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Penalty For Under-Reporting Of Income U/s 270A Of The Income-tax Act, 1961

Advocate Deepa Khare

Advocate Deepa Khare has explained the entire law relating to the imposition of penalty under the newly-introduced section 270A of the Income-tax Act, 1961. She has explained the precise differences between the erstwhile s. 271(1)(c) and 270A. She has also analyzed all the important judgements rendered in the context of s. 271(1)(c) and explained their relevance to s. 270A

1. Introduction:

Under the Income Tax act, Penalty under Section 271(1)(c) was provided for concealing the particulars of income or furnishing of inaccurate particulars of income (hereinafter referred as concealment penalty for the sake of brevity). The penalty was linked with the fundamental obligation under the Act of declaring the true and correct income and emerged from the assessment of income of a person. In fact, the fabric of default contemplated under such penalty prevailed from the Income Tax Act 1922 and remained intact with some deviations as to the burden of proof as a rule of evidence. While the scheme of Income Tax Act as to the basic charge, computation provisions as well as the procedural aspect remain unchanged, Finance Act 2016 revamped the above penalty to new Section 270A abandoning the old one. Obviously, such step on the part of the legislature not only came as a surprise but also posed further critical questions. These critical questions flowing from the new Section entail understanding the change in the fabric of default, the change in principles as well as the procedural aspect. The present endeavour therefore is made in that direction with a comparative discussion of old law. This may help us to adopt to the new penalty provision in Section 270A in correct perspective and bring us the desired clarity.

2. Basic Principles:

The provision though arrives as a new code, one must remember that the provision pertains to penalty. Some of the basic and important principles applicable to the penalty provisions must be kept in mind. These are as under-

a. Nature of Penalty Proceedings:

Tax, interest and penalty are distinct and different terms under the Income tax Act. Income Tax is the basic charge under this Act. Interest is levied as compensatory payment for withholding the amount of Tax, which was due to the Government. Liability for interest is merely compensatory in nature. However, imposition of penalty has a deterrent objective. Penalties are imposed to restrain the assessee from making defaults under the Act and since IT Act provides for a liability for payment in monetary forms, penalty proceedings are considered as quasi-criminal proceedings.

Penalty proceedings being quasi criminal in nature are discretionary. The word ‘may’ used in section implies a discretion in the hands of the AO to levy penalty. The Supreme Court in the case of Hindustan Steel held that penalty need not be initiated because it is lawful to do so.

b. Rules of Interpretation of Penal Statutes:

In any statute a clear language is needed to create a crime. A provision enacting an offence or imposing a penalty is strictly construed. This rule applies in the selection of one interpretation when two or more constructions are possible. The rules exhibits a preference for the liberty of the subject and in a case on ambiguity enables the court to resolve the doubt in favour of the subject and against the legislature which was failed to express itself clearly. It would further mean the benefit of doubt will go to the assessee and not to the department. If there is a reasonable interpretation which would avoid the penalty in any particular case we must adopt that interpretation. 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.

c. Assessment Proceedings and penalty proceedings are separate and independent proceedings:

As laid down by the Supreme Court in the case of Ananthram Veersinghaiah V CIT (123 ITR 457), the penalty proceedings are separate and independent from penalty proceedings. The AO is required to consider the entire material on record in order to decide whether penalty is leviable or not. The assessee can also place any further evidence in support of his case to prove that there was no default on his part. The findings or observations made in assessment proceedings are relevant but not conclusive in penalty proceedings.

d. Mensrea:

The penalty proceedings, being quasi-criminal proceedings, the element of mens rea is relevant. It means culpable state of mind, deliberate act, mala-fide motive. Supreme Court in the case of Dilip Shroff 291 ITR 523 laid down the principles in the context of concealment penalty and held that the conditions of Mensrea or guilty mind are essential and therefore the Department has to prove that the amount is income and it is the concealed income of the assessee and refer to the specific Explanation to the Section. Only after giving such finding by the AO the burden would shift to the assessee and not otherwise. Supreme Court in the case of K C builders 265 ITR 562 considered the aspect of mensrea in the context of concealment penalty and prosecution and observed that the meaning of concealment itself indicates essence of mensrea. Further controversy arose because the above decision in the case of Dilip Shroff was relied upon by the assessee in another case of UOI V Dharmendra Textiles 306 ITR 277 which was a case involving a question under the Central Excise Law. The Supreme Court while dealing with the provisions of Central Excise Act also commented on the decision in the case of Dilip Shroff and observed that “penalty u/s 271(1)(c) is a civil liability and implies a strict liability; the observations of Supreme Court in Dilip Shroff that mensrea is still applicable are not correct and mensrea is not essential ingredient as is the case of prosecution u/s 276C and therefore the case is not correctly decided”. In the decision of Supreme Court in the case of Dharmendra Textiles observations were made that the penalty is civil liability or strict liability. The rigour of the decision of Dharmendra Textiles however was toned down subsequently by Supreme Court in the case of UOI V Rajasthan Spinning & Weaving Mills reported in 224 CTR 1 wherein the Supreme Court explained that the decisions in the case of Dharmendra Textiles cannot be said to hold that penalty u/s 11AC is applicable for every non-payment of duty regardless of the conditions stated therein.

