Vide Finance Act 2016, with a view to rationalise the penalty provisions and to bring objectivity, certainty and clarity in the penalty provisions a new penalty law was inserted vide section 270A under the Income Tax Act, 1961 (‘the Act’) which is based on under-reporting and misreporting of income, replacing the erstwhile basis of concealment or furnishing of inaccurate particulars of income.
The new penalty provisions are applicable from AY 2017-18 for which assessments have concluded in December 2019. With the introduction of section 270A, provisions of section 271 have been made non-applicable from AY 2017-18.
|S. No.||‘Authorities’ are empowered to impose penalty u/s 270A||Proceedings in which such authority can initiate penalty u/s 270A|
|1||Assessing Officer (‘AO’)||Assessment or re-assessment|
|2||Commissioner(Appeals) [‘CIT(A)’]||While passing quantum appeal order u/s 250|
|3||Principal Commissioner or
Commissioner [‘PCIT or CIT’]
|On addition or disallowance made in pursuance of revision order passed u/s 263|
The AO or the CIT(A) or the CIT or the Pr. CIT 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.
Whether section 270A can be applied in case a rectification order is passed by the AO?
In the following situations a person shall be considered to have under-reported the income:
|S. No.||Situation||Under reported Income if|
|1.||Income tax Return (‘ITR’) filed||a||Income assessed >||Income determined u/s 143(1)(a)|
|b||Deemed total income assessed or re-assessed u/s 115JB/ 115JC >||Deemed total income determined u/s 143(1)(a)|
|z2.||No ITR filed or
ITR filed for the
|a||Income assessed >||Maximum amount not chargeable to tax|
|b||Deemed total income assessed u/s 115JB / 115JC >||Maximum amount not chargeable to tax|
|3.||Income Re-assessed||a||Income Re-assessed >||Income assessed or re-assessed immediately before such re-assessment|
|b||Deemed total income Re-assessed u/s 115JB /
|Deemed total income assessed or re-assessed immediately before such re-assessment|
|4.||Loss Return||Income assessed or re-assessed has the effect of
(a) reducing the loss
(b) converting such loss into income
In case any in intimation issued u/s 143(1)(a) which increases the returned income, then whether any penalty could be levied u/s 270A? From a perusal of above provisions, it is clear that such a case is not envisaged u/s 270A and therefore no penalty could be levied u/s 270A in such a scenario.
Whether computation mechanism fails if no intimation is issued u/s 143(1)(a) before passing the assessment order?
|S. No.||Situation||Under reported income would be|
|1.||Income has been assessed for the first time and ITR has been filed||Difference between
(a) Income assessed
(b) Income determined u/s 143(1)(a)
|2.||Income has been assessed for the first time and No ITR has been filed or ITR has been filed for the first time u/s 148||In case of company, firm or local authority, Income assessedIn case of any other Assessee, difference between
(a) income assessed; and
(b) maximum amount not chargeable to tax
|3.||Income Re-assessed||Difference between
(a) Income re-assessed or re-computed; and
(b) Income assessed, re-assessed or re-computed in a preceding order
Note: Where under-reported income arises out of determination of deemed total income in accordance with the provisions of section 11 5JB or section 11 5JC, the amount of total under-reported income shall be – (A – B) + (C – D)
A – Total income assessed as per general provisions
B – Total income as per general provisions reduced by the amount of under-reported income
C – Total income assessed as per section 1 15JB or section 1 15JC
D – Total income as per section 115JB or section 115JC reduced by amount of under-reported income
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 term “preceding order” means an order immediately preceding the order during the course of which the penalty u/s 270A(1) has been initiated.
Where the source of any deposit, receipt or investment made in current year is claimed to be an amount added to income in the assessment of any earlier year and no penalty was levied in such earlier year, then for the purpose of levying penalty u/s 270A the under-reported income shall include such amount as is sufficient to cover such deposit, receipt or investment in the following order:
(a) the preceding year immediately before the year in which the receipt, deposit or investment appears, being the first preceding year; and
(b) where the amount added or deducted in the first preceding year is not sufficient to cover the receipt, deposit or investment, the year immediately preceding the first preceding year and so on.
