CA Jaiprakash Bairagra and CA Paras Dawar have written separate articles in which they have considered the question whether penalty under section 270A of the Income-tax Act, 1961 can be levied in a case where a person has deposited his unaccounted cash in his bank account and paid due tax thereon in the return of income for AY 2017-16. Both learned experts have given cogent reasoning in support of their respective conclusions
CA Jaiprakash Bairagra
No Penalty Leviable For Cash In High Denomination Notes Deposited In Bank Account On Payment Of Applicable Taxes And On Making Requisite Declaration In The Return Of Income
1) The provisions of section 270A are inserted by the Finance Act 2016 w.e.f 1 April 2017.
2) The provisions of section 271 are applicable upto AY 2016-17 as per sub-section (7) of section 271 inserted by Finance Act 2016 and the provisions of section 270A and section 270AA are applicable w.e.f AY 2017-18.
3) Section 270A is applicable when there is difference between income as per order passed u/s 143(3) and income determined u/s 143(1)(a) and penalty is provided @ 50% of tax if case is covered by circumstances prescribed as under reporting as per sub-section (2) of section 270A. Further the penalty is levied @ 200% of tax if it is covered by circumstances to be treated as misreporting as per provisions of sub-section (8).
4) Under the provisions of section 271, the tax authority had to prove the fact that assessee has concealed the particulars of income or furnished the inaccurate particulars of income. Under the new scheme, there is no such requirement in case of under reporting of income since difference between the assessed income and income determined u/s. 143(1)(a) is presumed to be under-reporting of income or difference between the assessed income and maximum amount not chargeable to tax, where no return is filed by the assessee. However, in case of misreporting of income, the tax authority will have to prove or demonstrate that case of assessee falls within the criteria mentioned in sub- Section(9).
5) Penalty is to be computed on the tax payable on difference between assessed income u/s 143(3) and income determined u/s 143(1)(a). If there is no difference between both the incomes, section 270A is not applicable.
6) Combined reading of the sub sections (1), (2), (8) and (9) of section 270A reveals that misreporting of income will be only where there is under-reported income. A combined reading of sub-sections (8) & (9) shows that it is the under-reported income which is to be treated as misreporting of income if under-reported income is in consequence of items specified under subsection (9). So, firstly, under-reported income is to be computed and then A.O has to give a finding that such under-reported income is in consequence of the items specified under sub section (9). So, if any addition or disallowance does not fall within the scope of “under-reported income” then question of treating the same as misreporting of income does not arise.
7) If an assessee has declared any income in a particular AY and the AO feels that this is the income of some other AY or some other person he has to prove while if an assessee claims an expenditure then the burden is on the assessee to prove the evidences and also to prove that this is the expenditure of this year and incurred for the purpose of business.
8) The provisions of section 271AAB are applicable on the person in whose case search is initiated w.e.f 1.7.2012. Further as per sub-section (2) of this section in case of the person who is searched the old provisions of section 271(1)(c) and the new provisions of section 270A are not applicable. As per section 271AAB, penalty is leviable as follows:
| Admits undisclosed income substantiates manner in which earned and pays tax and interest and furnishes return declaring such income | 10% of undisclosed income |
| Does not admit but pays tax and interest and furnishes return declaring such income | 20% of undisclosed income |
| Not covered in above cases | 60% of undisclosed income |
9) As per the provisions of section 270AA if an addition is made in the assessment order the AO can grant an immunity from the imposition of penalty u/s 270A and initiation of prosecution u/s 276C or section 276CC only where the case is that of under reporting of income and not in case of misreporting and if the assessee satisfies following conditions:
1) tax along with interest as per order u/s 143(3) is paid within the period specified
2) no appeal is filed against 143(3) order and application is made within 1 month from the month in which order is received.
CA Paras Dawar
200% Penalty Cannot Be Imposed If Tax Is Paid On Unaccounted Cash In Current Year
Hon’ble Prime Minister, Sh. Narendra Modi on November 8, 2016 made one of his boldest move by launching an aggressive assault on black money through demonetisation of existing Rs. 500 and Rs. 1,000 currency notes. Being seen as a surgical attack on black money, fake currency and corruption, the Hon’ble Prime Minister informed his fellow countrymen that the existing Rs. 500 and Rs. 1,000 notes could be deposited in their bank accounts till December 30, 2016.
Following the news, there has been a rush in public towards deposit of existing Rs. 500 and Rs. 1,000 currency notes in their bank accounts. However, Income Tax Department through a series of press releases has warned regarding levy of penalty at 200% of the tax amount in case where amount of deposit is not in line with the income returned.