The above principle and discussion is found relevant in the context of the new provision. The study becomes critical in view of the new charge. An in-depth discussion on essence of mensrea is made in the decision of Dharmendra Textiles where number of penal provisions in different laws like FERA, SEBI, Excise Act have been discussed. The Supreme Court made observations about the penal provisions and held that the offences for statutory obligations are civil liabilities and mensrea is not essential. One however is in a position to draw distinction in the context of penalty like concealment penalty. The basic charge of concealment itself includes the element of guilty mind. Similar exercise is required in the context of penalty for under-reporting. The subject matter of the default being same ie the underlying obligation of declaring (reporting) true and correct income, the relevance of intention or guilty mind may not be ruled out. Moreover, performing this obligation itself is not objective. Income Tax act being a very peculiar Act, involves many subjective aspects. Interpretation, estimates, opinions are inbuilt into the process. In fact, the process of deriving income itself may suffer subjectivity at times. Apart from subjectivity, a pure human error creeps in many times. Supreme Court in the case of Price Water House Coopers P Ltd V CIT held in the context of concealment penalty that to err is human. In such situation providing a thumb rule for any variation in the income determination and calling it as a default under one/common head would not a reasonable and just interpretation. At this juncture, a comparison between other penalties and penalty linked to determination or assessment of income may be made. Penalties for defaults like, filing of return in time u/s 271F or non-deduction of TDS u/s 271C or non -filing Tax Audit Report u/s 271B stand on different footing. The test of commission of default is objective and can be concluded without much difficulty or confusion and so objective is the basic obligation. However, in case of default linked with assessment of income, the correct conclusion can be drawn only when the one goes into the process of understanding the reason for difference in the income offered and income determined after due process as per law. In one situation, the difference may arise because of true difference of opinion while in another case, it may arise on account of suppression of sales or income with a malafide motive. The former difference cannot be attributed to any failure to fulfil statutory obligation while the latter does. This is how the penalty linked with assessment of income becomes a quasi-criminal proceeding rather than just a civil liability for breach of statutory duties. This distinction was lost sight of in the case of Dharmendra Textile when an observation was made about concealment penalty u/s 271(1)(c). The decision of Supreme Court in case of Dharmendra Textile cannot be brushed aside for it is the law of land and would have to be pondered upon. The decision is critical and further study of the principle is essential.

3. Applicability:

Section 270A was brought in by Finance Act 2016 wef 1.4.2017. The corresponding amendment was brought in Sec 271(1)(c) by way of Sub-Section (7) providing that the provisions of this section shall not apply to and in relation to any assessment year commencing on or after the 1st day of April, 2017. The new code of penalty under Section 270A would therefore become applicable from Assessment Year 17-18.

4. Legislative Intent:

The unanticipated move on the part of the legislature in bringing a new code makes one curious to know the rationale and objective behind it. A reference to the Explanatory Memorandum explaining the provision is obvious. The Explanatory Notes says as under-

Rationalisation of penalty provisions

Under the existing provisions, penalty on account of concealment of particulars of income or furnishing inaccurate particulars of income is leviable under Section 271(1)(c) of the Income tax Act. In order to rationalize and bring objectivity, certainly and clarity in the penalty provisions. It is proposed that section 271 shall not 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 and penalty be levied under the newly inserted section 270A with effect from 1st April 2017. The new section 270A provides for levy of penalty in cases of under reporting and misreporting of income.

The clear objective is seen from the words ‘to rationalize and bring objectivity, certainty and clarity in the penalty provisions.’ The discussion made above in the context of mesrea highlighting the subjectivity of the income determination would raise further anxiety about of the new code for penalty.