The provisions contained in sub-section (4) & (5) are similar to Explanation 2 to sub-section (1) of section 271.
Under-reported income shall not include following 5 cases, i.e. in the following 5 cases even if any addition/disallowance is made in any assessment / re-assessment, the Assessee shall not be deemed to have under-reported any income.
(a) Income in respect of which the assessee offers an explanation and the AO or the CIT(A) or the CIT or the Pr. CIT, 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;
Here, disclosure of all the material facts means disclosure of primary facts only and it cannot be an endless disclosure requirement.
Thus, a case could not be treated to be of under-reporting of income, if
1. The assessee has offered an explanation,
2. The AO etc. is satisfied that said explanation is bona-fide and
3. The assessee has disclosed all material facts to substantiate the explanation,
For example, if the AO has issued a show cause notice to disallow an expense for non deduction of TDS. Thereafter, if the Assessee duly explained as to why TDS was not deductible (like due to applicability of DTAA) along with all requisite documents (like invoice, agreement, TRC, No PE declaration, Form 1OF etc.) in support thereof and AO is satisfied that said explanation is bona-fide then it could not be a case of under-reporting of income.
Clause (a) of sub-section(6) of section 270A is one of the most crucial part of section 270A and the Assessee will time and again need to fall upon this clause to come of the rigour of 270A. Therefore, it is of vital importance to understand the meaning of bona-fide. Whether or not the explanation is bona-fide, needs to be considered in a fair and objective manner and in the light of human probabilities.
In this regard, it is very apt to take note of a recent ruling of Mumbai ITAT in the case of Van Oord Dredging and Marine Contractors BV vs. ADIT  117 taxmann.com 194 (Mumbai – Trib.):
“6……………………………………….The human probabilities favour acceptance of this explanation for bona fides. It cannot always be feasible to prove the claim of bona fides to the hilt, nor, in our considered opinion, the assessee cannot be expected to do so. Whether or not the person has acted bona fide reflects the state of his mind in respect of his conduct, and, therefore, the assessee has his inherent limitations in establishing this aspect of the manner. All that the assessee can do, is to explain the circumstances in which he has acted in a particular manner and set out the related facts. The explanation for bonafides, at the cost of repetition, needs to be considered in a fair and objective manner and in the light of human probabilities. As long as the explanation given by the assessee in the light of the human probabilities, there are no factual errors or inconsistencies, and it is supported by rational supporting evidences regarding factual evidences embedded therein, if any, the bonafides should be taken as proved. We observe that the assessee’s explanation regarding bonafides of the claim does not suffer from any apparent inconsistencies or factual errors and it is quite in tune with the human probabilities. We, therefore, find no reason to reject the reason as unacceptable. In that view the matter the case of the assessee is not even hit by the mischief of any of the three eventualities envisaged by the deeming fiction under Explanation 1 to Sec. 271 (1)(c) of the Act. “
Another important aspect is that the assessee has disclosed all the material facts to substantiate the explanation.
In this regard, it is very apt to take note of ruling of the Rajasthan High Court in CIT v A. R. Enterprises (2002) 255 ITR 121, wherein the Hon’ble Rajasthan High Court explained the meaning of the expression “material facts”:
“…………………..The expression ‘material facts’ refers only to primary facts. There is no duty cast on the appellant to indicate or draw the attention of the AO to what factual or legal or other inferences can be drawn from primary facts. Relying on the decision of the apex Court in Calcutta Discount Co Ltd v ITO & Anr (1961) 41 ITR 191 (SC), the apex Court in a later decision, viz., Associated Stone Industries (Kotah) Ltd v CIT (1997) 138 CTR (SC) 260 (1997) 224 ITR 560(SC), held that the duty of the assessee is only to fully and truly disclose all material facts. Explaining the expression “material facts” as contained in s 34(/)(a), the Court observed that it refers only to the primary facts and the duty of the assessee is to disclose such primary facts. The court further observed that there is no duty cast on the assessee to indicate or draw the attention of the ITO to what factual or legal or other inferences can be drawn from the primary facts disclosed. There is not a word in the order of assessment if the respondent ‐assessee omitted to disclose any material fact.”
