Is Sec 270A efficient to replace Sec 271(1)(c)?

-by Advocates – K. Senguttuvan and SubathraManoharan

Introduction:

It is not a new fact that Sec 270A and Sec 270AA has been inserted to the Income Tax Act thereby replacing Sec 271.

The motive behind bringing these new Sections into force was to reduce the litigation between the tax payer and the revenue authorities, as tax authorities always levied the penalty whenever there was an addition or disallowance made by the AO. Thus, authorities used Sec 271 to levy penalty bluntly without application of mind, aggrieving the Assessee and pushing him to go to Court.

The authors have attempted to compare the provisions applicable till AY 2016-17 and applicable from AY 2017-18 as below:

 

OLD PROVISION – Sec 271 (1)(c) NEW PROVISION – Sec 270A
271(1)(b) – Failed to comply with a notice u/s 115WD(2) or u/s 115WE(2) or 142(2) or u/s 143(2) – in addition to tax, if any, penalty of Rs.10000/- for each failure Non-response to scrutiny notice

No provision u/s270A to levy penalty

271(1)(c) – has concealed the particulars of his income or furnished inaccurate particulars of such income – in addition to tax, if any, not less than but not exceeding three times of amount of tax sought to be evaded Would fall within the cases of misreporting provided in Sec 270A (9)
Explanation 1 Person failed to offer an explanation or such explanation found to be false or not able to substantiate or not able to prove such explanation is bona fide that all are disclosed – amount disallowed or added shall deemed to represent the income for the purpose of S 271(1)(c) Would fall within the cases of misreporting provided in Sec 270A (9) – misrepresentation or suppression of facts.
Explanation 2Where the additions of income are made during the course of assessment of earlier AY’s on which no penalty has been imposed

AND

claims that income arose from such additions/dis-allowances as source of any receipt, deposit, outgoing or investment in any subsequent AY

There is no provision in the new section which provides for a situation like provided under Explanation 2.
Explanation 3 a person fails to furnish return before issue of notice u/s 142/148, but furnishes after issue of notice, wherein the AO is satisified that such person has taxable income, be deemed to have concealed particulars of income – whole amount of income assessed shall be deemed to represent the income for the purpose of S 271(1)(c) Not directly present, however, Sec 276CC, provides for penalty in cases where return of income is not filed. 
Explanation 4 formula to arrive evaded tax amount Same u/s 270A
Explanation 5 for search initiated u/s 132 before 1st day of Jun 2007 Not relevant
Explanation 5A in the course of search u/s 132

      i.    the assessee claims the Cash/Bullion/Jewellery/other valuable articles are acquired from his PY income.

    ii.    the assessee claims any income as represented in his income of PY

a.     where the assessee has filed return but not reported such income or

b.     where the assessee has not filed return before and after the expiry of the due date

Situation ii (a) will fall under misreporting

and

situation ii (b) will fall under Sec 276cc.

Explanation 6 any adjustment made under proviso to S 143(1)(a), this section will not apply If the Income assessed u/s 143(3)/147 is greater than the income determined in the return processed u/s 143(1)(a), the difference will be covered by “Under Reporting” in Sec 270A.
Explanation 7any adjustment consequent TP assessment be deemed to represent the concealed income or  inaccurately furnished particulars

1.       Penalty imposable by virtue of Explanation …..

2.      Penalty proceedings initated u/s 271(1)(c) consequent to addition/disallowance in computing total income shall deemed to constitute satisfaction of AO

3.       Omitted

4.       AO is satisfied that the profits of a registered firm have been distributed otherwise than in accordance with the shares of the Partner and that partner returned his income below the real amount

then the AO will direct the partner to pay tax along with 1.5 times of additional tax amount as penalty

5.       Irrelevant

6.       Irrelevant

7.       Rescinding wef 1st Apr 2017

Concealed income and Inaccurately furnished particulars will be covered by Misreporting under Sec 270A.

 

 

 

Point 2 – Once an order for penalty has been issued there is no opportunity given to the assessee to explain himself to the AO.

 

 

Point 4 will fall under misreporting provided in Sec 270A (9)

Sec 270A

Sec 270A has written down situations where penalty can be levied, it is classified under two heads: “Under Reporting” and “Misreporting”.

UNDER REPORTING:

A person shall be considered to have under reported his income if –

  1. The Income assessed u/s 143(3)/147 is greater than the income determined in the return processed u/s 143(1)(a)
  2. Assessed Income is greaterthan exemption limit (presently 2.5 Lacs)where no return was filed
  3. Deemed total income assessed or reassessedu/s 115JB/115JC is greater than u/s 143(1)(a);
  4. Deemed total income assessed/reassessed u/s 115JB/115JC is greater than the threshold limit for filing return and no return was filed
  5. the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.

EXEMPTION FROM UNDER-REPORTING:

The under-reported income, shall not include the following: –

  1. 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 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;
  2. 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;
  3. the amount of under-reported income represented by any addition made in conformity with the arm’s length price determined by the TPO, 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
  4. the amount of undisclosed income referred to in section 271AAB (Penalty where search has been initiated).

MISREPORTING:

The cases of misreporting of income shall be the following, namely: –

  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; and
  6. 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 (Spl. Provisions relating to avoidance of tax) apply.

Sec 270AA:

Sec 270AA provides an immunity for the Assessee from imposition of penalty in the following situations:

  • An assessee may make an application to the AO 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:-
    • 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
    • no appeal against the order referred to in clause (a) has been filed.
  • An application 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.
  • The AO 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.
  • The AO 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:

Provided that no order rejecting the application shall be passed unless the assessee has been given an opportunity of being heard.

  • The order made under sub-section (4) shall be final.
  • No appeal under section 246A or an application for revision under section 264 shall be admissible against the order of assessment or reassessment, referred to in clause (a) of sub-section (1), in a case where an order under sub-section (4) has been made accepting the application

Critical Analysis:

  • The Finance Act, 2016 has conveniently removed the word “OR” in Sec 143 (a)(i), thus reducing the excuses the Assessee can provide to reduce/ escape penalty.
  • Sec 271 had a provision where an Assessee can initiate proceedings against the levy of penalty on him, whereas the new provisions do not provide any provision to the Assessee to be heard, which is against natural principles of justice.
  • In the case of Union of India v. Rajasthan Spinning & Weaving, the Supreme Court has explicitly held that to levy penalty under Sec 271, the factor of “MENS REA” must be essentially present and proved. The new provisions contrast with this principle, where if the situation fall within the ambit of “under reporting” and “misreporting”, notwithstanding the fact if mens rea is present or not, penalty will be provided. When the authorities had the power to use their judgment to levy penalty itself, they levied penalty as a blanket rule, now that nothing is stopping them from levying penalty, they will blindfold their judgment and apply Sec 270A, which will result in grave injustice to the Assessee.

Eg:

  • Failure to record any receipt in books of account having a bearing on total income will fall under “misreporting”, incase because of any “Act of God”, the assessee is not able to produce the receipt, he still must pay penalty under Sec 270A.

Conclusion:

It seems the Finance Ministry wants to hide under the veil of reducing litigation by introducing Sec 270A and Sec 270AA but they seem to be ensuring the Revenue Department their inflow of money without considering the Assessee.

sengu  K. Senguttuvan, CMA, L.L.B.

– Advocate – Managing Partner –  SAPAA

subathra-manoharan  Subathra Manoharan, B.S.L, L.L.B.

– Advocate – Associate –  SAPAA

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