5. Initiation:

The New penalty undoubtedly is linked to the assessment of income of a person. Section 270A therefore empowers the Assessing Officer, the Commissioner (Appeals) or the Principal Commissioner or Commissioner, in tune with the earlier law, to initiate the penalty. Further the words ‘during the course of any proceedings under this Act’ indicates that the penalty is to be initiated during the course of a proceeding ie assessment proceedings. At this juncture there appears to be some departure in the jurisdictional condition of recording of a satisfaction about the under-reporting. This is clear from the conspicuous absence of the term ís satisfied’ in Section 270A. The words appearing in the new Section- “may direct any person who has under-reported his income shall be liable to a penalty”- may imply that the requirement of satisfaction is done away in the new Section. The wordings are similar to one used in Section 158BFA(2). Taking a clue from this, Courts have interpreted a penalty provision u/s 158BFA keeping in mind the quasi-criminal nature. The word “may” therefore was interpreted to say that the Officer has the discretion to levy the penalty depending on the facts and circumstances of the case. The word ‘may’ gets crucial to perceive the proceedings with the inbuilt judicious discretion to be adopted by the Officer while initiating the penalty. Even going by the principles of natural justice, specific opportunity is required to be provided to the assesse to meet the charge raised against him before the default is made out. (Refer Section 274). The change can be considered from another perspective. Earlier, the penalty was for provided for two separate charges viz concealing the particulars of income or furnishing of inaccurate particulars of income. These two charges were understood to be distinct from each other. The Assessing Officer therefore was required to identify the specific charge with satisfaction and record the same in the assessment order. This enabled the assessee to know the specific charge framed against him.

The new penalty now has only one charge ie under-reporting, and therefore the required satisfaction is presumed in principle once penalty is initiated. In other words, doing away the requirement of recording of satisfaction may not dilute the inherent principle in law as to framing a specific charge against a person and confronting the same to him to meet out the same. Sub-Section (2) using the term ‘considered to have under-reported’ suggests application of mind before charging a person for under-reporting. More discussion on this aspect is found later in this write up. The AO may not have to arrive at a specific satisfaction in the assessment proceedings about under-reporting nonetheless the application of mind would be inevitable while initiating penalty proceedings.

6. Charge:

While the charge of “concealment penalty” was not defined under the old section, Courts resorted to the dictionary meaning of the word. The new Section 270A uses the Expression “Under Reporting”. Sub-Section (2) provides that a person shall be considered to have under reported his income. The usage of the term “consider” is important. The term means – contemplate, give thought to, examine, appraise, review etc. It denotes or envisages a process of application of mind before holding a person for charge of under- reporting. Such term can also be anaylised by comparing with expression ‘treated as’ which the legislature is familiar about. The conscious choice of such term therefore confirms the conclusion that it entails application of mind before- hand. One cannot loose sight of the preceding word “shall” which indicate the mandatory nature. The word ‘shall’ implying mandate read with “consider” may be interpreted to hold that the process of application of mind is mandated. Sub-section (1) uses the expression “Assessing Officer, the Commissioner (Appeals) or the Principal Commissioner or Commissioner may, during the course of any proceedings, direct”, from which one is able to deduce the meaning to the effect that the charge is not automatic. The expression ‘under-reporting’ has further been defined in Sub-Section (3) contemplating different situations in which the scope of under reported income is to be derived. Sub-section (3) in principle proceeds on the difference between income assessed and income reported u/s 143(1)(a). Further Sub-Section (6) provides for certain situations where the income added will not fall within the scope of Under Reported Income.

First exception applies in a case where the explanation of the assessee is found to be bondafide. This highlight the essence of existence of intention or motive of the assesse. The other clauses also indicate the non-existence of malafide motive based on which the situations are carved out the scope of the charge. The charge therefore has to be understood with reference to such intent and does not appear to be automatic. Extending the logic or interpretation further, the charge of default especially of this type cannot be objective in view of the scheme of the Act. This is because, the mechanism of computation or assessment of income may involve various factors like interpretation of provisions, difference of opinion, pure or inadvertent mistake, un-intentional omission, computational hazards etc. Such process happens during the assessment proceedings.

