Changing the age old methodology of levy of penalty u/s. 271(1)(c) of the Income tax Act, Finance Act 2016 has introduced a new mechanism for penalty in the form of section 270A and 270AA. These provisions shall become applicable for assessments related with A.Y. 2017-18 onwards. This write up attempts to analyze the nitty-gritty of this change which is going to have a far reaching impact for tax professionals.
Till now the raison d’etre of penalty was concealment of income or furnishing inaccurate particulars of the income. New regime is replacing this with “under reporting of income”. Now instead of concealment of income or furnishing inaccurate particulars of the income, the charge of penalty shall get attracted when there is under reporting of income and the tax payable on this under reported amount shall be the basis of quantifying the penalty.
Further, in the existing provisions of Sec. 271(1) (c), penalty could have ranged from 100% to 300% of the tax evaded. New provisions bring a certainty to the quantum of penalty by prescribing a fixed per-centage of penalty -50% in case of under reporting of income and 200% in case under reporting is due to mis-reporting.
Coverage Of New Provisions
For a proper understanding, the whole scheme of Sec. 270A and 270AA can be dissected into following 4 components :
- Basic Charge of Penalty- Who, when and on what [ Sub Sec. 1]
- Fixing up the nature of default
- Cases of Under reported income [ Sub Sec. 2 and 4 ]
- Exclusions from Under reported income [ Sub Sec. 6]
- Cases of Mis Reporting of Income [ Sub Sec. 9]
- Quantification of Penalty [ Sub Sec. 3,5,7,8 and 10]
- Quantification of Under reported income [ Sub Sec. 3 and 5]
- Calculation of tax payable on under reported income-base for penalty [ Sub Sec. 10]
- Rate of penalty [ Sub Sec. 7 and 8]
- Immunity from Penalty and prosecution [Sec. 270AA]
Charge of Penalty
Sub Sec. 1 to Section 270A is providing that “The Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner may, during the course of any proceedings under this Act, direct that any person who has under-reported his income shall be liable to pay a penalty in addition to tax, if any, on the under-reported income.”
Following points emerge from above proposition :
1. Penalty can be levied either by A.O. or C.I.T. (Appeals) or by Pr. C.I.T/C.I.T.. This position is same as was the case with provisions of Sec. 271(1)(c ).
2. Direction for penalty has to be “during the course of any proceedings under this Act”. The proceedings may be any assessment proceeding before O., Appeals before C.I.T. (Appeals) or revisionary proceedings before Pr. C.I.T/C.I.T.
3. Unlike sec. 271(1)(c ), there is no explicit requirement of ‘satisfaction” of the authority for direction of levy of penalty.
4. Though the use of word “may” indicate that penalty is not automatic in every case and each case needs to be considered judiciously by the authority before levy of penalty, the way “under reported income” has been considered in the subsequent part of section, it may result into penalty being imposed in every case of addition during assessment etc. This contrasting proposition of the section is bound to see a good amount of litigation as the things unfold.
Under Reporting of Income [ Sub Sec. 2 and 4]
As mentioned earlier, the criterium of penalty under this section is “under reporting of income”. Sub section 2 lists out 7 cases where a person shall be considered to have under-reported his income .
Out of these 7 cases, 3 relates to “normal income” i.e. where income has been assessed other then under MAT/AMT provisions and 3 cases are of deemed total income assessed under MAT/AMT provisions. 7th case is where assessment has resulted into reduction of loss or conversion of loss into income. Following is a tabular view of cases of “under reported income” as contemplated by sub sec. 2 to Sec. 270A:
|Income assessed “normally” i.e. other then under MAT/AMT provisions||Income assessed under MAT/AMT provisions (i.e. u/s. 115JB/115JC)|
|Assessment when return is filed||a) Income assessed is greater than the income determined in the return processed u/s. 143(1)(a)||d) The deemed total income assessed or reassessed as per the provisions of sec. 115jb/115jc, is greater than the deemed total income determined in the return processed u/s. 143(1)(a)|
|Assessment when no return is filed||b) The income assessed is greater than the maximum amount not chargeable to tax||e) The deemed total income assessed as per the provisions of sec. 115jb/ 115jc, is greater than the maximum amount not chargeable to tax|
|Reassessment||c) The income reassessed is greater than the income assessed or reassessed immediately before such reassessment||f) The deemed total income reassessed as per the provisions of sec. 115jb / 115jc, 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.|
Sub Section 4 adds one more case to the list of unreported income by providing that “where the source of any receipt, deposit or investment in any assessment year is claimed to be an amount added to income or deducted while computing loss, as the case may be, in the assessment of such person in any year prior to the assessment year in which such receipt, deposit or investment appears (hereinafter referred to as “preceding year”) and no penalty was levied for such preceding year, then, the under-reported income shall include such amount as is sufficient to cover such receipt, deposit or investment.” This provision takes care of what is typically called “intangible additions in earlier years” i.e. any additions in earlier years, which have not been peanlised then and now used to explain source of any receipt/deposit/investment etc. in any subsequent year.” This is akin to the provisions of Expl. 2 to sec. 271(1).
