) If any person,—
(b) refuses to sign any statement made by him in the course of any proceedings under this Act, which an income-tax authority may legally require him to sign;
Quantum of penalty
Maximum : Rs. 10,000 for each such default or failure
Maximum : Rs. 10,000 for each such default or failure
Authority by whom leviable [Section 272(3)(a)]
Income tax authority not lower in rank than a Joint Director or a Joint Commissioner, by such income-tax authoritty
No order under this section shall be passed by any income-tax authority referred to in sub-section 272(3)(a) unless the person on whom the penalty is proposed to be imposed is given an opportunity of being heard in the matter by such authority.
(3) Failure to attend or give evidence or produce books of accounts and documents in compliance with the requirements of summons under section 131(1) [Section 272A(1)(c)]
Text of Section 272A(1)(c)
272A. (1) If any person,—
(c) to whom a summons is issued under sub-section (1) of section 131 either to attend to give evidence or produce books of account or other documents at a certain place and time omits to attend or produce books of account or documents at the place or time.
Quantum of penalty
Maximum : Rs. 10,000 for each such default or failure
Maximum : Rs. 10,000 for each such default or failure
Authority by whom leviable [Section 272(3)(a)]
Income tax authority not lower in rank than a Joint Director or a Joint Commissioner, by such income-tax authoritty
No order under this section shall be passed by any income-tax authority referred to in sub-section 272(3)(a) unless the person on whom the penalty is proposed to be imposed is given an opportunity of being heard in the matter by such authority.
Penalty under section 271AAB cannot be levied based on defective notice
Penalty under section 271AAB levied on the basis of defective notice could not be sustained as there was no mention about various conditions provided under section 271AAB as it was incumbent upon Assessing Officer to mention in notice issued under section 274 read with section 271AAB as to under which clause of section 271AAB penalty was leviable and that too, at which rate.
Assessee contended that in the notice issued under section 274 to assessee there was no mention about the various conditions provided under section 271 AAB relating to levy of penalty @ 10% or 20% or 30% (as the case may be). Nothing was specified in the notice about Clause-a, b & c of Section 27 1AAB as to at what percentage the penalty would be levied on assessee for the undisclosed income not surrendered during the course of search. Assessee deserved an opportunity to plead before Assessing Officer before being visited with the penalty under section 271AAB. The alleged notice issued under section 274 r.w.s 271AAB was liable to be quashed since there was a technical defect in issuing the notice. It was held there was no mention about various conditions provided under section 271 AAB. Assessing Officer had very casually used the proforma used for issuing notice before levying penalty under section 271(1)(c) for the concealment of income or furnishing of inaccurate particulars of income. Except mentioning the Section 271AAB in the notice it did not talk anything about the provision of section 271AAB. Certainly such notice had a fatal error and technically was not a correct notice in the eyes of law because it intended to penalize an assessee without spelling about the charge against the assessee. In the case of CIT v. Kulwant Singh Bhatia (2018) 304 CTR 103 ; CIT v. Manjunatha Cotton Ginning Factory (2013) 359 ITR 565 (Karn) and CIT v. SSA’s Emerald Meadows, (ITA No. 380/2015, dated 23.11.2015), it was held that such show cause notices would not satisfy the requirement of law as notice was not specific. Merely issuing notice in general proforma would negate the very purpose of natural justice. Following the same, the penalty proceedings had been quashed. (Related Assessment Year : 2014-15) – [Ashok Bhatia v. DCIT – Date of Judgement : 05.02.2020 (ITAT Indore)
Payment made in cash for purchase of raw material surrendered during search – No irregularity found in books of account as regards stock of raw material
During the course of search assessee admitted payment made in cash for purchase of raw material. Assessing Officer treated the same as undisclosed income within the meaning of Explanation to section 271AAB and accordingly levied penalty. It was held that there was no irregularity found in books of account so far as stock of raw material was concerned. Hence, even if some purchases were made in cash, however, stock being duly recorded in the books of account, income surrendered by assessee during search could not be treated as ‘undisclosed income’ within the meaning as defined in Explanation to section 271AAB. – (Related Assessment year : 2013-14) – [Shri Balaji Industrial Engineering Ltd. v. ACIT (2019) TaxPub(DT) 4325 (ITAT Jaipur )]