In this article, the possibility for levy of penalty under section 270A of the Income Tax Act, 1961 (‘Act’) has been analysed in case where a person has deposited his unaccounted cash in his bank account and paid due tax thereon in the return of income for AY 2017-16.
The Finance Act 2016 in order to rationalize and bring objectivity, certainty and clarity in the penalty provisions, replaced the existing section 271 of the Act and inserted a new section 270A of the Act for levy of penalty in cases of under reporting and misreporting of income.
Sub-section (1) of the new section 270A of the Act provides that the Assessing Officer, CIT (Appeals) or the Commissioner may 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. Thus, trigger point for applicability of penalty under section 270A of the Act is under-reporting of income.
Thus, in order to discuss applicability of penalty in cases where tax has been paid, it is important to first analyse what constitutes under-reporting of income.
Under-Reporting of Income
Sub-section 2 of section 270A of the Act provides that a person shall be considered to have under-reported his income, if, inter alia, the income assessed is greater than the income determined in the return processed under 143(1)(a) of the Act.
Thus, there shall be under-reporting of income only in cases where income assessed during the course of assessment proceedings would be greater than income determined in the return processed under section 143(1)(a) of the Act. Since, the income determined in the return processed under section 143(1)(a) of the Act in normal circumstances would be same as the income returned by a person, the penalty under section 270A of the Act could be levied only when income assessed would be greater than income returned by the person. This position is further clarified by sub-section 3 of section 270A of the Act which provides for manner to calculate the under-reported income.
Rates of Penalty
Sub-section 7 of section 270A of the Act provides that the rate of penalty shall be 50% of the tax payable on under-reported income.
Further, sub-section 8 of section 270A of the Act provides in a case where under-reported income is in consequence of any misreporting thereof by any person, penalty levied shall be 200% of the tax payable on such under-reported income.
Thus, even for levy of penalty at 200% of the tax payable, it is important that the there must be an under-reported income which must be in consequence of misreporting.
Levy of penalty where tax has been duly paid
As can be seen from above, for levy of penalty under section 270A of the Act, there must be under-reporting of income. Where there was no under-reporting of income, no penalty under section 270A (whether at 50% or 200%) could be levied.
Assume a person has unaccounted cash on which no tax was ever paid. Such a person deposits this unaccounted cash in his bank account in November 2016 and duly declares such additional income in his return of income for AY 2017-18. Tax at appropriate rate are paid in full on such income for AY 2017-18.
Now, his income determined in the return processed under section 143(1)(a) of the Act would include this unaccounted cash income [assuming there is no other cause for variation under section 143(1)(a) ]. When the case for AY 2017-18 would be picked up for scrutiny by income tax department, the Assessing Officer would not be able to make any addition on account ofthiscash deposited in bank account since the person would have already offered this income to tax in his return of income filed for AY 2017-18.
In such a scenario, the income assessed would not be greater than the income determined in the return processed under section 143(1)(a) of the Act (assuming there is no addition on any other account). Hence, in such cases, there would be no under-reported income. Thus, the basic condition for levying penalty under section 270A of the Act would not be triggered.
Reference is further drawn on Circular No.25 of 2016 dated June 30, 2016 issued by CBDT while providing clarifications on the Income Declaration Scheme, 2016 (‘IDS’). In question no. 9 of the circular, the CBDT dealt with the question regarding the advantages of the IDS where past undisclosed income is disclosed as current income in the return of income to be filed for AY 2017-18 in place of declaration under IDS. The answer of CBDT, inter alia, provided for the following:-
“If anyone attempts to disclose past undisclosed income in the current year, he will have to explain the source of income and substantiate the manner of earning the said income. In case of disclosure under the Scheme, there is no need to explain the source of income.”
Thus, it may be noted that where income is disclosed in return of income for AY 2017-18, the person making such disclosure would have to explain the source of income and substantiate the manner of earning the said income.
However, even where such person fails to offer the source of such cash deposit, the Assessing Office may only declare such cash deposits to be an unexplained income under section 68 of the Act on which no slab benefit (in case of individual/HUF) or any deduction would be eligible as per section 115BBE of the Act.
However, the Assessing Officer would not be able to make any addition on account of such cash deposit as income in respect thereof would already have been offered to tax. Thus, in the absence of any under-reported income, penalty under section 270A of the Act would not be levied.
The aforementioned legal position is author’s personal view based on reasons set out hereinabove. It is pertinent to mention that litigation on levy of penalty cannot be ruled out specifically in light of the fact that the CBDT has explicitly warned against declaration of past income in current year in its clarificatory circulars on Income Declaration Scheme, 2016. Hence, before resorting to declare previously undeclared money in current year, a person is advised to independently verify the legal position with his tax advisors.
