Strict amendments in penalty provisions of Income tax-Union budget 2016

Chapter XXI of the Income-tax Act, 1961 (ITA) embodies the penalties imposable for prescribed defaults. Of these, the penalty which concerns almost every taxpayer subjected to a scrutiny assessment, is that provided under section 271(1)(c) for concealing particulars of income or reporting inaccurate particulars of income. Presently, the penalty ranges between 100% to 300% of the tax sought to be evaded.

Proposed provisions:
With a view to rationalize and bring objectivity in the penalty provisions, the Union Budget 2016 has proposed that effective 1 April 2017 (i.e. from financial year 2016-17), a new section 270A would apply in place of section 271. The new provisions propose as under:
1. A penalty may be levied if a person has either under-reported income or misreported income.
2. The scope of under-reported income shall be as follows:

Income assessed > income u/s 143(1)(a)
Income for which bonafide explanation and material facts are furnished
Income assessed > maximum amount not chargeable to tax, where no return is filed
Income based on an estimate, if the accounts are correct and complete but the method employed is such that the income cannot be properly deduced
Income reassessed > income assessed/ reassessed immediately before such reassessment
Income based on an estimate, where the taxpayer has estimated a lower amount and included such amount in his income computation
Deemed total income assessed/reassessed u/s 115JB or 115JC > deemed total income u/s 143(1)(a)
Income representing transfer pricing addition for which proper documents are maintained and material facts are disclosed
Deemed total income assessed u/s 115JB or 115JC > maximum amount not chargeable to tax, where no return is filed
Undisclosed income on account of search where penalty is leviable under other provisions
Income assessed/reassessed which results in reducing the loss or converting the loss into income

3. Misreporting shall cover:
- Misrepresentation or suppression of facts;

- Non-recording of investments in the books of account;

- Claiming of expenditure not substantiated by evidence;

- Recording of false entry in the books of account;

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

- Failure to report any transaction to which the transfer pricing provisions apply.

4. The penalty would be 50% of the tax payable on under-reported income and 200% of the tax payable on misreported income.

5. In cases where the under-reported income arises out of determination of deemed total income under section 115JB /115JC, the same shall be computed as (A – B)+(C – D); where

A = the total income assessed as per the general provisions of the ITA;

B = the total income that would have been chargeable had the total income assessed as per the general provisions been reduced by the amount of under-reported income;

C = the total income assessed as per the provisions of section 115JB /115JC;

D = the total income that would have been chargeable if the total income chargeable under section 115JB /115JC would be reduced by the amount of under-reported income.

In cases where the under-reported income on any issue is considered both under the provisions of section 115JB/115JC and under the general provisions, such amount shall not be reduced from total income assessed while determining the amount under item D.

6. In case of company, firm or local authority, the tax payable on under-reported income shall be calculated as if such under-reported income is the total income. In any other case (eg. individuals, HUF) tax at 30% of the under-reported income shall be payable.

7. An addition or disallowance for which penalty has already been levied for the same or another assessment year, shall not be subjected to penalty again.
Proposed immunity from penalty:
It is further proposed to insert a new section 270AA for granting immunity from imposition of penalty if an application is made to the tax officer within the time prescribed. Such immunity will be granted provided the assessed demand is paid within the period specified and the taxpayer does not appeal against the assessment/ reassessment.
Immunity is however not available in cases of misreporting.
 i.  The present rates for penalty levy (at minimum 100% and maximum 300% of the tax sought to be evaded) have been in force since 1 April 1989 i.e. for close to three decades. A revision in rates was hence overdue. Accordingly, the proposed reduction to 50% of the tax payable on under-reported income, is in keeping with the Government's objective to promote 'ease of doing business in India' and a step to alter the perception of India being a relatively high tax regime.

 ii.   Except for the deeming fiction provided under Explanation 1, section 271 does not expressly guide on the distinction between 'concealment of particulars of income' and 'furnishing of inaccurate particulars of income'. Tax officers are hence known to initiate penalty proceedings in a vague manner, without making specific reference to whether the allegation relates to concealment, inaccurate reporting or coverage under the deeming provisions. This being despite court decisions requiring the tax officer to demonstrate application of mind when invoking penalty provisions.

Given the significant difference in the penalty rates under the two scenarios, the proposed provisions have spelt out instances which would qualify as under-reporting and those that would amount to misreporting. The same should compel the tax officer to give some thought before classifying a taxpayer's case either way. However, in view of the generic nature of some of these instances (eg: misreporting would cover 'misrepresentation or suppression of facts'), dispute around categorization cannot be ruled out.

 iii. The provision that under-reported income shall not include income for which the taxpayer gives bonafide explanation and discloses material facts, is along the lines of a recommendation by the Justice Easwar Committee and supports the view that so long as proper explanation and facts are furnished, penalty is not automatic even if an addition is accepted.

 iv. The following proposals aim to check potential / repetitive litigation:
  -  Immunity from penalty in cases of under-reporting, albeit on payment of demand and waiver of appeal,
  -  Imposition of penalty not permissible in respect of an addition or disallowance which has already formed the basis of penalty levy in the same or another assessment year.

 v.   Penalty levy in case of under-reporting by an individual/ HUF is proposed to be based on tax payable at 30% of such under-reported income. This could lead to a higher outflow in case of an individual/ HUF falling within the 10% or 20% tax bracket.

The proposals thus seek to carry out sweeping changes in the current law relating to penalty. While most of these appear to have a positive bearing, only time will tell whether the stated objective of bringing certainty and clarity would be met.
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