The assessment proceedings being separate proceedings, the outcome may not be final or conclusive in the context of penalty as per the settled principle of law. That means the leviability of penalty is to be seen independently in the penalty proceedings with reference to the specific charge. Sub-Section (3) can be understood to define the scope of the expression ‘Under Reported income’ rather than defining the actual term ‘under-reporting’. The scope as defined in sub-section (3) if further subjected to the filter of bonafides as per Sub-Section (6), is indicative or suggestive of the nature or character of the charge. If therefore one feels that the charge of “Under- Reported Income” is not directly defined, one may resort to looking at the dictionary meaning of “Report”, it says – to prepare, make or submit something observed, investigated; to make one’s condition or whereabouts, as to a person in authority; to give or render a formal account or statement of; to make known the presence, condition, or whereabouts of, to present to a person in authority, as in accordance with requirements. This also suggests and indicates that there is an underlying obligation to disclose or declare something known to you. The expression Ünder” suggests that something ought to have disclosed but not disclosed with your knowledge or intent. This draws a parallel or comparability of new charge with the old charge of concealment penalty. To that extent the legislative intention as explained in the Explanatory Memorandum explaining the amendment or provision of bringing objectivity appears to be misconceived. One is puzzled to think if objectivity can be achieved by laying down any straight jacket formula to postulate whether there is a default of under-reporting. If at all any objective test can be laid down, it would only be motive or intention which would depend on facts and circumstances of each case. That’s exactly the new provision gets interpreted as it stands in the form or the way it is inserted.

The legislature has brought out different levies like additional tax u/s 143(1A) in the past with the mandatory nature. If there was addition or adjustment, additional tax was leviable. The provision was very express and clear. In that context, the Supreme Court in the case of CIT V Hindustan Electro Graphites Ltd 243 ITR 48 held that additional tax has the imprint of penalty and revenue cannot be heard to say that the levy of additional tax is automatic. The Supreme Court made these comment in the context of adjustment made on account of retrospective amendment. This decision was further doubted in a subsequent decision of Supreme Court in the case of ACIT V J K Synthetics 251 ITR 200 on the ground that the provisions of additional tax were not challenged before Supreme Court. We may draw a limited reference from the above decisions to say that any levy in the nature of penalty can not be automatic.

However, there appears to be variation with the earlier charge of Concealment penalty u/s 271(1)(c) in the context of the time or the occasion when it may take birth or arise. Concealment Penalty was examined with reference to the original return of income. The basic obligation to declare correct income was tested with the original return of income. New charge is tested at a stage of intimation u/s 143(1)(a) as against the stage of original return of income, which is a significant change. It means the charge is to be examined with reference to the intimation u/s 143(1)(a). This can be attributed to the shift or adoption of technology driven controls and electronic processing. This results in relaxation to a certain extent in the approach towards compliance of the obligation. If something was left out at the time of filing return but was corrected in the processing u/s 143(1)(a), is not looked upon as default as such, may be for the reason that the information was already on the record or possession of the department. This change with the supposed underlying rationale is welcome.

Further the term ‘Concealing the particulars or furnishing inaccurate particulars of income’ was understood with reference to the specific act or conduct of the assesse. In the era of Under Reporting, the same principle should apply. This conclusion is based on the reason or logic that the test of bonafide explanation (intention), being embedded in the Act in sub-section (6), has to be applied to a set of situation/s, act or conduct. The conclusion of Under Reporting therefore has to be preceded by some act or conduct which is necessarily to be brought out to fix the charge. Here comes the inherent principle that specific charge must be made out before levy of penalty. This has relevance because, in the process of assessment, there may be many components giving rise to multiple additions. The penalty cannot be understood to operate with reference to the entire/ overall difference or addition to the income assessed. In that sense, the term Under Reporting does not appear to be hollow so as look hypothetical/ automatic or hyper- technical. The charge of under-reporting proceeds chronologically as provided so as to come out as a default liable for penalty from sub-sec (1)- may direct, sub-sec (2) – shall be considered to have under-reported, Sub-Sec (3)- scope of under-reported income with reference to the difference in income offered and assessed and then Sub-Sec (6) – exclusion if fall in exceptions with reference to bonafides.

7. Burden Of Proof:

Another important aspect of the penalty proceedings is the burden of proving the default so as to levy penalty. In the context of concealment penalty, at the inception, law provided that the burden was on the Department to prove beyond doubt that the disputed amount is the income of the assessee and secondly the assessee has consciously concealed the particulars of income or furnished inaccurate particulars of income. The Supreme laid down the law to the extent of holding that merely because a particular explanation of the assessee is found to be false, it does not necessarily attract penalty.

