the term penalty has not been defined under the income tax act, 1961 (act)

The term Penalty has not been defined under the Income Tax Act, 1961 (Act).

Punishment; Suffering or loss imposed for breach of a law; a fine or loss agreed upon in case of non-fulfilment of some undertaking; a fine

- Chambers 20th Century Dictionary, 1983 Edition

Penalty is a liability composed as a punishment on the party committing the breach of contract. Agreement to pay at default interest at a higher rate does not amount to penalty.

- P Ramanatha Aiyar’s Law Lexicon , 2nd Reprint Edition 2009

2PRASHANTH G S, FCA December 29,2012

Punishment imposed on wrongdoer, usually in the form of imprisonment or fine; especially a sum of money exacted as punishment for either a wrong to the state or a civil wrong (as distinguished from compensation for the injured party’s loss). Though usually for crimes, penalties are also sometimes imposed for civil wrongs.

- Black’s Law Dictionary, 9th Edition


4

Section 271 Section 271F

Section 271(1B) Section 271G

Section 271A Section 27BB

Section 271AA Section 273

Section 271AAA Section 273AA

Section 271AAB Section 273B

Section 271B Section 274

Section 271BA Section 275

Section 271C

Section 271D

Section 271E

PRASHANTH G S, FCA December 29,2012

If the Assessing Officer or Commissioner (Appeals)

or Commissioner in the course of any proceedings

under this Act, is satisfied that any person –

(a) ................

(b) has failed to comply with a notice

(c) has concealed the particulars of his income or

furnished inaccurate particulars of such income,

or

(d) has concealed the particulars of the fringe benefits or

furnished inaccurate particulars of such fringe benefits


Gist of the offence under section 28(1)(c) is that the

assessee has concealed the particulars of his income

or deliberately furnished inaccurate particulars

of such income and, therefore, the department must

establish that the receipt of the amount in dispute

constitutes income of the assessee. If there is no

evidence on the record except the explanation given

by the assessee, which explanation has been found

to be false, it does not follow that the receipt

constitutes his taxable income.

6


Hindustan Steel Ltd, 83 ITR 26- SC observed:

Penalty will not be imposed because it is lawful

to do so. It is a matter of discretion of the

authority to be exercised judicially

Anwar Ali 76 ITR 696 –discussed earlier

Khoday Eswara & Sons, 83 ITR 369- SC :

It is clear that penalty proceedings being penal in

character, the department must establish that the

receipt in dispute constitutes income of the

assessee

7


Explanation 4.-For the purposes of clause (iii) of this sub-section, the expression "the amount of tax sought to be evaded",-

in any case where the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished has the effect of reducing the loss declared in the return or converting that loss into income, means the tax that would have been chargeable on the income in respect of which particulars have been concealed or inaccurate particulars have been furnished had such income been the total income;

in any case to which Explanation 3 applies, means the tax on the total income assessed as reduced by the amount of advance tax, tax deducted at source, tax collected at source and self-assessment tax paid before the issue of notice under section 148 ;

in any other case, means the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished.

8


In the course of search initiated after 01.06.2007, assessee found to be the owner of : Any money, bullion, jewellery etc.. And assessee claims that

such asset have been acquired by him utilising wholly or partly his income for previous year; or

Any income based on any entry in any books of account or other documents or transactions and he claims that such entry represents his income wholly or partly for any previous year, ended before search date and

Where return of income has been furnished before the said date without declaring the said income;

Where return of income has not been filed and due date has expired.

Notwithstanding that income has been declared by him, in return furnished on or before the date of search, he shall for the purpose of penalty u/s 271(1)(c) be deemed to have concealed the particulars of income.


Suresh Chandra Mittal, 251 ITR 9 –SC :

It is well settled that initial burden lies on revenue to establish that the assessee

had concealed /furnished inaccurate particulars of income. Burden shifts to

assessee if he fails to offer any explanation. However, Expl 1 provides for

shifting of this burden again where the explanation offered by the assessee is

found to be bonafide.

K C Builders & Another , 265 ITR 562 – SC :

The word "concealment" inherently carried with it the element of mens rea.

Therefore, the mere fact that some figure or some particulars have been

disclosed by itself, even if it takes out the case from the purview of non-

disclosure, it cannot by itself take out the case from the purview of furnishing

inaccurate particulars.

