The Finance Bill 2017 has introduced few interesting amendments to improve tax compliance and ensure that tax returns are filed within the due dates. One such amendment being the insertion of section 234F which proposes to levy a Fee for delay in furnishing of return beyond the due dates prescribed under the Income-tax Act, 1961 (or the Act).

Current Scenario

Under the extant laws, an assessee filing his return of income beyond the due date prescribed is liable to various consequences prescribed under the Act. To summarize, payment of interest for taxes outstanding^[1], denial of carry-forward of losses/ deduction^[2], losing the opportunity to revise the return, payment of penalty^[3] and in extreme cases even face prosecution^[4].

While interest on outstanding taxes is paid at the time of filing the belated return, there could be occasions wherein the assessing officer may direct the assessee to pay by way of penalty a sum of Rs. 5,000 in a case where the assessee has not filed the return of income before the end of the relevant assessment year.

The penalty is not to be imposed in all cases and is generally at the discretion of the assessing officer. No penalty could be imposed if the assessee is able to prove reasonable cause for the delay. Further, such penalty imposed is appealable. 

Proposed Amendment

In order to ensure that the returns are filed within time the Finance Bill 2017 proposes to levy a Fee for delay in furnishing of return from the assessment year 2018-19 and onwards. Correspondingly, the penalty provisions has been done away with.

The proposed Fee structure prescribed under the new section is as under:

1. A Fee of five thousand rupees shall be payable, if the return is furnished after the due date but on or before the 31^st day of December of the assessment year;

2. A Fee of ten thousand rupees shall be payable in any other case;

3. In a case where the total income does not exceed five lakh rupees, it is proposed that the Fee amount shall not exceed one thousand rupees.

In a scenario where the assessee pays tax before the due date but files the return after the due date or in a case where the assessee does not have a tax liability but files the return after the due date, the question that would arise is whether the assessee is still liable to pay the applicable Fees. On a plain reading of the proposed provisions, the answer looks to be in the affirmative.

Proposed amendments to computation of the self-assessment tax and return processing

Corresponding amendments have also been introduced to ensure in provisions dealing with the computation of the self-assessment tax[^5] and also in the provisions dealing with processing of return of income^[6].

In both the above provisions, the Fee payable under the proposed section 234E shall be factored along with the tax and interest payable.

Comments

Unlike the extant provisions, wherein penalty will be imposed in cases wherein the assessee is unable to justify the delay with a reasonable cause, the proposed amendment requires the assessee to pay the Fee irrespective of whether he has a reasonable cause or otherwise before the filing of his return of income.

Having come to reality that the imposition of Fee for the default is imminent, one would wonder what the characterisation of this Fee is.

Whether the Fee partakes the character of tax?

The term used is “Fee” and is not clarified whether it partakes the nature of “tax” or “interest” or “penalty” and hence the question arises as to whether the term “Fee” should be treated at par with “tax” as defined under the Act.

The term “tax” has been defined^[7] to inter alia mean income-tax chargeable under the provisions of the Act.  What constitutes “tax” has been a subject matter of various tax disputes.

Tax in the context of late filing of TDS return/statement

A similar provision of imputing a Fee was introduced in the context of failure to file the TDS/TCS returns/statements within prescribed time^[8]. In this context, there were questions raised on the constitutional validity of charging a Fee and whether such levy was punitive in nature.

The tax payers contended that a “Fee” is known in the commercial and legal world to be a recompense of some service or some special service performed, and it cannot be collected for any disservice or default. It was further contented that the said provision seeks to collect tax in the guise of a Fee.

In this regard, the Honourable Bombay High Court in [TS-44-HC-2015(BOM)-O] has taken a view that the Fee charged under that section of the Act was not punitive in nature but a Fee which is a fixed charge for the extra service which the Department had to provide due to the late filing of the TDS statements.

The Court further held that the Fee sought to be levied was not in the guise of a tax that is sought to be levied on the deductor. It was held that the said provision was not found to being onerous on the ground that the section does not empower the Assessing Officer to condone the delay in late filing of the TDS return/statements, or that no appeal is provided for from an arbitrary order passed under that section.

Tax (or income tax) for Minimum Alternate Tax (MAT) computation

Explanation 1 to the provisions [9] dealing with computation of MAT provides that the amount of income tax paid or payable or provision thereof, if any debited to the Profit and Loss Account, should be added back to the Net Profit.

The meaning of Income tax used in that provision was clarified that in addition to income tax, it would include dividend distribution tax, interest if any charged under the Act, surcharge and Education Cess and Secondary and Higher Education Cess.

Accordingly, it did not include any Fee, penalty or any other payment other than those specifically covered in the above definition.

Comments

Based on the above discussion and the ruling discussed above, one can argue that a Fee charged for late filing of a return cannot take the colour of income-tax and is not in the nature of penalty. 

In computing Business Income a position of deductibility can be taken for such Fee and also for MAT. 

Conclusion

Though the proposed amendment will act as a deterrent for perpetual defaulters but this could be harsh on assessees who have genuine reasons for not filing the tax return within the due dates

It will be helpful if the Government brings out a clarification on the circumstances in which such Fee can be waived off by the tax authorities to mitigate genuine hardships faced by tax payers (similar to the one being deliberated for late filing of TDS/TCS returns or statements). One would need to wait and watch how the fine print will look like!!

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[1] Section 234A

[2] Section 80

[3] Section 271F

[4] Section 276CC

[5] Section 140A

[6] Section 143(1)

[7] Section 2(43)

[8] Section 234E

[9] Section 115JB