Penalty Provisions under the Income Tax Act – Unlearning and Relearning Consequent to The Finance Bill, 2016

By: Rishabh KhandalArticle Assistant

Kalani & Co.

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Section 271(1)(c) V/s

Section 270A and Section 270AA

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271(1)(c) - “Concealment of particulars of income or fringe benefits or furnishing of inaccurate particulars of income or fringe benefits

Concealment or Failure of furnishing the particulars of accurate income will attract penalty under this section.

Penalty under this section will be levy @ 100% to 300% of the tax to be evaded .

This penalty will be in addition of the tax calculated on such concealed income.

Decision of rate of penalty is at full discretion of Income Tax officer.

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270A- “Underreporting of Income and Misreporting of Income

Finance Bill, 2016 amended the existing provision u/s 271(1)(c) to provide the different categories of misconduct.

New section 270A provides for levy of penalty in cases of under reporting and misreporting of income.

Under this Section rate of penalty is fixed.

It reduces the discretion powers of tax officers.

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270A(2)- “Underreporting of Income” 5

When return of income is filed When return of income is not filed

Income assessed > income processed u/s 143(1)(a);

Income assessed > Maximum amount not chargeable to tax

Income reassessed > income assessed or reassessed previously;

Deemed total income (DTI) assessed or reassessed u/s 115JB (MAT) or 115JC (AMT) > DTI processed u/s 143(1)(a);

Deemed total income (DTI) assessed u/s 115JB (MAT) or 115JC (AMT) > Maximum amount not chargeable to tax.

Total income assessed or reassessed has the effect of reducing the loss or converting such loss into income.

270A(2)- “Underreporting of Income” 6

Any addition in the assessment or reassessment order shall be treated as

under-reporting of income

270A(6)- “Cases of exclusions from under reported income ” 7

Assessee offers explanation which is bonafide and substantiated the same with material facts.

Income is computed on the basis of estimate though the accounts are correct and complete but such income not properly deducible due to the method employed.

Assessee suo moto does additions or disallowance and compute his income along with disclosure of all material facts, which disallowance is varied by the tax authorities.

Assessee maintains documentation u/s 92D and declares International transactions under chapter X along with disclosure of all material facts.

Undisclosed income is detected in search operations and penalty is leviable u/s 271AAB

270A(3)- “Calculation of underreported income ” 8

I) Income assessed for the first time

A) If ROI is filed - Difference between Income assessed and income determined u/s 143(1)(a).

B) If ROI is not filed – Difference between income assessed and maximum amount not chargeable to tax.

II) Any other case - Difference between income reassessed or recomputed and income assessed, reassessed or recomputed previously.

270A(3)- “Calculation of underreported income ” 9

If under reporting arises out of deemed total income u/s 115JB or 115JC then

formula (A-B)+(C-D) shall be applied to compute under reporting.

where, A = Total income assessed as per the provisions excluding sec 115JB or 115JC. (herein called general provisions)

B = Total income assessed as per the general provisions reduced by the amount of under-reported income.

C = Total income assessed as per section 115JB (MAT) or 115JC(AMT).

D = Total income assessed as per section 115JB or 115JC as reduced by the amount of under-reported income.

[If amount is considered under both normal provision and MAT/AMT, then such amount shall not be reduced from total income assessed while determining item D.]

270A(7)- “Penalty of underreported income ” 10

Rate of penalty u/s 270A(1) is at 50% of the amount of tax payable on under-reported income.

270A(9)- “Cases of Misreporting of Income” 11

Misrepresentation or suppression of facts; (no where defined in Act)

Failure to record investments in the books of account; (Sec. 69)

Claim of expenditure without substantive evidence;

Recording of false entry in books of account;

Failure to record any receipt in books of account having a bearing on total income; and

Failure to report any international transaction or deemed international transactions or any specified domestic transaction under chapter X.

270A(8)- “Penalty of Misreporting of Income” 12

Where under reported income results from misreporting of income – penalty u/s 270A(8) shall be levied at 200% of the amount of

tax payable on under-reported income.

Exclusions provided in section 270A(6) shall not be applicable to cases where penalty is imposed for misreporting of income.

IMMUNITY FROM PENALTY– Section 270AA 13

To seek immunity from penalty u/s 270A - File an application to the Assessing officer.