(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 AO or the CIT(A) or the CIT or the Pr. CIT, as the case may be, but the method employed is such that the income cannot properly be deduced therefrom;
Thus, if under-reported income is determined by the AO on the basis of an estimate, where accounts are correct & complete (i.e. Books not rejected u/s 145) but AO used some estimate to compute assessed income e.g. certain percentage of G.P. or N.P. or sales is estimated without rejecting the books then also it could not be a case of under-reporting of income.
(c) The amount of under-reported income is 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;
Thus, if the under-reported income is determined by the AO on the basis of an estimate, where Assessee has, on his own,
i. estimated a lower addition/disallowance on the same issue;
ii. included such amount in computation of income; and
iii. disclosed all the facts material to the addition or disallowance.
then also it could not be a case of under-reporting of income.
For example, if any asset like car is used for both business and non-business purpose and the AO enhanced the Assessee’s estimate of personal expense component in the expenditure incurred on said car (like petrol, repair & maintenance and driver salary).
(d) The amount of under-reported income represented by any addition made in conformity with the arm’s length price (‘ALP’) determined by the Transfer Pricing Officer (8TPO’), 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;
Thus, if the addition was made as per ALP determined by the TPO, and the Assessee had
1. maintained TP study & documentation;
2. declared international transaction and;
3. disclosed all the material facts relating to the transaction;
then also it could not be a case of under-reporting of income.
For example, addition was made as per ALP determined by the TPO by applying a different method instead of method adopted by the Assessee.
(e) The amount of undisclosed income referred to in section 271AAB i.e. penalty in case of Search would be outside the purview of section 270A.
|Section||Case is of||Amount of penalty|
|270A(7)||Under-reported income||50% of the amount of tax payable on under-reported income|
|270A(8)||Where under-reported income is in consequence of any misreporting thereof||200% of amount of tax payable on under-reported income|
By usage of phrase “where under-reported income is in consequence of any misreporting thereof” in sub-section (8) of section 270A it is clear that for any case to fall within the ambit of mis-reporting, first of all it should be treated as under-reported income i.e. if any income is not under-reported income then it could never be a case of mis-reporting of income. Thus, if the case of the Assessee is covered under sub-section (6) of section 270A i.e. covered in any one of the five situations specified under sub-section (6) then the Assessee shall not be deemed to have under-reported any income and consequently could not at all be said to have mis-reported any income.
In the following situations, the case of the Assessee shall be treated as of misreporting o income:
|S. No.||Situations in which case of the Assessee shall be treated as of misreporting of income|
|1.||Misrepresentation or suppression of facts|
|2.||Failure to record investments in the books of account|
|3.||Claim of expenditure not substantiated by any evidence|
|4.||Recording of any false entry in the books of account|
|5.||Failure to record any receipt in books of account having a bearing on total income|
|6.||Failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which Transfer Pricing provisions (as specified in ChapterX of the Act) apply|
|7.||Second proviso to section 56(2)(viib)
√ Where provisions of section 56(2)(viib) have not been applied to a start-up company on account of fulfilment of conditions specified in the notification issued under clause (ii) of the first proviso to section 56(2)(viib) and
√ such start-up company fails to comply with any of those conditions, then,
√ any consideration received for issue of share that exceeds FMV 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 under-reported the said income in consequence of the misreporting u/s 270A.