Assessing Officer can impose penalty under section 271AAB in case where a search is initiated under section 132 and during such operation assessees admits undisclosed income and specifies the manner in which such income has been derived
Penalty where search has been initiated – A search and seizure operation under section 132(1) was conducted wherein, cash was found and seized in assessee’s office premises – Thereafter, notice under section 153A was issued and in response assessee filed return of income declaring income – During assessment proceeding, Assessing Officer noted that assessee owned up entire cash seized as his undisclosed and admitted that it was out of his income and offered to tax – Assessing Officer completed assessment by recording that penalty proceedings under section 271AAB was being initiated separately – CIT(A) confirmed Assessing Officer’s action – Held, there was no dispute in respect of date of search and seizure operation on 24.04.2014 – Therefore, applicability of section 271AAB was justified – There was no dispute in owning cash seized during search and seizure operation as undisclosed income of assessee which was out of his professional income – There was no dispute that assessee offering same for taxation – There was no dispute in respect of payment of tax together with interest in respect of undisclosed income – There was no dispute in respect of filing of return of income to specified Previous year declaring such undisclosed income – Therefore, present case fulfiled conditions as contemplated clause (a) in sub-section (1) of section 271AAB to impose penalt – Therefore, no infirmity was found in order of CIT(A) and confirming penalty imposed by Assessing Officer under section 271AAB(i)(a) – Action of imposition of penalty under section 271AAB(a) was independent of enquiries made and subsequent additions made during course of assessment proceedings – This penalty was not based upon facts gathered during course of assessment proceeding – Assessee’s appeal dismissed. (Related Assessment year : 2014-15) – [Krishan Chandra Bajaj v. ACIT (2019) 56 CCH 106 (ITAT Kolkata)]
Penalty under section 271AAB justified if surrendered stock was unaccounted
During the course of search, assessee had admitted and surrendered undisclosed income of Rs. 2,83,00,000/- in the statement recorded on oath under section 132(4). Assessing Officer initiated penalty proceedings on the said income under section 271AAB. It was held admittedly, the surrender had been made on account of discrepancy /shortage in stock. Clearly, this short stock had not been accounted for by assessee . The same therefore, had been rightly held to qualify as “undisclosed income” as per the definition of the same in section 271AAB. Moreover the issue was squarely covered by the order of the ITAT in the case of M/s SEL Textiles Limited, wherein identical surrender made on account of the discrepancy in stock was held by the ITAT to qualify a s undisclosed income liable to penalty under section 271AAB. In view of the same, levy of penalty under section 271AAB was justified in present case. – [M/s Royal Lifestyle Jewellers (P) Ltd v. DCIT – Date of Judgement : 21.06.2019 (ITAT Chandigarh)
Search initiated on or after 1st day of July 2012 – Disclosure of undisclosed income – Disclosed manner of earning of income and paid tax along with interest – Liable to pay penalty at 10% and not at 30%
It was held that, when the assessee suo motu admitted undisclosed income and substantiated manner in which such undisclosed income was earned and had also paid tax together with interest, assessee is liable to pay penalty at rate of 10 per cent in terms of clause (a) of section 271AAB(1) but not under clause (c) at rate of 30 per cent of section 271AAB(1). (Related Assessment Year : 2013-14) – [ACIT v. Vishal Agarwal (2019) 175 DTR 127 : 174 ITD 125 (ITAT Kolkata);ACIT v. Shailaja Park (P) Ltd (2019) 175 DTR 127 (ITAT Kolkata);ACIT v. Vikash Agarwal (2019) 175 DTR 127 (ITAT Kolkata)]
Penalty – Search initiated on or after 1st June, 2007 – Failure to specify and substantiate manner in which undisclosed income was derived rather embarked upon mercy plea that he was making surrender to buy peace of mind and avoid litigation – Levy of penalty is held to be justified
