Introduction

Section 271(1)(c) of the Income Tax Act, 1961 (“the Act”) is the main and widely used section for levying penalty whether it be for non – appearance, non-compliance of notices or for additions/ adjustments to the total income. It is a known fact that penalty (automatically) follows when there is addition to the total income. We would be dealing mainly with the provisions of section 271(1)(c) of the Act as most of the litigation is around that section. 

Penalty under Section 271(1)(c) is provided for concealing the particulars of income or furnishing of inaccurate particulars of income. Though the phrase concealing the particulars of income is loosely referred to as concealment of income, but under the taxation laws both are different. Under both the terms “particulars of income” assume much importance.  If all particulars of income are furnished there cannot be any penalty for concealment or furnishing of inaccurate particulars of income. The penalty is thus linked with the fundamental obligation under the Act of declaring the true and complete particulars of income by the Assessee.

The law on penalty u/s. 271(1)(c) was fairly settled and it was an admitted legal position, that penalty is quo the return of income, the Assessing Officer (“AO”) should record a satisfaction in the order before proceedings to levy penalty, the charge of penalty should be specific, and levy of penalty was discretionary. Also, there were certain decisions of courts which laid down a law that penalty cannot be levied for addition made by rejecting the claim made in the return of income.   

By the introduction of section 270A w.e.f. 1-4-2017 the above settled position of law is given a go-bye. The entire law on penalty has been given a paradigm shift. From the earlier position of recording a satisfaction before initiating penalty, now the cases of adjustment to income would be considered as deemed cases for levy of penalty. The terms “concealment”/ “inaccurate” particulars of income are now changed to under-reporting of income and under-reporting on account of mis-reporting.  In this article we have discussed the provisions of newly inserted section 270A. 

Section 270A- Pragmatic move towards rationalizing the scope of penalty

The provision of section 270A has been enacted to rationalize and bring objectivity, certainty and clarity in the penalty provisions. In terms of section 270A, it is only one charge i.e. under-reporting. Unlike section 271(1)(c) of the Act, from the plain reading of the provision of section 270A(1), recording of satisfaction is not a condition precedent for exercising jurisdiction under 270A. The expression “Under” suggests that something ought to have been reported but was not reported . Thus, it becomes quite imperative that the outcome of the assessment proceeding would have clear bearing on the applicability of penalty under section 270A. The provision of section 270A are undoubtedly linked to the assessment of income of a person and therefore it empowers the Assessing Officer, the Commissioner (Appeals) or the Principal Commissioner or Commissioner, in tune with the earlier law, to initiate the penalty.

The provision of section 270A shall apply to and in relation to any assessment for the assessment year commencing on or after the 1st day of April 2017 and subsequent assessment years.

Quantum of Penalty

Under the existing provisions of section 271(1)(c) the penalty ranges from 100% to 300% of tax sought to be evaded. In the amended section:-

a. In cases of under-reporting of income, the penalty is restricted to 50% of the amount of tax payable;

b. In case of mis-reporting, the penalty is to be computed at 200% of the amount of tax payable.

It may be noted that the discretion of the AO to levy penalty at 100% to 300% of the tax sought to be evaded under the existing provisions is now taken away and absolute rates of penalty are now prescribed in section 270A.  Except a case falls under the specific provision dealing with mis-reporting of income all the additions or disallowances which are made in the course of assessment will be treated as under-reporting. The onus to prove that the under-reporting was on account of mis-reporting is on the AO. In line with Explanation -6 to section 271(1)(c), under section 270A as well, it is provided that any adjustment to the returned income processed u./s 143(1)(a) shall not be regarded as case of under-reporting of income. 

Amount of “Under-reported Income”

Sub-section (3) prescribes the manner of determination of “Under-Reported Income”:

Proviso to section 270A(3) deals with the situation where the income is assessed u/s 15JB/115JC of the Act. The manner of determination of amount of under-reported income under the said proviso is in line with the existing provision contained in Explanation-4 to 271(1)(c). As per the plain reading of proviso to section 270A(3), it is clear that the said provision is applicable only where the Under-Reported Income arises out of the determination of deemed total income in accordance with the provision of 115JB/115JC of the Act. In other words, if the Under-Reported Income does not arise out of determination of deemed income, then one may argue that provision of section 270A(3)  is not applicable. This proposition can be explained with the help of following example. 

In view of the above, one may take a view that since the literal reading of proviso to section 270A(3) do not envisage the above situation, the provision of  section 270A(3) cannot be said to be applicable. 