|S. No.||Situation||Amount of tax payable on under-reported income|
|1||(a) No ITR filed or ITR filed for the first time u/s 148;
(b) income has been assessed for the first time
|Amount of tax calculated on under-reported income as increased by maximum amount not chargeable to tax as if it were the total income|
|2||Where total income determined u/s 143(1)(a) orassessed, reassessed or recomputed in a preceding order is a loss||Tax calculated on the under-reported income as if it were the total income|
|3||Any other case||(X-Y)
X = Tax calculated on under-reported income as increased by 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 = Tax calculated on total income determined u/s 143(1)(a) or total income assessed, reassessed or recomputed in a preceding order
√ No addition or disallowance of an amount shall form the basis for imposition o penalty,
√ if such addition or disallowance has formed the basis of imposition of penalty
√ in the case of the person
√ for the same or any other assessment year.
The penalty shall be imposed, by an order in writing, by the AO, the CIT(A), the CIT or the Pr. CIT, as the case may be.
Though penalty law has been revamped and shifted from concealment or furnishing inaccurate particulars to under-reporting or mis-reporting of income, however, similar to erstwhile penalty law, if initiation of penalty does not have its genesis from the assessment order, penalty proceedings would be void ab-initio. Thus, penalty should specifically be initiated in the assessment order.
The requirement of initiating the penalty in the assessment order is also evident from the meaning of the term “preceding order” as defined in Explanation (a) to Sec. 270A(3). Said explanation defines the term “preceding order” as an order immediately preceding the order during the course of which the penalty u/s 270A(1) has been initiated. Thus, it is clear that penalty sought to be levied u/s 270A must be initiated in the assessment/appeal order.
Further, as specified in section 270AA, assessee has to apply for immunity in one month from the end of the month in which the order u/s 143(3)/147 has been received. Assessee can apply for immunity from penalty, basis said order u/s 143(3)/147 only when penalty has been initiated in the assessment/re-assessment order. This also reaffirms the requirement of initiating the penalty in the assessment/re-assessment order.
Moreover, as amount of penalty payable for under-reporting (50%) and mis-reporting (200%) varies substantially and immunity can be applied only in case of under-reporting, therefore the AO has to clearly specify in the assessment order whether penalty is for under-reporting or mis-reporting, meaning thereby penalty must be initiated in the assessment/re-assessment order and it must be clearly discernible from the assessment/re-assessment order that whether it is for under-reporting or mis-reporting.
The Assessing Officer (‘AO’) should clearly specify in the assessment order and even in the penalty notices that whether penalty is initiated or sought to be levied for under-reporting of income or for mis-reporting of income. If there is no such clear demarcation or in other words if non-relevant clause is not stroked-off or if in assessment order and/or in penalty notices both the clauses i.e. under-reporting and mis-reporting are specified then such penalty proceedings will be invalid.
On perusal of assessment orders and penalty notices issued after completion of assessments of AY 2017-18, it can be observed that either inadvertently or out of confusion or because of lack of clarity tax officers have not suitably initiated penalty in assessment order and/or penalty notices.
While initiating penalty in the assessment order and while issuing penalty notice specific and correct ground on which penalty is initiated or sought to be levied should be specified (and inapplicable limb/clause should be stroked-off). This ratio emerges out of various judicial precedents [e.g. landmark case of CIT v. Manjunatha Cotton & Ginning factory (2013) 359 ITR 565]. Applying this ratio, following scenarios should lead to quashing of penalty proceedings:
a) Initiated penalty on both the grounds i.e. for under-reporting and mis-reporting (both in the assessment order as well as in penalty notice issued u/s 270A);
b) Initiated penalty either for mis-reporting or under-reporting in the assessment order, however while issuing penalty notice u/s 270A specified both the limbs of under-reporting/mis-reporting without striking-off inapplicable one;
c) Initiated penalty for mis-reporting in the assessment order but while issuing penalty notice u/s 270A specified the ground of under-reporting and vice-versa.
Provisions of section 273A which provides power to Pr. CIT / CIT reduce or waive the amount of penalty, have been amended to include section 270A.
