Satender Singh Rana
Commissioner of Income Tax(DR)-7,
ITAT, Delhi
s.s.rana@incometaxindia.gov.in

Satender Singh Rana

Sri Satender Singh Rana is an IRS officer of 1994 Batch and is currently posted as Commissioner of Income Tax, ITAT, New Delhi. He has extensive experience in the field of Income Tax Litigation and judicial matters and is part of several committees formed by CBDT on Judicial/Litigation Matters

Executive Summary

Penalty provisions have been substantially amended from A.Y.2017-18 onwards. This article discusses the amended provisions. In the light of various judicial pronouncements, it shows the correct way of initiating penalties under sections 271(1)(c), 270A and 271AAC of Income Tax Act

Penalty u/s 271(1)(c) is leviable only upto A.Y. 2016-17

Penalty u/s 270A is required to be levied from A.Y. 2017-18 onwards

Penalty u/s 270A is leviable for:

1 Under-reporting of income Penalty @ 50% of amount of tax payable on under-reported income
 

2

Under-reported income is in consequence of any misreporting thereof Penalty @ 200% of amount of tax payable on under-reported income

Under Reporting of income is defined in Section 270A(2) of Income Tax Act as follows:

“(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;

(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;

(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.”

Exceptions to under reporting of income are laid down in Section 270A(6) of Income Tax Act as follows:

“(6) The under-reported income, for the purposes of this section, shall not include the following, namely:

(a) the amount of income in respect of which the assessee offers an explanation and the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, 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, if the accounts are correct and complete to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, 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 on the same issue, has included such amount in the computation of his income and has disclosed all the facts material to the addition or disallowance;

(d) the amount of under-reported income represented by any addition made in conformity with the arm’s length price determined by the Transfer Pricing Officer, 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; and

(e) the amount of undisclosed income referred to in section 271AAB.”

Section 270A(8) of Income Tax Act is reproduced below:

“(8) Notwithstanding anything contained in sub-section (6) or sub-section (7), 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.”

A perusal of above clause shows that penalty is 200% where under-reported income is in consequence of any misreporting thereof by any person.

Misreporting of income is defined in Section 270A(9) as follows:

“(9) 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;

© 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.”

An important question for the Assessing Officers is how to correctly initiate penalty proceedings u/s 270A.

Hon’ble Karnataka High Court in the case of CIT Vs Manjunatha Cotton And Ginning Factory (2013)(359 ITR 565) held as follows:

“63. In the light of what is stated above, what emerges is as under:

(a) …..

(b) …..

(p) Notice under Section 274 of the Act should specifically state the grounds mentioned in Section 271(l)(c), i.e., whether it is for concealment of income or for furnishing of incorrect particulars of income

(q) Sending printed form where all the ground mentioned in Section 271 are mentioned would not satisfy requirement of law.

(r) The assessee should know the grounds which he has to meet specifically. Otherwise, principles of natural justice is offended. On the basis of such proceedings, no penalty could be imposed to the assessee.

(s) Taking up of penalty proceedings on one limb and finding the assessee guilty of another limb is bad in law.

(t) The penalty proceedings are distinct from the assessment proceedings. The proceedings for imposition of penalty though emanate from proceedings of assessment, it is independent and separate aspect of the proceedings.

(u) The findings recorded in the assessment proceedings insofar as “concealment of income” and “furnishing of incorrect particulars” would not operate as res judicata in the penalty proceedings. It is open to the assessee to contest the said proceedings on merits. However, the validity of the assessment or reassessment in pursuance of which penalty is levied, cannot be the subject matter of penalty proceedings. The assessment or reassessment cannot be declared as invalid in the penalty proceedings.”

Relying upon the above decision, Hon’ble Karnataka High Court in the case of CIT Vs SSA’S Emerald Meadows [2016] 73 taxguru.in 241 (Karnataka) dismissed appeal of the Department in which substantial question of law was as follows:

“(1) Whether, omission if assessing officer to explicitly mention that penalty proceedings are being initiated for furnishing of inaccurate particulars or that for concealment of income makes the penalty order liable for cancellation even when it has been proved beyond reasonable doubt that the assessee had concealed income in the facts and circumstances of the case?”

Hon’ble Supreme Court dismissed SLP of the department in the above case of CIT Vs SSA’S Emerald Meadows [2016] 73 taxguru.in 248 (SC)/[2016] 242 Taxman 180 (SC).

In view of the above decisions, the assessing officers must be very careful so as to initiate penalty proceedings u/s 270A correctly. Two different rates of penalty i.e. 50% & 200% are required to be levied u/s 270A. Hence, after each addition, it must be clearly specified whether penalty is being initiated for:

(i) under-reporting of income or

(ii) under-reporting income which is in consequence of misreporting thereof.

Taking into consideration above case laws and provisions of section 270A, penalty u/s 270A may be initiated as follows:

1. Penalty proceedings u/s 270A of Income Tax Act are hereby initiated for under-reporting of income

2. Penalty proceedings u/s 270A of Income Tax Act are hereby initiated for under-reporting of income which is in consequence of misreporting thereof

Section 270A has clearly defined under-reporting of income in Section 270A(2) and misreporting of income in Section 270A(9). In comparison, ‘furnishing inaccurate particulars of income’ and ‘concealed particulars of income’ were not defined in section 271(1)(c). Hence, as far as possible, while recording satisfaction for initiation of penalty, the assessing officer should try to identify in which clause or sub-clause of Section 270A(2) or Section 270A(9) that particular addition falls. Similarly, in the penalty order also the relevant clause or sub-clause of Section 270A(2) or Section 270A(9) should be specified. Moreover, if the assessing officer has specified the clause or sub-clause in assessment order, it is essential that in the penalty order also, same clause or sub-clause has to be relied upon.