This remained the legal position upto 31.3.1964 and the said principles were reiterated by the Supreme Court in the following cases:

a. CIT V Khoday Eswara & Sons 83 ITR 369
b. CIT V N A Mohammed Haneef 83 ITR 215
c. Mathuraprasad Agarwal V CIT 108 ITR 370
d. Ananthram Veerasinghaiah & Co V CIT 123 ITR 457

By introducing Explanation 1, the onus was cast upon the assessee to prove that the additions to the income did not arise from fraud or willful neglect on his part. The explanation thus laid down the rule of evidence where a presumption was raised against the assessee, which was open for rebuttal for him. Hence, the explanation cast a negative burden on the assessee.

Viewing the said principal and comparing the new provision that is brought in, sub-section (6) can be looked upon as specific exceptions where the charge would not prevail. A question arises whether the list in Sub-Section (6) is exhaustive and any situation outside its purview would automatically fall under the charge. Eg if in a situation, the assesse does not offer any explanation at all and the Assessing Officer makes addition by way of disallowance of expenditure based on some conflicting legal position, question arises whether penalty would automatically be levied. A reasonable answer based on the settled principals and the judicial pronouncements, comes in negative. This invites lot of importance since the situations can be comprehended in many ways where the motive would be expressly/obviously absent. Another perspective to the issue can be the interpretation of sub-section (6). If basic principal provides that burden is on the Department, sub-section (6) whether can be interpreted or conceived so as to create a fiction about the existence of act under-reporting? In other words, if there is no explanation coming forward from the assessee, the act of under-reporting would be presumed. A view that “it may not” appears to be a possible view. However, it would depend on facts of each case. If the facts are ambiguous and not free from doubt, there appears to be close possibility that the assessee will be saddled in the clutches of charge. It is of outmost importance that there has to be extended exercise on the part of the assessee to provide all the primary facts and information and provide explanations in support of his case. This conclusion though is untested as on date is based on the entire gamut of principles applicable to penalty proceedings as quasi-criminal proceedings. To that extent, it is obviously vulnerable to the pronouncement or interpretation of the provisions by the judiciary in times to come. Suffice it to say that the principle gets crucial to be decided in the face of the new provision.

8. Quantum of Penalty:

The quantum of penalty in the new regime now is restricted to 50% of tax payable on under-reported income as provided in sub-section (7).The formula for computation of tax payable has been provided in sub-section (10). However, the rate of penalty has been enhanced to 200% in cases of misreporting. Sub-Sections (8) and (9) dealing with misreporting is being separately discussed below.

9. Misreporting:

Sub-Section (8) provides that 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 percent of the amount of tax payable on under-reported income. Sub-section (9) further provides for situations which shall be termed as mis-reporting. They are as under-

(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.

Sub-Section (8) and (9) seem to create a more serious charge as mis-reporting. The words ‘where under-reported income is in consequence of any misreporting thereof’, implies that the same is made a sub-set of under-reporting. Both the charges are alternate and may not operate at once. More so, it seems to make two categaories of defaults viz under-reporting per se and mis-reporting, former being lenient and later a serious default. The quantum of penalty varies in a significant degree from fifty percent to two hundred percent. The earlier discussion on charge being not automatic suffers a dent, for one to take a pause and look back. The discussion above with reference to the words used in sub-section (1) to (6) leaning towards the discretionary nature gets a sudden jolt with a seeming contradiction in the scheme. The contradiction can be illustrated by following pointers –

i. What was bonafide if taken out or excluded from under-reporting within sub-section (3) read with (6), what remains therein is something mala-fide. Having rested at under-reporting charge, an extended mala-fide cannot be conceived specially when the result of such malafide act is same.

ii. To put it differently, there cannot be different degrees of mala-fide conducts or acts in so far as the obligation of reporting correct income is concern nor the damage caused due to non- fulfillment of obligation. The outcome in both the cases is non – payment of tax/avoidance of tax.

iii. There is no rationale in making a discrimination/distinction within the different mala-fide acts.

iv. Further referring to the clauses (a) to (f), it can be seen that every case may fit in one or the other clause. Now if clause (a) is generally worded so as to take within its sweep almost every situation, the earlier provision of under-reporting becomes non-functional.

v. The Officer gets an option to charge for the default with greater penalty which otherwise by definition falls in smaller charge.

vi. Interpreting the mis-reporting provision, one seem to make obvious conclusion that the under-reporting charge is automatic.

