Penalty and immunity from penalty under new provisions – penalty will not apply when tax and interest is not payable as per assessment order – a study and point of view for brain storming.

[DEV KUMAR KOTHARI]

Sections 270A and 270AA:

These are new provisions w.e.f. AY 2017-18, for penalty for under reporting and misreporting of income. These sections are reproduced  after preliminary discussion ,  with highlights added by author for easy analysis and understanding of important points.

Preliminary discussion:

Both sections are integrated code about penalty and immunity from penalty. Therefore, both sections need to be read together and these must be workable as per new scheme of penalty. When a penalty u.s. 270A is intended to be levied ( or has been levied), the provision of immunity should also be workable.

As per provision of S.270AA one of conditions for immunity from penalty, is that  the assessee must pay tax and interest demanded. In case there is no demand for tax and interest, due to excess payment or in case  loss assessed when there is no assessment of tax in case of loss,  because there is mere reduction of loss assessed, this condition cannot be complied with.

Therefore a possible view is that when there is a situation when mandatory conditions for  immunity u.s. 270AA are not applicable hence cannot be complied  and assessee cannot make an application for immunity, then  penalty cannot be levied u.s. 270A.

This is because only  if there are  tax and interest payable and paid within specified time, by assessee, as per provisions then assessee can avail immunity from penalty. However, when no tax and interest are payable as per assessment order, then assessee cannot avail immunity from penalty.

Thus, for levy of penalty there should exist circumstances when assessee can comply with conditions for application for immunity from penalty when no such circumstances exist, then there should not be penalty.

For example, suppose in a case assessee had paid tax of ₹ 10 lakh and claimed refund of ₹ 1 lakh. The AO made some additions of ₹ 2 lakh in income  and reduced refund to say ₹ 40000/- and granted refund of ₹ 40000 with interest. In this case as per assessment order there is no tax and interest payable so  assessee cannot make any payment as required u.s. 270AA hence cannot apply for immunity from penalty in respect of additions made by the AO.

Therefore, demand for payment of tax and interest as per assessment order should also be requirement and pre-conditions for levy of penalty S.270A.

This view is also logical because penalty should only be  in case of actual tax avoidance and not merely because of not allowing any claim made by assessee and when there is no tax payable.

As per the constitution of India, the Union / the Central Government of India is empowered to levy tax on income  other than agricultural income, and that power include incidental powers to ensure that tax on income is collected and is not avoided.

However, when there is no income and there is no  tax actually payable on income, then the incidental powers to collect tax and levy penalty will not be available. This concept find recognition in provisions of S.270AA and therefore, precondition for levy of penalty  seems that there should be tax  and interest payable as per assessment order.    

The point raised in this write-up is based on provision of S.270AA therefore, first that section is analyzed and S.270A is analyzed after wards:

Provisions:

Income-tax Act, 1961

¹[Immunity from imposition of penalty, etc.

“270AA.(1) An assessee may make an application to the Assessing Officer 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:-

(a) 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

(b) no appeal against the order referred to in clause (a) has been filed.

(2) An application referred to in sub-section (1) 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.

(3) The Assessing Officer 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.

(4) The Assessing Officer 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.

(5) The order made under sub-section (4) shall be final.      

(6) 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.]

 

***********

Notes:-

1.  Inserted vide  THE FINANCE ACT, 2016  w.e.f. 1st day of April, 2017

Un quote- discussion by author:

Expressions

 “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,

And

“ has been paid within the period specified in such notice of demand”

 

Provide machinery provision for immunity from penalty. These clearly suggest that there must be both situations – demand for tax and interest on assessment order

and payment of the demand by assessee within specified period.

In case there is no such situation, then an assessee in whose case additions have been made but there is no income tax and interest payable will not be able to seek immunity, whereas in case the same assessee had not earlier  paid tax and is now burdened with demand notice can seek immunity.

This goes against principal of natural justice and for that reason also it can be said that precondition for levy of penalty is that there should be demand of tax and interest in assessment order and the AO should specify the period for its payment. 

 

¹[Penalty for under-reporting and misreporting of income.

‘270A. (1) The Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner may, during the course of any proceedings under this Act, direct that any person who has under-reported his income shall be liable to pay a penalty in addition to tax, if any, on the under-reported income.

(2) A person shall be considered to have under-reported his income, if-

(a) the income assessed is greater than the income determined in the return processed under clause (a) of sub-section (1) of section 143;

(b) the income assessed is greater than the maximum amount not chargeable to tax, where ²[no return of income has been furnished or where return has been furnished for the first time under section 148];

(c) the income reassessed is greater than the income assessed or reassessed immediately before such reassessment;

(d) the amount of deemed total income  assessed or reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income determined in the return processed under clause (a) of sub-section (1) of section 143;

(e) the amount of deemed total income assessed as per the provisions of section 115JB or section 115JC is greater than the maximum amount not chargeable to tax, where ³[no return of income has been furnished or where return has been furnished for the first time under section 148];

(f) the amount of deemed total income reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income assessed or reassessed immediately before such reassessment;

(g) the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.