Courts have consistently held that at the time of initiation of penalty, charge should be clearly specified. Understanding of this basic concept by the assessing officers will go a long way in correct initiating of penalty and passing of sustainable penalty orders. Each and every word in the sentence for initiation of penalty is crucial. Hence, the assessing officers must stop, think and ponder before recording satisfaction for initiation of penalty.

As reproduced above, Hon’ble Karnataka High Court in the case of CIT Vs Manjunatha Cotton & Ginning Factory held that notice under Section 274 of the Act should specifically state the grounds mentioned in Section 271(l)(c), i.e., whether it is for concealment of income or for furnishing of incorrect particulars of income. Similarly, in the printed notice u/s 274 r.w.s 270A, it is essential to tick the applicable part in printed penalty notice and strike off inapplicable part in printed penalty notice. Thus, if penalty is initiated only for under reporting of income, the printed notice must not contain mention of misreporting of income. In such a case, misreporting of income is required to be essentially struck off.

Section 270AA provides for immunity from imposition of penalty u/s 270A. The section is reproduced below:

“Immunity from imposition of penalty, etc.

270AA. (1) An assessee may make an application to the Assessing Officer to grant immunity from imposition of penalty under section 270A and initiation of proceedings under section 276C or section 276CC, if he fulfils the following conditions, namely:

(a) the tax and interest payable as per the order of assessment or reassessment under sub-section (3) of section 143 or section 147, as the case may be, has been paid within the period specified in such notice of demand; and

(b) no appeal against the order referred to in clause (a) has been filed.

(2) An application referred to in sub-section (1) shall be made within one month from the end of the month in which the order referred to in clause (a) of sub-section (1) has been received and shall be made in such form and verified in such manner as may be prescribed.

(3) The Assessing Officer shall, subject to fulfilment of the conditions specified in sub-section (1) and after the expiry of the period of filing the appeal as specified in clause (b) of sub-section (2) of section 249, grant immunity from imposition of penalty under section 270A and initiation of proceedings under section 276C or section 276CC, where the proceedings for penalty under section 270A has not been initiated under the circumstances referred to in sub-section (9) of the said section 270A.

(4) The Assessing Officer shall, within a period of one month from the end of the month in which the application under sub-section (1) is received, pass an order accepting or rejecting such application”

In view of the above provision, penalty u/s 270A is required to be waived by the assessing officer if the assessee pays entire tax and interest within the time specified in notice of demand and does not file appeal against the order. However, it may be noted that in view of provisions of section 270AA(3), immunity is not provided for cases of misreporting of income refer to in section 270A(9).

Penalty proceedings u/s 271(1)(c) are required to be initiated in assessments upto A.Y. 2016-17. In view of various case laws discussed above, as far as possible, penalty u/s 271(1)(c) for a particular addition should be initiated either for furnishing inaccurate particulars of income or concealment of income, not both limbs. Penalty u/s 271(1)(c) may be initiated as follows:

(i) Penalty proceedings u/s 271(1)(c) of Income Tax Act are initiated for furnishing inaccurate particulars of income

(ii) Penalty proceedings u/s 271(1)(c) of Income Tax Act are initiated for concealing particulars of income

Penalty proceedings u/s 271(1)(c) initiated in the following manner may not stand the test of appeal:

(i) Penalty proceedings u/s 271(1)(c) are initiated for furnishing inaccurate particulars of income and concealing particulars of income

(ii) Penalty proceedings u/s 271(1)(c) are initiated for furnishing inaccurate particulars of income or concealing particulars of income

(iii) Penalty proceedings u/s 271(1)(c) are initiated for furnishing inaccurate particulars of income and/or concealing particulars of income

Thereafter, inapplicable part in printed penalty notice is required to be struck off

Thus, correct initiation of penalty is the foundation upon which entire penalty order stands. Correct initiation of  penalty after due application of mind will go a long way in penalty orders being sustained.

Penalty in Cash Deposit Cases

Assessing Officers are making addition u/s 68 or section 69A of Income Tax Act on account of unexplained cash deposits.

In many cases, Assessing Officers have initiated penalty u/s 271(1)(c) or 270A.

In this regard, attention is drawn to provisions of section 271AAC of Income Tax Act applicable from A.Y. 2017-18 onwards. Penalty is required to be levied under this section where addition has been made u/s section 68, section 69, section 69A, section 69B, section 69C or section 69D and tax is payable u/s 115BBE of IT Act.

Section 271AAC is reproduced below:

Penalty in respect of certain income.

271AAC. (1) The Assessing Officer may, notwithstanding anything contained in this Act other than the provisions of section 271AAB, direct that, in a case where the income determined includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D for any previous year, the assessee shall pay by way of penalty, in addition to tax payable under section 115BBE, a sum computed at the rate of ten per cent of the tax payable under clause (i) of sub-section (1) of section 115BBE:

Provided that no penalty shall be levied in respect of income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D to the extent such income has been included by the assessee in the return of income furnished under section 139 and the tax in accordance with the provisions of clause (i) of sub-section (1) of section 115BBE has been paid on or before the end of the relevant previous year.

(2) No penalty under the provisions of section 270A shall be imposed upon the assessee in respect of the income referred to in sub-section (1).

(3) The provisions of sections 274 and 275 shall, as far as may be, apply in relation to the penalty referred to in this section.

From A.Y. 2017-18 onwards, Assessing Officers must initiate penalty only u/s 271AAC where tax is payable u/s 115BBE of IT Act.

Source- CBDT Taxalogue Magazine Jul – Oct 19 | Volume 1 | Issue 1

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