Pursuant to notice under section 153A, assessee filed its return wherein certain income was surrendered on account of unexplained investment in construction of a project and difference in stock. Assessing Officer levied the penalty for failure to specify and substantiate manner in which undisclosed income was arrived. CIT(A) confirmed the order of Assessing Officer. On appeal the Tribunal held that failure to specify and substantiate manner in which undisclosed income was derived rather embarked upon mercy plea that he was making surrender to buy peace of mind and avoid litigation. Levy of penalty is held to be justified. (Related Assessment Year : 2009-10) [Narsi Iron & Steel (P) Ltd. v. DCIT (2019) 175 ITD 213 (ITAT Delhi)]
Search initiated on or after 1st June, 2007 – Manner of earning the undisclosed income to be given in the statement under section 132(4) only if a question is asked to that effect – Deletion of penalty is held to be justified
As per sub-section (2) of section 271AAA, no penalty is leviable under sub-section (1) if the assessee in his statement recorded under section 132(4) admits the undisclosed income, specifies the manner in which such income has been earned and satisfies certain other conditions. Held that where the assessee had admitted the undisclosed income but not specified the manner in which such income was earned in his statement under section 132(4), penalty under the section was still not leviable since the Officer had not asked a question requiring the assessee to specify the manner in which such income was earned. Appeal of revenue is dismissed. – [PCIT v. Phoenix Mills Ltd. (2019) 307 CTR 700 : 175 DTR 433 (Bom)]
Search initiated on or after 1st day of July 2012 – Levy of penalty on the basis of loose sheets found in the course of search was held to be not justified as loose sheets represented only projection – Imposition of penalty is directory and not mandatory
Dismissing the appeal of the revenue the Tribunal held that: Levy of penalty on the basis of loose sheets found in the course of search was held to be not justified as loose sheets represented only projection. Imposition of penalty is directory and not mandatory. (Related Assessment Year 2013-14) [ACIT v. Marvel Associates (2018) 194 TTJ 338 : 170 ITD 353 : 166 DTR 409 (ITAT Vishakha)]
Penalty under section 271AAB justified on return filed after issue of notice under section 142(1)
Here admittedly, assessee was not maintaining any books. There was thus no question of recording any money, bullion, jewellery or any entry in any books. It is not disputed that assessee had not disclosed any receipts from bill trading before the date of search to the Revenue. Assessee had in the statement recorded under section 132(4) of the Act accepted accommodation bill trading done by it with M/s. BGR Energy Systems Ltd and earning of 0.25% commission. Claim of the assessee is that such commission was accepted for purchasing peace from Department. However, this claim, in our opinion cannot be accepted since there is no alleviating clause in Section 273AAB of the Act. That apart, assessee has not filed its return within the time allowed under section 139(1) of the Act but only after issue of notice under section 142(1) of the Act. Thus in our opinion what was returned by the assessee fell within the definition of the term ‘’undisclosed income” coming under Explanation (c) to Section 271AAB of the Act. As to the contention of the assessee that, if at all penalty is levied under section 271AAB of the Act, then such levy should be under clause (a) of sub-section (1), what we find is that for applying the said clause, it is a necessary precondition that assessee should have furnished the return of income before the specified date. Specified date is the due date for furnishing returned income under section 139(1) of the Act. Admittedly, assessee had filed returned income after such date. Hence, in our opinion, assessee cannot take advantage of clause (a) of sub-section (1) of Section 271AAB. In the circumstances, we are of the opinion that penalty was rightly levied and confirmed by the ld. Commissioner of Income Tax (Appeals). (Related Assessment Year : 2014-15) [Sonal Steels Trading (P) Ltd v. ACIT – Date of Judgement : 23.07.2018 (ITAT Chennai)]
Search initiated on or after 1st June, 2007 – Manner in which undisclosed income earned was not satisfied – Deletion of penalty was held to be not valid