(3) The amount of under-reported income shall be,-

(i) in a case where income has been assessed for the first time,-

(a) if return has been furnished, the difference between the amount of income assessed and the amount of income determined under clause (a) of sub-section (1) of section 143;

(b) in a case where ⁴[no return of income has been furnished or where return has been furnished for the first time under section 148],-

(A) the amount of income assessed, in the case of a company, firm or local authority; and

(B) the difference between the amount of income assessed and the maximum amount not chargeable to tax, in a case not covered in item (A);

(ii) in any other case, the difference between the amount of income reassessed or recomputed and the amount of income assessed, reassessed or recomputed in a preceding order:

Provided that where under-reported income arises out of determination of deemed total income in accordance with the provisions of section 115JB or section 115JC, the amount of total under-reported income shall be determined in accordance with the following formula-

(A - B) + (C - D)

where,

A = the total income assessed as per the provisions other than the provisions contained in section 115JB or section 115JC (herein called general provisions);

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 underreported income;

C = the total income assessed as per the provisions contained in section 115JB or section 115JC;

D = the total income that would have been chargeable had the total income assessed as per the provisions contained in section 115JB or section 115JC been reduced by the amount of under-reported income:

Provided further that where the amount of under-reported income on any issue is considered both under the provisions contained in section 115JB or section 115JC and under general provisions, such amount shall not be reduced from total income assessed while determining the amount under item D.

Explanation.-For the purposes of this section,-

(a) “preceding order” means an order immediately preceding the order during the course of which the penalty under sub-section (1) has been initiated;

(b) in a case where an assessment or reassessment has the effect of reducing the loss declared in the return or converting that loss into income, the amount of under-reported income shall be the difference between the loss claimed and the income or loss, as the case may be, assessed or reassessed.

(4) Subject to the provisions of sub-section (6), where the source of any receipt, deposit or investment in any assessment year is claimed to be an amount added to income or deducted while computing loss, as the case may be, in the assessment of such person in any year prior to the assessment year in which such receipt, deposit or investment appears (hereinafter referred to as “preceding year”) and no penalty was levied for such preceding year, then, the under-reported income shall include such amount as is sufficient to cover such receipt, deposit or investment.

(5) The amount referred to in sub-section (4) shall be deemed to be amount of income under-reported for the preceding year in the following order-

(a) the preceding year immediately before the year in which the receipt, deposit or investment appears, being the first preceding year; and

(b) where the amount added or deducted in the first preceding year is not sufficient to cover the receipt, deposit or investment, the year immediately preceding the first preceding year and so on.

(6) The under-reported income, for the purposes of this section, shall not include the following, namely:-

(a) the amount of income in respect of which the assessee offers an explanation and the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered;

(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 Assessing Officer 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;

(c) 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;

(d) the amount of under-reported income represented by any addition made in conformity with the arm’s length price determined by the Transfer Pricing Officer, 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

(e) the amount of undisclosed income referred to in section 271AAB.

(7) The penalty referred to in sub-section (1) shall be a sum equal to fifty per cent. of the amount of tax payable on under-reported income.

(8) Notwithstanding anything contained in sub-section (6) or sub-section (7), where under-reported income is in consequence of any misreporting thereof by any person, the penalty referred to in sub-section (1) shall be equal to two hundred per cent. of the amount of tax payable on under-reported income.

(9) The cases of misreporting of income referred to in sub-section (8) shall be the following, namely:-

(a) misrepresentation or suppression of facts;

(b) failure to record investments in the books of account;

(c) claim of expenditure not substantiated by any evidence;

(d) recording of any false entry in the books of account;

(e) failure to record any receipt in books of account having a bearing on total income; and

(f) 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.

(10) The tax payable in respect of the under-reported income shall be-

(a) where ²[no return of income has been furnished or where return has been furnished for the first time under section 148] and the income has been assessed for the first time, the amount of tax calculated on the under-reported income as increased by the maximum amount not chargeable to tax as if it were the total income;

(b) where the total income determined under clause (a) of sub-section (1) of section 143 or assessed, reassessed or recomputed in a preceding order is a loss, the amount of tax calculated on the under-reported income as if it were the total income;

(c) in any other case, determined in accordance with the formula-

(X-Y)

where,

X = the amount of tax calculated on the under-reported income as increased by the total income determined under clause (a) of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order as if it were the total income; and

Y = the amount of tax calculated on the total income determined under clause (a) of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order.

(11) No addition or disallowance of an amount shall form the basis for imposition of penalty, if such addition or disallowance has formed the basis of imposition of penalty in the case of the person for the same or any other assessment year.

(12) The penalty referred to in sub-section (1) shall be imposed, by an order in writing, by the Assessing Officer, the Commissioner (Appeals), the Commissioner or the Principal Commissioner, as the case may be.]

---------------

Notes:-

1. After section 270 of the Income-tax Act [as it stood immediately before its omission by section 105 of the Direct Tax Laws (Amendment) Act, 1987], the above section 270A shall be inserted with effect from the 1st day of April, 2017  vide THE FINANCE ACT, 2016 

2. Substituted vide FINANCE (NO. 2) ACT, 2019 w.e.f. 01-04-2017 before it was read as" no return of income has been furnished"

3. Substituted vide FINANCE (NO. 2) ACT, 2019 w.e.f. 01-04-2017 before it was read as"no return of income has been filed"

4. Substituted vide FINANCE (NO. 2) ACT, 2019 w.e.f. 01-04-2017 before it was read as"no return has been furnished"

  Un quote:

S.270A is very widely worded and covers scope for levy  of penalty in cases even when there is no assessment and / or  demand for tax and interest. However, considering provisions of the Constitution of India and provision for immunity of penalty vide S.270AA , as discussed earlier, demand of tax and interest should be considered as precondition for levy of penalty in spite of very wide scope for levy of penalty as provided in S.270A

 

Readers are requested to send their views.