10


Virtual Soft Systems, 289 ITR 83 – SC : This court as well as the various High Courts of the country have

consistently held that the statute creating the penalty is the first and the

last consideration and must be construed within the term and language

of the particular statute. In Bijaya Kumar Agarwala v. State of Orissa

[1996] 5 SCC 1 it has been held by this court in paragraphs 17 and 18 as

under:

"17. Strict construction is the general rule of penal statutes. Justice Mahajan in

Tolaram Relumal v. State of Bombay, AIR 1954 SC 496, at pages 498-499, stated

the rule in the following words:

'If two possible and reasonable constructions can be put upon a penal

provision, the court must lean towards that construction which exempts

the subject from penalty rather than the one which imposes penalty. It is

not competent to the court to stretch the meaning of an expression used

by the Legislature in order to carry out the intention of the Legislature.'11


Gold Coin Health Food P Ltd , 304 ITR 308 -SC :

Whether the penalty was leviable even in a case where

addition of concealed income reduces the returned loss?

Finding: Yes.

The court has to analyse the nature of the amendment to

come to a conclusion whether it is in reality a clarificatory or

declaratory provision. Therefore, the date from which the

amendment is made operative does not conclusively decide

the question. The court has to examine the scheme of the

statute prior to the amendment and subsequent to the

amendment to determine whether the amendment is

clarificatory or substantive.

12


T Ashok Pai ,292 ITR 11- SC :

It is not a case where penalty has been imposed

for breach or contravention of a commercial

statute where lack of intention to contravene or

existence of bona fides may not be of much

importance. It is also not a case where penalty is

mandatorily imposable. It was, therefore, not a

case where the enabling provision should have

been invoked.


Penalty – Concealment of “particulars” of income

In order to be covered by section 271 (1)(c), there

has to be concealment of particulars by the

assessee. Making incorrect claim does not amount

to concealment of particulars.

To attract penalty, the details furnished in return

must not be accurate or correct.

Mere making of claim which is not sustainable in

law will not amount to furnishing of inaccurate

particulars.


The role of the Explanation having regard to the principle

of statutory interpretation must be borne in mind before

interpreting the aforementioned provisions.

Imposition of penalty is not automatic. Levy of penalty is

not only discretionary in nature but such discretion is

required to be exercised on the part of the Assessing

Officer keeping the relevant factors in mind. Some of

those factors apart from being inherent in the nature of

penalty proceedings as has been noticed in some of the

decisions of this court, inheres on the face of the

statutory provisions.


Section 271(1)(iii) again provides for a

discretionary jurisdiction upon the assessing

authority inasmuch as the amount of penalty may

not be less than the amount of tax sought to be

evaded by reason of such concealment of

particulars of his income, but it may not exceed

three times thereof.


The question which arises for determination in all these appeals is whether section 11AC of the Central Excise Act, 1944 (in short "the Act") inserted by Finance Act, 1996, with the intention of imposing mandatory penalty on persons who evaded payment of tax should be read to contain mens rea as an essential ingredient and whether there is scope for levying penalty below the prescribed minimum.


Conclusion :

It is pointed out that in Dilip N. Shroff's case, the

question relating to discretion was not the basic

issue. In fact, section 271(1)(c) of the Income-

tax Act provides for some discretion and,

therefore, that decision has no relevance. So far

as the present dispute is concerned, whether

the discretion has been properly exercised is a

question of fact.18


Dilip N. Shroff's case was not correctly decided

but Chairman, SEBI's case [2006] 5 SCC 361 has

analysed the legal position in the correct

perspectives. The reference is answered.


Rajasthan Spinning & Weaving Mills ,23 DTR 158 – SC :

The decision in Dharmendra case must therefore, be

understood to mean that once the section is applicable

,the concerned authority would have no discretion in

quantifying the amount and penalty must be imposed

M/s Siddhartha Enterprises –184 Taxmann 460–P&H

The judgment in Dharmendra Textile cannot be read as

laying down that in every case where particulars of

income are inaccurate, penalty must follow.


Kanbay Software India P Ltd, 22 DTR 481- Pune Tri.

The views expressed in Dharmendra case cannot

be viewed as an authority for the proposition that

penalty u/s 271(1)(c) is an automatic consequence

being made to addition to the income .

Final conclusion :

By resorting to a process of interpretation, we must

not dilute the law laid down by their Lordships in

Dharmendra Textiles case.


at pages 561 & 562

Satisfaction in the very nature of things precedes the issue of

notice and it would not be correct to equate the satisfaction

of the Income-tax Officer or Appellate Assistant

Commissioner with the actual issue of notice. The issue of

notice is a consequence of the satisfaction of the Income-tax Officer

or the Appellate Assistant Commissioner and it would, in our

opinion, be sufficient compliance with the provisions of the statute

if the Income-tax Officer or the Appellate Assistant Commissioner is

satisfied about the matters referred to in clauses (a) to (c) of sub-

section (1) of section 271 during the course of proceedings under

the Act even though notice to the person proceeded against in

pursuance of that satisfaction is issued subsequently.