However, language used in sub-sec (1) to (6) does not permit so for the reasons discussed in above paras. It makes a backdoor entry for settling the position that the charge of under-reporting is automatic and would follow once addition is made. The language thus suffers contradiction.

The above discussion is made at the outset to point out the contradiction which goes to the very root of the provision. However, one has to make an interpretation that makes the provision workable unless some challenge to the provision itself is made out successfully. It remains a topic for study and deliberation.

Moving on with the discussion about the provision for mis-reporting in sub-section (8) and (9), the clauses would operate specifically and so need to be invoked as such. The charge being serious attracting higher penalty, the clause specifically is required to be invoked by the officer. Accordingly, a specific notice is implied. It is noteworthy that the burden of invoking a specific case for mis-reporting is on the Officer and that would be heavier. Unless the case is made out by the officer beyond doubt, the assessee may not be held liable for mis-reporting.

10. Immunity u/s 270AA:

The new code provides immunity from levy of penalty u/s 270A as well as prosecution u/s 276C, 276CC if an application is made to the effect to the Assessing Officer with one month of the receipt of the assessment order subject to fulfillment of conditions. The conditions pertain to payment of tax and interest within specified time and the assessment order is not contested in appeal. The AO is required to grant immunity subject to fulfillment of conditions by assessee and after expiry of period of filing the appeal. The benefit of availing immunity however is not made available in cases of mis-reporting.

The AO is required to pass order after one month from the date of receipt of application either accepting or rejecting. The AO has been given an option of rejecting or accepting the application. In case of rejection, there is no further remedy by way of appeal but the assessee only gets opportunity of hearing. The legislature thus has provided a perpetual dispute resolution scheme by way of immunity.

Such provision may prove to be helpful for certain cases where the assessee can get away by paying tax and interest. This itself would provide good amount of relief in selected cases.

Suffice it to say, the provision of immunity surely would help in reducing the litigation.

11. Agreed Addition

The situation often arise at the time of assessments where the income is enhanced based on the agreed additions. The assessee merely agrees for the additional income to avoid litigation and to purchase peace with the department. The authority in the context of concealment penalty is CIT V Sir Shadilal Sugar & General Mills Ltd. (168 ITR 705 SC). In that case of Supreme Court, there was a disallowance of expenses. It was apparently a case of furnishing inaccurate particulars of income if at all penalty was leviable. Further, the Tribunal had given a clear finding that the assessee had a good case to argue that the claims of expenditure were not bogus. In spite having a good case, the assessee decided not to dispute the above additions in quantum, as he wanted to maintain good relations with the department. It was in this context the Supreme Court said that there could be so many reasons for the assessee for agreeing to additions, but imposition of penalty solely on the basis of assessee’s surrender will not be well founded. The law then has taken several turns depending on the facts of each case and fleet of decisions came our way like K P Madhusudan (251 ITR 99) SC, Suresh Chandra Mittal (251 ITR 9) SC and MAK Data (358 ITR 593) SC. The term ‘agreed addition’ denotes some sort of mutual conciliation, settlement between the department and the assessee. The agreement may arise for deciding purely the method for arriving at the correct income in absence of any indication as to concealment i.e. adoption of net profits, valuation of immovable property, for disallowance of expenses on ad hoc basis. Further the point of time of agreement is also relevant as an agreement made after a clear cut case is made out by the department then the assessee cannot be relieved from penalty under the pretext or guise of agreement to buy peace with the department.

Principles governing “Agreed Addition” would emerge as under:

i. Whether there was any material or evidence found by the Assessing Officer or in other words detection by the Assessing Officer? This would be relevant to decide whether the surrender was voluntary or otherwise.

ii. The exact nature and mode in which the offer is made. Eg if the assessee agrees that he has been inflating purchases and surrenders inflated purchases as against surrender of expenditure on ad-hoc basis without any specific reason. The former case indicates an admission of suppression of profits while the later case is just an agreement without any indication of suppression of profits. It means the voluntary offer itself could be suggestive or indicative of deliberate act on the part of the assessee.

iii. After the surrender, the burden is on the assessee to prove that the surrender was bonafide. This would be decisive of the levy of penalty in a given case. The assessee therefore has to bring all the evidence or explanation so as to prove its bonafides.

In short, the question regarding leviability of penalty in cases of agreed additions may not undergo any change in the light of new provision and the principles governing the issue remain the same.