In the erstwhile penalty regime, in view of provisions of section 273B, penalty is not imposed if the assessee proves ‘reasonable cause’. However, section 273B has not been amended to include penalty u/s 270A, which means that the safeguard of ‘reasonable cause’ is not available for penalty u/s 270A.
|1.||Condition precedent for immunity application
√ Application can be made to grant immunity from penalty u/s 270A & prosecution u/s 276C or 276CC if
√ Tax & interest payable as per order u/s 143(3)/147 has been paid within the period specified in notice of demand and
√ no appeal has been filed against such order.
Can immunity be applied issue wise or for complete order? From a perusal of provisions, it seems that principle of complete merger will apply and therefore, immunity cannot be applied issue wise.
If there is some mistake apparent from records for which assessee needs to file a rectification, then whether immunity application can be filed post rectification?
|2||Procedure for filing immunity application
√ Application in Form 68 is filed
√ in one month
√ from the end of the month in which the aforesaid order has been received (Rule 129).
|3||No immunity in case of mis-reporting
√ AO shall, subject to fulfilment of specified conditions,
√ after expiry of time of filing appeal u/s 249(2)(b),
√ grant immunity from penalty u/s 270A and prosecution u/s 276C or 276CC, ( where penalty has not been initiated for mis-reporting.
|4||Order in one month, no rejection before opportunity of being heard
√ AO shall,
√ in one month from the end of the month of receipt of application,
√ pass a final order accepting or rejecting such application.
√ However, before any rejection, opportunity of being heard shall be provided.
|5||No appeal/revision, if immunity application is accepted
No appeal u/s 246A or revision application u/s 264 shall be admissible against aforesaid assessment/reassessment order, if immunity application is accepted.
|6||If immunity application is rejected, appeal/revision is possible
√ Though AO can grant immunity only after expiry of time limit of filing appeal u/s
√ however, second proviso to section 246(2)(b) provides that
√ where immunity application is made u/s 270AA(1),
√ the period beginning from the date on which the application is made, to the date on which the order rejecting the application is served on the assessee, shall be excluded to calculate the period of 30 days.
√ Thus, in view of second proviso to section 246(2)(b), appeal can be filed against assessment/re-assessment order in case immunity application is rejected.
√ Further, there is no restriction in filing revision application u/s 264 in case immunity application is rejected.
|7||Assessee not precluded from contesting same issue in an earlier AY
√ CBDT vide Circular No. 5/2018 dated 16 August 2018 clarified that
√ where an assessee makes a immunity application u/s 270AA,
√ it shall not preclude such assessee from contesting the same issue in any earlier assessment year.
√ Further, the Income-tax Authority, shall not take an adverse view in the proceedings for penalty u/s 271(1)(c) in earlier assessment years
√ merely on the ground that the assessee has acquiesced on the issue in any later assessment year
√ by preferring immunity on such issue u/s 270AA.
|8||Penalty proceedings on same issues in future years
√ If assessee availed immunity u/s 270AA with respect to certain disallowances / additions (e.g. in AY 2017-18), and
√ penalty proceedings are initiated on the same issues in future years (e.g. in AY 2018-19),
√ then fresh immunity application needs to be filed,
√ i.e. immunity has to be sought separately for every year.
No amendment is made has been made section 274(2) and prior approval of Joint Commissioner would still be required in the following situations:
|S. No.||Authority passing penalty order||For imposing penalty exceeding|
|2||Assistant Commissioner or Deputy Commissioner||Rs.20,000|
As per section 2(28C), “Joint Commissioner” means a person appointed to be a Joint Commissioner of Income-tax or an Additional Commissioner of Income-tax u/s 117(1).
Though the purpose of new penalty provisions is to bring objectivity, certainty and clarity in the penalty provisions, however as we know any new law brings with it new era of litigation as it takes a long while both for the taxpayers and the tax officers to absorb new provisions and for many interpretational issues to get settled down.
(Author, CA Deepak Goel, can be reached at: Mob: +91 9911839405, E-mail: [email protected])