Bhadra Advancing Pvt Ltd vs ACIT,

Karnataka HC

Madhushree Gupta vs Union of India and

Another, Delhi HC

CIT vs Atul Mohan Bindal, 317 ITR 1 – SC

23


Sir Shadilal Sugar & General Mills Ltd, 168 ITR 705 –SC :

From agreeing to additions, it does not follow that the amount agreed to be added was concealed income. There may be a hundred and one reasons for such admission

CIT vs. Saran Khandsari Sugar Works – Allahbad HC

CIT vs Mansa Ram and Sons – Allahabad HC


K P Madhusudhanan, 251 ITR 99 – SC :

that the assessee had agreed to the additions to his income referred

to hereinabove to buy peace and it did not follow therefrom that

the amount that was agreed to be added was concealed income.

That, it did not follow that the amount agreed to be added was

concealed income, is undoubtedly what was laid down by this

court in the case of Sir Shadilal Sugar and General Mills Ltd and

that, therefore, the Revenue was required to prove the mens rea

of a quasi-criminal offence. But it was because of the view taken

in this and other judgments that the Explanation to section 271

was added. By reason of the addition of that Explanation, the

view taken in this case can no longer be said to be applicable.


Harigopal vs CIT – P&H

CIT vs Sangrur Vanaspati Mills Ltd – P&H

CIT vs Dhillon Rice Mills – P&H

CIT vs Kailash Crockery House – Patna

Teja Constructions vs ACIT – Hyd.

26


Supreme Court in Rampal vs Rewa Coalfields

Ltd, 1962 AIR 361 / 1962 SCR (3) 762 held that

-

‘sufficient cause' receiving a liberal

construction so as to advance substantial

justice when no negligence nor inaction nor

want of bona fide is imputable to the

appellant

27


Supreme Court in Price Waterhouse

Coopers Pvt Ltd vs CIT, 348 ITR 306

No penalty on inadvertent ‘silly’ mistakes

28


The person may be directed to pay penalty :

29

Section Penalty

271(1)(b) Rs. 10,000

271(1)(c) 100- 300% of tax sought to be evaded


Assessment order deemed to constitute

satisfaction of the Assessing Officer :

On addition or disallowance of any amount

in computing the total income in an

assessment order; and

The penalty proceedings have been initiated

under section 271(1)(c)


Search initiated after 1.06.2007 but before 01.07.12

Penalty at the rate of 10% of the

undisclosed income of the specified

previous year

No penalty under section 271(1)(c) in

respect of undisclosed income


Search initiated after 1.06.2007 but before 01.07.12

32

Conditions

Penalty not applicable

1. Assessee admits the undisclosed income

2. Assessee specifies and substantiates the manner of deriving undisclosed income

3. On or before the specified date- Pays the tax together with interest on

undisclosed income

4. On or before the specified date-Furnishes the return of income for the

specified year declaring such undisclosed income


Search initiated after 01.07.12

33

Conditions Penalty

1. Admits the undisclosed income

10% of undisclosed income

2. specifies and substantiates the manner of deriving undisclosed income

3. On or before the specified date- Pays the tax together with interest

on undisclosed income

4. On or before the specified date - Furnishes the return of income for the specified year declaring such undisclosed income



34

Conditions Penalty

1. Does not admit the undisclosed income

20% of undisclosed income

2. On or before the specified date- Pays the tax together with interest

on undisclosed income

3. On or before the specified date –Declares such income in the return of income furnished for the specified year



In any case not covered above, penalty shall

not be less than 30% and shall not exceed

90% of such undisclosed income.


Section

Conditions Penalty

271DAcceptance of loans/deposits in contravention to section 269SS

Shall be liable for penalty at the rate of 100% of such loans / deposits that are accepted/repaid.

It shall be imposed by the Joint Commissioner.

271ERepayment of loans/deposits in contravention to section 269T


If any person fails to – Deduct the whole or any part of tax as per Chapter XVII-

B;

Pay the whole or any part of the tax a required by or

under

Section 115-O(2); or

the second proviso to section 194B

Attracts Penalty to the extent of tax to be deducted

or paid as aforesaid

Penalty shall be imposed by Joint Commissioner


Person in respect of International Transaction or specified domestic transaction

Section 271AA :

38

Particulars Conditions Penalty

Without prejudice to provisions of section 271 or 271BA

Failure to keep, maintain or retain books of account, documents, etc. in respect of certain transactions

1. Fails to keep and maintain books as required by section 92D(1) or sec 92D(2)

2% of the value of each international transaction or specific domestic transaction

2. Fails to report such transaction which he is required to do so

3. Maintains or furnishes an incorrect information or document


Person in respect of International Transaction or specified domestic transaction

Section 271G :

39

Conditions Penalty

Failure to furnish information or document within 30days from receipt of notice as required under section 92D

2% of the value of each international transaction or specific domestic transaction


Section Particulars Penalty

271AFailure to keep, maintain or retain books of accounts, documents etc.