Penalty in case of Re-assessment

Explanation-3 to section 271(1)(c) provides that any person who has failed to file return of income without reasonable cause within the time limit u/s 153(1) and till the expiry of that period no notice u/s 142(1) or 148 has been issued, then for the purpose of section 271(1)(c), a person is said to have concealed his income irrespective of the fact that that person has later on filed return in pursuance of notice u/s 147. It may be noted that the conditions for the applicability of Explanation-3 are cumulative and each of the condition has to be established for invoking said provision. (Chhaganlal Suteriya v ITO 337 ITR 350 (Guj) (2011). Under section 270A however there is no deeming fiction but same is already included under the definition of “Under reported Income”.  Thus, even when notice u/s 147 has been issued  within time limit u/s 153(1), penalty is leviable u/s 270A.

Penalty in Search cases

Under the existing provisions of law penalty in search cases is covered u/s.271(1)(c) and section 271AAA/271AAB. Section 271AAB deals with penalty for specified previous year being the year of search or the year which has ended before the date of search and the year for which due date of filing of return of income u/s.139(1) has not expired. Section 271(1)(c) covered cases of penalty in search cases for the year prior to the specified years. These provisions are covered by Explanation (5A) of section 271(1)(c).  However, it is interesting to note that the newly inserted section 270A, substituting the entire section 271(1)(c), there is no corresponding deeming fiction created for search cases for non-specified years.

Penalty in case of upward adjustments on account of transfer pricing

Under the existing provisions, penalty on adjustment to the arm’s length price (“ALP”) on account of transfer-pricing was governed by Explanation 7 to section 271(1)(c). It may be noted that u/s. 270A, no penalty is leviable in cases of adjustments to ALP on account of difference in application of method or computation of ALP as per the Assessee and as per the Transfer-pricing Officer subject to the fact that the Assessee had maintained information and documents as prescribed u/s. 92D, declared the international transaction and had disclosed all material facts relating to the transaction. It is to be noted that failure to report international transactions or any transaction deemed to be an international transaction or any specified domestic transaction u/s 92C are covered in cases of misreporting of income liable to be penalty @200%.

Misreporting of Income

a. The provision of section 270A further prescribes following situations which shall be considered to be cases of misreporting of income which consequently attracts penalty at 200%:-

b. Misrepresentation or suppression of facts- this is similar to furnishing of inaccurate particulars of income under the existing section 271(1)(c).

c. Failure to record investments in books of accounts. Cases like additions made u/s 69 being unexplained investment and 69B being investment not fully recorded in the books of accounts would be covered.

d. Claim of any expenditure not substantiated by any evidence.

e. Recording of any false entry in books of accounts

f. Failure to record receipts in books of account having a bearing on the total income.

g. 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 apply.

No penalty in specified cases

Under the original provisions, the scope of penalty was enhanced by creating deeming fiction. Under the new law, the entire law, is flipped to clearly provide a limitation on imposing penalty and therefore the scope of levying penalty has been restricted in the following cases:

a. Explanation supplied by Assessee is bona fide to the satisfaction of the AO and the Assessee has disclosed all the material facts to substantiate the explanation offered. Therefore, if the addition or the disallowance is made by the AO by rejecting the explanation, without finding the same to be untrue, the penalties cannot be levied. (similar to Explanation-1 to section 271(1)(c))

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 concerned officer but the method employed is such that the income cannot be deducted therefrom.

c. Where it represents enhanced disallowance by Assessing Officer which is already considered by the Assessee in its computation of income but with a different amount.

d. Where it represents addition made by the Transfer Pricing Officer, where the Assessee has maintained information and documents prescribed u/s 92D and all material facts relating to the transactions disclosed.

Under the new law also it becomes incumbent on the part of the Assessee to provide all the primary facts and information and provide explanations in support of his case during the course of the Assessment proceeding. It is to be noted and also necessarily to be remembered that if any information was not or could not be provided during the assessment proceedings, the same can be and must be provided during penalty proceedings. 

Penalty for failure to comply with Notice for scrutiny assessment u/s 143(2) or 142(1) or 142(2A)

Penalty u/s 271 would not be leviable from 1^stApril, 2017 since the provisions of section 270A would be applicable from that date. The new section 270A does not provide for penalty in case of non-compliance of notices issued u/s. 143(2), 142(1) or failure to comply with the directions issued u/s 142(2A) which was earlier governed by the provisions of section 271(1)(b) of the Act. 

Immunity from Penalty u/s 270A

Section 270AA allows an Assessee to make an application u/s 270AA to the Assessing Officer within one month to grant immunity from imposition of penalty u/s 270A and initiation of proceedings of prosecution u/s 276C of the Act, subject to condition that:

a. Tax and interest payable is paid within the time allowed in the notice of demand;

b. No appeal is preferred against such order.

It may be noted that Immunity u/s 270AA is granted in cases of under-reporting of income and not on account of misreporting of income. Where such application is accepted by Assessing officer u/s 270AA, no appeal u/s 246A or application of revision u/s 264 can be preferred against such assessment order passed.