12. Disclosure of primary and material facts:

In the context of penalty, the disclosure of primary and material facts has always been the important test to decide the default in a given case. It equally held good even in case of concealment penalty.

The honest effort and intention to disclose all the facts necessarily puts the assessee in a honest and bonafide zone and helps him to defend the penalty. Sub-section (6) expressly make a condition that the assessee offers an explanation which is bonafide and all the primary facts are disclosed. In view of this, disclosure of information must be taken seriously and attempt should be made to come forward with the optimum information to the assessing officer rather than waiting for any requirement from his side. It is also necessarily to be remembered that if some information was not or could not be provided during the assessment proceedings, the same can be and must be provided during penalty proceedings. The books of accounts, vouchers, confirmations of parties, stock records, statements of persons, requests for cross examination, any other relevant evidence to substantiate the claim as well as any evidence in support of the genuineness of the claim should be furnished.

Explanation referred in sub-section (6) would be considered with reference to the explanation in penalty proceedings which can be supported by ample evidences. The opportunity thus must be fully exploited to come out of the rigour of the provision. It is noteworthy to make such sincere effort in view of the fact that the procedures of filing returns getting electronic may have limitations in providing information. What could not be furnished in the return of income, may be provided at the time of assessment proceedings as well as penalty proceedings.

13. Conclusion:

The Penalty u/s 270A is a new arrival. But it has past trails in the form of concealment penalty which makes the study critical. The above exercise is made to high light and discuss basic principles and concepts which may help us to adopt the subject with clarity. The topic undoubtedly is very vast and therefore the above discussion may have left many loose ends as also several stones untouched. However, within the constraints of time and space, the endeavour goes to bring out the legal structure as effectively as possible.

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14 comments on “Penalty For Under-Reporting Of Income U/s 270A Of The Income-tax Act, 1961
  1. undoubtedly, basic characteristics of penalty will remain. we can not equate penalty u/s 271F being exactly equal to penalty u/s 271(1)(c ). My intention of drawing attention to Minister Speech is that, at least we should take it into consideration and not treat it as nullity. that’s it.

  2. Pramod sir, I agree

    But on bare reading of S 270A, there is no explicit requirement for “satisfaction” which also can not be read into the section which was there in 271(1)(c).

    Today we say that there is no parallel explanation 1 so now the onus is shifted back on IT Dept to prove. If that is so, the converse is also true, Apparently, the initiation of penalty is more or less automatic. Ofcourse application of mind is there.

    I am trying to put forth a point that we can not read 271(1)(c ) and its philosophy into 270A by itself.

    270A has to stand on its own feet.

    This is my personal opinion

    • Pramod Shingte says:

      I feel if it is termed as Penalty, therefore principles will remain same, because penalty is always understood as a quasi criminal proceedings. So new provision cannot be read in isolation.

      • Just re-producing para 8 CIT v Reliance Petroproducts (P.) Ltd
        [2010] 189 Taxman 322 (SC)/[2010] 322 ITR 158 (SC)/[2010] 230 CTR 320 (SC). This para deals with interplay of 2 SC decisions in case of Dilip Shroff and Dharamendra Textile Processors regarding mens rea.

        ….However, it must be pointed out that in Dharamendra Textile Processors’ case (supra), no fault was found with the reasoning in the decision in Dilip N. Shroff’s case (supra), where the Court explained the meaning of the terms “conceal” and “inaccurate”. It was only the ultimate inference in Dilip N. Shroff’s case (supra) to the effect that mens rea was an essential ingredient for the penalty under section 271(1)(c) that the decision in Dilip N. Shroff’s case (supra) was overruled.