Rs. 25,000

271BFailure to get accounts audited u/s 44AB

0.5% of total sales, turnover or gross receipts or Rs. 1,50,000/-Whichever is less

271BA Failure to furnish report u/s 92E Rs. 1,00,000

271F Failure to furnish return of income Rs. 5,000


Notwithstanding anything contained in the

provisions of sections

271 (1)(b), 271A, 271AA, 271B, 271BA, 271BB, 271C,

271CA, 271D, 271E, 271F, 271FA, 271FB, 271G,

271H, 272A(1)( c), 272A(2)(d), 272AA(1), 272B,

272BB(1) & (1A), 272BBB(1),273(1) (b),273(2) (b),

(c)

no penalty shall be imposable on the person or the

assessee, as the case may be, for any failure

referred to in the said provisions if he proves that

there was reasonable cause for the said failure.

41


The Punjab & High Court has held that no penalty is leviable when the assessee has acted in a bonafide manner based on the certificate issued by the Chartered Accountant.

The CA was directed to be examined. 275 ITR 206 , S D Rice Mills; 274 ITR 603, Deep Tools Pvt Ltd

42


The Commissioner may, reduce or waive the amount of penalty under section 271(1)(iii)

On disclosure of full particulars by the assessee of

income, prior to Assessing Officer detecting

concealment of income

Co-operation of assessee in all enquiries relating to the

assessment of his income

Payment or satisfactory arrangement to make

payment of any tax and interest


The Commissioner can waive or reduce penalty

only with prior approval of Chief

Commissioner or Director General in cases

where the income on which the penalty is levied

is greater than Rs. 5,00,000


An Application may be made to Commissioner for

granting immunity from penalty, if:

Application is made for settlement u/s 245C and

the proceedings for settlement have been

abated under section 245HA; and

The penalty proceedings have been initiated

under this Act.

Application for grant of immunity of penalty shall

not be made after imposition of penalty after

abatement


The Commissioner may grant immunity from

penalty if he is satisfied that the assessee has

given:

Full co-operation with income tax authorities in

proceedings before him

Made true disclosure of his income and the manner

in which such income has been derived

Immunity granted stands withdrawn if the person

fails to comply with any condition subject to which

the immunity was granted


No order imposing penalty under this Chapter shall be

made :

unless the assessee has been heard or has been given

reasonable opportunity of being heard;

No order imposing penalty under this Chapter shall be

made :

By the ITO, where the penalty exceeds ten thousand

rupees;

By the ACIT or DCIT, where the penalty exceeds twenty

thousand rupees except with prior approval of Joint

Commissioner47


Limitation for passing the order of penalty

48

Condition Limitation

1. Assessments/Revision of order u/s 263 or 264

Six months from the end of the month in which the order is passed

2. In case of Appeal to Commissioner(Appeals) or Appellate Tribunal

Expiry of the FY in which penalty proceedings are completed or six months from the end of the month in which the CIT(A)/ITAT order is received by CCIT or CITWhichever is later

3. In any other case

Expiry of the FY in which penalty proceedings are completed or six months from the end of the month in which penalty is initiatedWhichever is later


Wrong quoting of tax deduction account

number or tax collection account number or

tax deduction and collection account number

in challans, certificates, statements or

documents referred to under section 203A(2)

Assessing Officer may direct a penalty of Rs.

10,000


Penalty in case of an assessee who furnished

an advance tax statement u/s 209A(1)(a) which

he knew or had reasons to believe to be untrue : 10% to 1 ½ times of the amount by which the

advance tax paid falls short of :

(1) 75% of the assessed tax as per section 215(5), or

(2) the actual amount of advance tax, had the

assessee furnished a correct statement as per

section 209A(1),

Whichever is less


Penalty when assessee fails to furnish advance

tax statement u/s 209 (1)(a)

10% to 1 ½ times of 75% of the assessed tax as

per section 215(5)

In case of company assessees, the

provisions of this section shall have effect after

substituting the word “75 %” with “83 1/3 ”

wherever it occurs.


When an assessee is in default or is deemed to be in

default in making a payment of tax, he shall, in

addition to the amount of the arrears and the amount

of interest payable under sub-section (2) of section

220, be liable, by way of penalty, to pay such amount

as the Assessing Officer may direct, and in the case of

a continuing default, such further amount or amounts

as the Assessing Officer may, from time to time, direct,

so, however, that the total amount of penalty does not

exceed the amount of tax in arrears …….


Thank You

[email protected]+91-98454-80269

53


the term penalty has not been defined under the income tax act, 1961 (act)

Documents

eprashanth g s

inaccurate particulars

c section

taxable income

income tax act

penalty proceedings

punishment suffering

term penalty