A simple reading of cases covered in sub sec. 2 conveys the idea that whenever there is an addition during the course of assessment , this shall result into case being treated as a case of under reporting income. However, an important point to note in this regard is that in the opening line of s.s.2, the wordings are “a person shall be considered to have under-reported his income” and not “a person shall be deemed to have under-reported his income”. Thus s.s.2 is not strictly a deeming provision. As discussed earlier, whether penalty is automatic in every case of addition or concerned authority has a discretion in the matter to be exercised based on a careful consideration of facts of the case- the seeds of litigation have been sown in the section right from its birth.
Another point to be noted is that in case of first assessment, the additions are being seen not with reference to the return filed by the assessee but with reference to the income determined after processing of return u/s. 143(1a). This means that in respect of any additions which occur between returned filed by the assessee and its processing u/s. 143(1)(a), no penalty is leviable.
Exclusions from Under reported income [ Sub Sec. 6]
After listing out different cases of under reported income as above, Sec. 270A goes on to provide 5 exclusions for the same. These are the cases where income shall NOT be considered as under reported and consequently no penalty shall be leviable. Following are these cases :
1. The amount of income in respect of which the assessee offers an explanation and the A.O./C.I.T. (Appeals)/Pr.C.I.T/C.I.T., is satisfied that
a. The explanation is bona fide and
b. The assessee has disclosed all the material facts to substantiate the explanation offered.
2. The amount of under-reported income determined on the basis of an estimate,
a. if the accounts are correct and complete to the satisfaction of the A.O./C.I.T. (Appeals)/Pr.C.I.T/C.I.T, but
b. the method employed is such that the income cannot properly be deduced therefrom.
.3. The amount of under-reported income determined on the basis of an estimate,
a. if the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue,
b. has included such amount in the computation of his income and
c. has disclosed all the facts material to the addition or disallowance.
(e.g. Disallowance of car expenses on account of personal use, where assessee on his has disallowed the same at a lower percentage)
4. In transfer pricing cases, where the amount of under-reported income is represented by any addition made in conformity with the arm’s length price determined by the Transfer Pricing Officer, and
a. the assessee had maintained information and documents as prescribed under section 92D,
b. declared the international transaction under Chapter X, and,
c. disclosed all the material facts relating to the transaction.
5. The amount of undisclosed income during search cases where penalty is leviable u/s. 271AAB.
As discussed above, the way sub section 2 has been framed, every case of addition during assessment/reassessment may be treated as a case of under reported income. In the light of this proposition, exclusions discussed above become very important in the sense that if assessee is not able to demonstrate that additions made in his case get covered by any of the exclusion cases mentioned above, he runs the risk of suffering the penalty.
Mis Reporting of Income [ Sub Sec. 9]
In case of under reporting simpliciter, the quantum of penalty is 50% of tax payable on under reported income. However, section prescribes that if this under reporting is due to mis-reporting, the quantum of penalty shall get quadrupled to 200%. The cases of mis-reporting have been listed out in sub section 9. Out of total 6 cases designated as mis-reporting, 3 relate themselves with books of accounts and remaining 3 covers conduct during assessment .
|Mis reporting of Income – Books of Accounts||Mis reporting of Income – Conduct During Assessment|
|• Non-recording of investments in books of account.||• Misrepresentation or suppression of facts.|
|• Recording of false entry in books of account.||• Claiming of expenditure not substantiated by any evidence.|
|• Failure to record any receipt in books of account having a bearing on total income.||• Failure to report any international transaction or deemed international transaction under chapter X.|
Quantification of Penalty
Once the case is treated to be of under reporting of income, either under reporting simpliciter or under reporting with mis reporting, the next issue is to quantify the penalty. Sub sec. 3 gives the mechanism of determination of “under reported income” and then sub sec. 10 lays down calculation of “tax payable on under reported income”. The amount of penalty is 50%/200% of this “tax payable”.