        8. Therefore, it is obvious that it must be shown that the conditions under section 271(1)(c) must exist before the penalty is imposed. There can be no dispute that everything would depend upon the Return filed because that is the only document, where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. In Dilip N. Shroff v. Jt. CIT [2007] 6 SCC 329, this Court explained the terms “concealment of income” and “furnishing inaccurate particulars”. The Court went on to hold therein that in order to attract the penalty under section 271(1)(c), mens rea was necessary, as according to the Court, the word “inaccurate” signified a deliberate act or omission on behalf of the assessee. It went on to hold that Clause (iii) of section 271(1) provided for a discretionary jurisdiction upon the Assessing Authority, inasmuch as the amount of penalty could not be less than the amount of tax sought to be evaded by reason of such concealment of particulars of income, but it may not exceed three times thereof. It was pointed out that the term “inaccurate particulars” was not defined anywhere in the Act and, therefore, it was held that furnishing of an assessment of the value of the property may not by itself be furnishing inaccurate particulars. It was further held that the assessee must be found to have failed to prove that his explanation is not only not bona fide but all the facts relating to the same and material to the computation of his income were not disclosed by him. It was then held that the explanation must be preceded by a finding as to how and in what manner, the assessee had furnished the particulars of his income. The Court ultimately went on to hold that the element of mens rea was essential. It was only on the point of mens rea that the judgment in Dilip N. Shroff’s case (supra) was upset. In Dharamendra Textile Processors’ case (supra), after quoting from section 271 extensively and also considering section 271(1)(c), the Court came to the conclusion that since section 271(1)(c) indicated the element of strict liability on the assessee for the concealment or for giving inaccurate particulars while filing Return, there was no necessity of mens rea. The Court went on to hold that the objective behind enactment of section 271(1)(c) read with Explanations indicated with the said section was for providing remedy for loss of revenue and such a penalty was a civil liability and, therefore, wilful concealment is not an essential ingredient for attracting civil liability as was the case in the matter of prosecution under section 276C of the Act. The basic reason why decision in Dilip N. Shroff’s case (supra) was overruled by this Court in Dharamendra Textile Processors’ case (supra), was that according to this Court the effect and difference between section 271(1)(c) and section 276C of the Act was lost sight of in case of Dilip N. Shroff (supra). However, it must be pointed out that in Dharamendra Textile Processors’ case (supra), no fault was found with the reasoning in the decision in Dilip N. Shroff’s case (supra), where the Court explained the meaning of the terms “conceal” and “inaccurate”. It was only the ultimate inference in Dilip N. Shroff’s case (supra) to the effect that mens rea was an essential ingredient for the penalty under section 271(1)(c) that the decision in Dilip N. Shroff’s case (supra) was overruled.

  3. The article is definitely informative, no doubt. A few thoughts on the same.

    Following is the relevant paragraph of speech of finance minister while presenting Budget 2016 in para-phrased manner.

    166. Levy of heavy penalty for concealment of income has over the years resulted in large number of disputes despite a number of decisions of the Apex court on interpretation of statutory provisions and principles guiding imposition of penalty.
    At present the Income-tax Officer has discretion to levy penalty at the rate of 100% to 300% of tax sought to be evaded.
    I propose to modify the entire scheme of penalty by providing different categories of misdemeanor with graded penalty and thereby substantially reducing the discretionary power of the tax officers.
    The penalty rates will now be 50% of tax in case of underreporting of income and 200% of tax where there is misreporting of facts.
    Remission of penalty is also proposed in certain circumstances where taxes are paid and appeal is not filed.

    My individual thoughts.

    Misdemeanour means a minor wrongdoing, a non-indictable offence, regarded in the US (and formerly in the UK) as less serious than a felony.

    I think that, we may have to read the new scheme of penalty De-hors the legacy of penalty regime u/s 271(1)(c ) because penalty u/s 271(1)(c ) was never a Misdemeanour.

    FM wants to treat the penalty provisions which does not require “mens rea” but a negligence may also suffice. Ofcourse if reasonable cause is there, penalty may not be there.

    Mis-reporting is more serious one than “only under-reporting”.

    Apparently, the criteria for satisfaction is being given a safe burial but application of mind is still there.

    CA. Yogesh S. Limaye – yogesh@salcoca.com | 9890938790

    • Pramod Shingte says:

      Another aspect is purposive interpretation can not be read in Penalty provision if FM wants to make a particular provision of Penalty less harsh he has to say so in section and not in speech only.

  4. sir/madam.

    sHE HAS COVERED IN DEPTH,
    WITH LUCID EXPLAINATION.

    CONGRATULATION FOR YOUR SUCCESSFUL EFFORT

    TO EXPLAIN SUBJECT.
    WISH KEEP IT.

    C.A. ASHWIN K SHAH JSK

  5. G V V Satyanarayana says:

    A very good analysis and since it is new arrival much needs to be seen.

  6. Ganesh Purohit Senior advocate Jabalpur says:

    Excellent effort all facets are considered by author,
    It will really help to understand the provision.

  7. CA Goutam Chand Baid says:

    A detailed analysis. Great Job.

  8. RCGUPTA says:

    Excellent,very educative analysis.

  9. K.Srinivasan. says:

    A Good analysis. Sathe sab will be proud of Junior.

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