Following are the conditions to be adhered to –

i. Payment of the tax and interest payable as per the assessment order u/s 143(3) or 147 within specified time

ii. No filing of an appeal against assessment order;

iii. Application to be filed in prescribed form and manner within one month from the end of the month from receipt of order;

Immunity not applicable to misreporting of income.

Section 271AAB(1):- Where Search has been initiated on or after 01-07-2012 and Undisclosed income found

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In case of search u/s 132 any undisclosed income found then in such case penalty in addition to tax payable shall be leviable as follows:a)10% of undisclosed income of the specified previous year if assessee admits the undisclosed income u/s 132(4); substantiates the manner in which it was derived; and on or before the specified date pays the tax, together with interest thereon and furnishes the return of income for the specified previous year declaring such undisclosed income .

b)20% of undisclosed income of the specified previous year if assessee does not admits the undisclosed income u/s 132(4); substantiates the manner in which it was derived; and on or before the specified date declare such income in the return of income furnished for the specified previous year and pays the tax, together with interest thereon.

c)Minimum 30%and maximum 90% of undisclosed income of the specified previous year if it is not covered by (a) or (b) above .

Section 271AAB(1):- Where Search has been initiated on or after 01-07-2012 and Undisclosed income found

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Finance Bill 2016, amended clause (c) of this sub-section with a objective to rationalise the rate of penalty and to reduce the discretion of tax officers.

As per the amendment made under clause (c), now the penalty on undisclosed income will be leviable @ 60% of such income.

This is effective from A.Y. 2017-18.

Section 272A: Penalty for failure to answer questions, sign statements, furnish information, returns or statements, allow inspections, etc.

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By Finance Bill, 2016, a new clause (d) added to the sub-section (1) 272A.

Insertion of clause (d) in 272A(1) is similar to the present Section 271(1)(b).

Penalty of Sum Rs. 10,000 for each default or failure to comply with the notice issued under Section 142(1) or Section 143(2) or failure to comply with direction issued under Section 142(2A).

From A.Y. 2017-18 Section 271(1)(b) is not applicable.

This insertion is effective from A.Y. 2017-18.

Section 273A: Power to waive or reduce penalty in certain cases

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Principal Commissioner or Commissioner to use discretion power to waive the penalty

No time limit prescribed for accepting or rejecting the petition for waiver.

Finance Bill, 2016 provides time limit to pass order u/s 273A.

Time limit – within 12 months from the end of the month in which petition received.

Rejection order should be passed only after petitioner has been heard.

Section 273AA: Power to Principal Commissioner to grant immunity from penalty

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Principal Commissioner or Commissioner to use discretion power to grant immunity from penalty imposable on taxpayer, where taxpayer has made an application u/s 245C for settlement proceedings and prof.

No time limit prescribed for accepting or rejecting the petition for waiver.

Finance Bill, 2016 provides time limit to pass order u/s 273A.

Time limit – within 12 months from the end of the month in which petition received.

Rejection order should be passed only after petitioner has been heard.

PENALTY – Section 271GB Objective - To ensure proper reporting of the international group in compliance with

section 286

Section 286 - Requires maintenance and furnishing of the CbC report by multinational enterprises (MNE’s)

Penalty u/s 271GB is levied on failure in furnishing CbC report.

i. A sum of Rs 5000 per day if failure does not exceed 1 month

ii. A sum of Rs 15000 per day if failure exceeds 1 month

iii. A sum of Rs 5000 per day - Non-submission of information called for by the prescribed authority for the period of default

iv. A sum of Rs 50,000 per day - Beyond the date of service of order levying penalty, in case the default continues even after the service of order levying penalty (in the above-mentioned three cases)

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PENALTY – Section 271GB

Reporting entity providing inaccurate information in the report furnished under section 286(2) and where the entity has

a) knowledge of the inaccuracy at the time of furnishing the report but fails to inform the prescribed authority; or

b) discovered the inaccuracy after the report is furnished and fails to inform the prescribed authority and furnish correct report within a period of fifteen days of such discovery; or

c) furnished inaccurate information or document in response to the notice issued under sub-section (6) of section 286

The prescribed authority may impose a penalty of Rs.5 lakhs on such reporting entity. [271GB (4) ]

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PENALTY – Section 273B

Finance Bill, 2016 ,new Section 271GB is also inserted in Section 273B.

It means that penalty u/s 271GB can be waived under Section 273B.

However, Section 270A is not inserted in 273B.

Penalty of Section 270A cannot be waived u/s 273B.

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THANK YOU

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