Section 271J – Request to issue guidelines for levy of penalty under section 271J for furnishing incorrect information in reports or certificates
Issue/Justification
The Finance Act 2017 has inserted a new provision by way of section 271J which provides that where the Assessing Officer (AO) or Commissioner (Appeals) {CIT(A)}, in the course of any proceedings under the Income-tax Act 1961, finds that an accountant or a merchant banker or a registered valuer (hereinafter referred to as ‘professional’) has furnished incorrect information in any report or certificate furnished under any provisions of the Act or the rules made there under, the AO or CIT(A) may direct that such professional shall pay, by way of penalty, a sum of Rs. 10,000 for each such report or certificate. The terms ‘accountant’, ‘merchant banker’ and ‘registered valuer’ are defined in section 271J. Further, section 273B has also been amended to provide that if the professional proves that there was a reasonable cause for the failure referred in section 271J, then penalty shall not be imposable in respect of section 271J.
The object of the new provision is that the professional furnishing report or certificate undertakes due diligence before making such certification.
Representations have been received by the Board stating that in the absence of any clear definition of the term “incorrect information”, clarification/guidelines on scope of section 271J may be provided by the Board for proper administration of the law and curtail chances of avoidable litigation.
Suggestion
In order to avoid unnecessary litigation with respect to applicability of section 271J and to ensure that no penalty is levied in bonafide cases, it is hereby clarified that following approach shall be adopted before considering the case fit for levy of penalty on a professional.
1. While deciding upon levy of penalty, the AO/CIT(A) may consider that the penalty is for furnishing ‘incorrect information’. While this term is not defined in the Act, the distinction between furnishing of incorrect facts and expression of professional opinion should be duly considered. No penalty should be levied where facts as stated in the report are not found to be incorrect. It may be noted that mere disagreement with the professional’s opinion does not justify levy of penalty if the professional has not been found to be negligent while issuing the report or certificate. Views taken on the basis of judicial decisions and sound judicial principles should not be treated as “incorrect information”.
2. Before commencing the process of enquiry, the materiality of the tax impact may be considered. In case the tax impact owing to incorrect information does not exceed a specified amount the enquiry should not be proceeded further.
3. The inquiry should preferably be made by Jurisdictional AO/CIT(A) of the Professional on being referred by the Jurisdictional AO/CIT(A) of the assessee. The penalty should be initiated by the jurisdictional AO/CIT(A) of the professional and for this purpose, if the inquiry was initiated by a differentAO/CIT(A), the matter should be referred to the jurisdictional AO / CIT(A).
4. Also the possibility of bonafide typographical errors while furnishing information in electronic mode on the website of the Department should be duly considered. The matter may be decided on merits on the basis of physical copy of the report/ certificate and/or any other materials available on record or furnished by the professional.
5. Due consideration should be given to the fact that the professionals are obliged to comply with professional standards laid down by regulator of the profession (eg. Institute of Chartered Accountants of India for Chartered Accountants or Securities & Exchange Board of India for merchant bankers, etc) to exercise due diligence while issuing any report or certificate and any breach thereof may invite regulatory action against the professional. The penalty under section 271J of the Act is an additional deterrent.
6. Since the object of the provision is to ensure that the professional has exercised due diligence before issue of report or certificate, inquiry should be made whether the professional has followed professional standards laid down by the respective regulator of the profession before issue of the certificate or report. Such inquiry should be made with prior approval of Principal Chief Commissioner or Chief Commissioner or Principal Commissioner before initiating the penalty. The inquiry may be made by referring the matter to the respective regulator and calling for a report within a period of three to six months. The report, if any, received from the regulator should be considered before initiation of the penalty.
7. If the report from the regulator states that the professional had exercised due diligence as per professional standards, the proceedings should be dropped with the approval of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner whose approval was sought before making the inquiry.
8. If adverse report is received from the regulator, the AO/CIT(A) may initiate penalty proceedings against the professional.
9. If no report is received from the regulator within a period of three to six months, the AO / CIT(A) may initiate penalty proceedings against the professional.
10. In both circumstances mentioned in VIII and IX above the professional should be heard or should be given a reasonable opportunity of being heard before initiating the penalty proceedings . The AO/CIT(A) may then decide the case on merits in accordance with law.
11. Also, penalty shall not be levied on any professional in respect of any report or certificate issued by such professional in any financial year relevant to the assessment year, which falls beyond the period of limitation mentioned in respective sections under which proceedings are initiated. For instance, notice u/s 148 of the Income-tax Act, 1961 for Assessment Year 2010-11 (relevant to Financial Year 2009-10) is issued by the Assessing Officer on 29th March, 2017 and such assessment or reassessment proceedings u/s 147 of the Income-tax Act, 1961 are to be completed on or before 31st December, 2017. In such case, the Assessing Officer shall not be allowed to impose penalty on professional in respect of documents signed in financial year 2009-10 since such year is already barred by limitation after 31st March, 2017 for the professional.
12. Where penalty is levied by CIT(A), since no specific remedy of appeal to the Appellate Tribunal has been provided to the professional in the Act, for proper administration of law and until the Act is amended suitably, it is hereby clarified that if the professional files appeal before the Appellate Tribunal against such order, no objection shall be taken on the ground that the Act does not confer jurisdiction on the Appellate Tribunal to admit such appeal.