Quantification Of “Under Reported Income” [ Sub Sec. 3]
Sub. Sec. 3, through its 2 clauses, 2 provisos and 1 explanation creates following different cases for quantification of under reported income :
Case 1- Normal Case
Interestingly, above methodology is not referring to additions made during the assessment as the unreported income. Instead, it is talking about difference between income assessed presently and income assessed/determined previously. One interesting fall out would be if due to carry forward losses, despite of additions made during assessment, income assessed remains Nil, nothing would get quantify as unreported income due to methodology prescribed above.
Case 2 : Where under-reported income arises out of determination of deemed total income in accordance with the provisions of section 115JB or section 115JC,
Total under-reported income = (A-B) + (C-D)
It has been further provided that where the amount of under-reported income on any issue is considered both under the provisions contained in section 115JB or section 115JC and under general provisions, such amount shall not be reduced from total income assessed while determining the amount under item D.
The formula mentioned here leads itself to various mathematical intricacies.
- For B and D above, total income assessed is to be reduced by the amount of under reported income. Now when formula it self is for calculation of under reported income, how under reported income is to be reduced for its own determination , is something a mathematical fallacy. To use the term of spread sheet calculations, it is a “circular reference” .
- Further, since under reported income, as calculated by above formula is a mix-up of both general provisions under reported income and Sec. 115JB/115JC under reported income, how tax payable on such combined income shall be calculated, is another question which demands a clarification.
Case 3 : Where assessment or reassessment has the effect of reducing the loss declared in the return or converting that loss into income :
- The amount of under-reported income shall be the difference between the loss claimed and the income or loss, as the case may be, assessed or reassessed.
Quantification of “Tax Payable”
The penalty is 50%/200% of the “tax payable in respect of the under-reported income”. Sub Sec.10 provides that this tax payable shall be calculated as follows :—
a) where no return of income has been furnished and the income has been assessed for the first time, the amount of tax calculated on the under-reported income as increased by the maximum amount not chargeable to tax as if it were the total income.
b) where the total income determined u/s. 143(1)(a) or assessed, reassessed or recomputed in a preceding order is a loss, the amount of tax calculated on the under-reported income as if it were the total income.
c) in any other case, determined in accordance with the formula (X-Y) where,
X = the amount of tax calculated on the under-reported income as increased by the total income determined u/s. 143(1)(a) or total income assessed, reassessed or recomputed in a preceding order as if it were the total income.
Y = the amount of tax calculated on the total income determined u/s. 143(1)(a) or total income assessed, reassessed or recomputed in a preceding order.
The last piece of this new puzzle is provision related with immunity from this penalty and also from prosecution u/s. 276C or 276CC. This beneficial proposition is contained in Sec. 270AA. Following are the important ingredients of this immunity :
Application by Assessee
1. Assessee needs to make an application to the Assessing Officer for grant of immunity from imposition of penalty under section 270A and initiation of proceedings under section 276C/276CC.
2. Application is to be made within 1 month from the end of the month in which the order of assessment or reassessment is received
3. Following conditions are required to be satisfied for this purpose :
a) The tax and interest payable as per the order is paid within the period specified in notice of demand
b) No appeal has been filed against such assessment order.
– It is important to observe that apart from penalty by A.O. in assessment/reassessment proceedings, penalty can also be levied by C.I.T.(Appeals) and by Pr. C.I.T..C.I.T. in an appeal or revision proceeding. However the immunity provision is only talking about A.O. and assessment and reassessment proceedings.
Order by A.O.
1. The A.O. shall, on fulfilment of the above conditions and after the expiry of period of filing appeal, grant immunity from initiation of penalty and proceeding u/S 276C.
– The use of word “Shall” needs to be seen carefully which conveys that if assessee has fulfilled the conditions, the grant of immunity by A.O. is mandatory.
2. Immunity is available only if the case is not of mis-reporting of income.
3. Order, accepting or rejecting the application, is to be passed within a period of 1 month from the end of the month in which such application is received.
4. Before rejecting application, opportunity of being heard is required to be given to assessee.
5. The order of Assessing Officer under this section shall be final.
1. No appeal u/s. 246A or revision application u/s. 264 shall be admissible against the order of assessment or reassessment, in a case where an order u/s. 270 AA has been made accepting the application.
2. Where the assessee makes an application u/s. 270AA, then, the period from the date of application to the date of service of the order rejecting the application, shall be excluded for filing of appeal with C.I.T. (Appeals).
Hon. F.M., when proposing the Finance Act, 2016 has mentioned that the new scheme of penalty is being introduced with the objective of bringing objectivity, certainty and clarity in the penalty provisions. As compared to earlier penalty mechanism, new provisions are certainly at a higher pedestal in achieving the stated objectives. However, as is the case with any new provisions of law, there are a number of unresolved issues which need to be resolved in order to make these provisions workable in a clear and litigation free manner.