Allowing the appeal of the revenue, the Court held that : the appellate authorities misdirected themselves in holding that the conditions under section 271AAA(2) were satisfied by the assessee. The second condition for availing of the immunity from penalty was that the assessee should have specified in the statement under section 132(4) the manner in which such income stood derived. The assessee had merely stated that the sums advanced were undisclosed income. However, she had not specified how she had derived that income and under what head it fell (rent, capital gains, professional or business income out of money lending, source of money, etc.). Unless such facts were mentioned with some specificity, it could not be said that the assessee had fulfilled the requirement that she had in her statement under section 132(4), “substantiated the manner in which the undisclosed income was derived”. The order of the appellate authorities deleting the penalty was erroneous. (Related Assessment Year : 2009-10) – [CIT v. Ritu Singal (Smt.) (2018) 403 ITR 97 : 303 CTR 738 : 164 DTR 153 (Del)]
Section 271AAA : Penalty – Search initiated on or after 1st June, 2007 – When no specific query to substantiate the manner of earning undisclosed income was put forward to the assessee by the authorised officer levy of penalty was held to be not valid when the taxes were paid on the amount surrendered
Dismissing the appeal of the revenue, the Tribunal held that : When no specific query to substantiate the manner of earning undisclosed income was put forward to the assessee by the authorised officer levy of penalty was held to be not valid when the taxes were paid on the amount surrendered (Related Assessment Year : 2010-11) – [ACIT v. Beena Kedia – Date of Judgement :28.02.2018) (ITAT Delhi)]
Penalty under section 271F for failure to furnish return under section 153A
Facts in brief are that for all the assessment years under consideration, notice under section 153A was issued on 21.9.2007 calling for the assessee to file his return of income. The assessee did not file his return of income under section 153A. As no return of income was filed by the assessee, penalty proceedings under section 271F of the Act for non-filing the return of income, were initiated and show cause notice was issued to the assessee. The assessee did not file any reply. Therefore, the Assessing Officer after examining the provisions of sections 271F and 153A, concluded that the provisions of section 139 are applicable in respect of returns to be filed under section 153A. He, therefore, levied the penalty of Rs. 5,000/- for each of the assessment years.
Ld. CIT (A) following the order for the Assessment Year 2000-2001, confirmed the Assessing Officer’s action. Being aggrieved, the assessee was in appeal before the Tribunal. It was held that “From a bare reading of both sections, it is evident that the provisions of section 271F are attracted when a person is required to furnish the return in accordance with section 139(1) or by provisos of that section. Section 153A starts with non-obstante clause and the purpose is only to specify separate time limit for filing the return. The only distinction in section 153A is that the Assessing Officer is required to issue notice to the assessee requiring him to furnish the return within such period, as may be specified in notice, but otherwise the provisions of the Act have been made applicable accordingly, as if such return were a return required to be furnished under section 139. Therefore, all the consequences following for failure to file the return under section 139 will follow under section 153A also. We, therefore, do not find any infirmity in the order of Ld. CIT (A) to interfere and, accordingly, uphold the same.(Related Assessment Years : 2001 to 2001 to 2006- 2007) – [Kashinath Tapuriah v. DCIT – Date of Judgement : 16.04.2010 (ITAT Mumbai)]
Argument that penalty under section 272A(1)(c) can be levied only for non-compliance of section 131(1) and not section 131(1A) is not correct because section 131(1A) has to be read with section 131(1)
So far as the arguments of the Ld. counsel for the assessee that there was a reasonable cause on the part of the assessee in not submitting the details as called for by the ADIT (Investigation) is concerned, we find from the record that there was a deliberate defiance on the part of the assessee for non-submission of the same under the pretext that some of the details are available in the records of the Income Tax Department or some of the details are available in the Website of the Ministry of Corporate Affairs. On facts, the penalty is justified because the conduct of the assessee is not bona fide. There is deliberate and complete defiance to the summons issued under section 131(1A). – [Young Indian v. ADIT – Date of pronouncement : 30.08.2018) (ITAT Delhi)]
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