(The author is a practicing Chartered Accountant based in Delhi and can be reached atparas@parasdawar.com or +91 9711107317)
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Provisions of section 68,69, 69A,69B & 69C etc are deeming provisions. These sections says for word Found and it can be possible only when there is Assessment, Search or Survey. I think these provisions can be invoked only by the Asessing officer not by the assessee itself by declaring in the ITR. Fruther, section 115BBE may be amend/remove retro, as it is not penal provision.
Contd.
Apropos of Previous comments herein, see the latest Post on a further development,of common concern @ http://www.itatonline.org/articles_new/penalty-for-cash-deposit-in-banks-declaring-as-unaccounted-income/#comment-3160
By paying extra 15% tax under IDS , assessees have saved interest under various sections of the Act and prosecution.
1. IDS is not applicable for AY 2017-18 in terms of section 183(1) of the Income Disclosure Scheme 2016.
2. As far as any deposit in the bank account in FY 2016-17 is concerned, the same may be taxed at normal rates if it is income under any head of income specified u/s 14 of the IT act or at the rate of 30% u/s 115BBE in case the source of the deposit is unexplained.
3. Alternatively, no tax liability would be attracted if the deposits made are in the nature of the following
i. Agriculture income
ii. Cash in hand that has already suffered tax
iii. Accruals from past/ household saving
iv. Redeposit of cash periodically withdrawn either from a loan/OD or any other account hitherto disclosed in the return of income.
4.Penalty u/s 270A is only for under reporting and misreporting of income. Under reported income is quantified by taking difference between Assessed income and Returned income. Say for example if Rs 5 lakhs is the Returned income and the same is accepted u/s 143(1)a and later assessed at Rs 8 lakhs by the assessing authorities then the under reported income is Rs 3 lakhs.
5. Now the situation becomes bit tricky when the given income is subject to different rates of taxation. Take for instance, the current demonetization drive because of which a taxpayer say ‘X’ deposits Rs 5 lakhs in currency of Rs 500/1000 in his bank account and later declares the same claiming it as income from business in his/her individual return of income for AY 2017-18.
6. If the claim of X is accepted by the ITO then it suffers normal tax rate of Rs 25 thousand. However, if the assessing authority on scrutiny clearly establishes that the deposit is not income from business but an unexplained deposit, then the tax liability is Rs 1.5 lakhs. In the latter situation, the under reported income for the purpose of section 270A is nil because the quantum of assessed income and returned income remains the same at Rs 5 lakhs. The additional tax liability of Rs 1.25 lakhs ( Rs 1.5 lakhs on assessed income- Rs 25 thousand on returned income) is only on account of differential tax rate on the same quantum of income. Under such circumstances, penalty provision may not get attracted notwithstanding that X has actually misreported the facts relating to the nature of deposit of Rs 5 lakhs in his/her account and paid less than the actual tax liability.
1. Some of the members in the forum are arguing that the taxpayers who had opted for IDS and paid 45% tax on undisclosed money/assets are worse-off than those who would now opt to pay 30% tax by disclosing the same as income in the current year. This is not entirely correct. The extra 15% tax paid by the taxpayers who have opted for IDS is something similar to paying insurance premium to cover the risk. The risk here is any subsequent action by the IT department like search/survey/enquiry in his/her own case or in case of any other person with whom such taxpayers has had the dealings resulting in unearthing of transactions that otherwise might have tax implications for the period covered under IDS ie. prior to AY 2017-18. Therefore, by paying the premium of 15% extra tax, the taxpayers who have declared their undisclosed assets under IDS-both movable and immovable- for the period prior to AY 2017-18 are fully insured against punitive action of penalty and prosecution .
Whereas the taxpayer who has not subscribed to IDS does not have any risk coverage. He / She can no doubt deposit the old bills of Rs 500/1000 in the bank account, declare the said cash of earlier years as income of the current year and pay only 30% tax. But he/she is exposed to the risk of subsequent action by the department resulting in unearthing of actual facts relating to cash. If the department is able to prove that the money/cash deposited in the bank account in the current year was actually that of earlier years, the consequent punitive action would follow. This is particularly true in the case of high value cash deposits made in the bank account .So it is totally incorrect to say that taxpayers opting IDS are put to disadvantage or loss.
2. The other issue is whether the taxpayer can suo moto offer the cash deposit as income u/s 68/69A in the return of income. It is seen that the relevant sections itself provides that where the assessee offers no explanation about the nature and source of the money thereof the same may be charged to income-tax as the income of the assessee of that previous year . The income under section 68/69/69A/69B/69C/69D is deemed income and does not fall under any particular head of income in terms of section 14 of the IT act. However this by itself does not bar the taxpayer offering such deemed income in the return of income. In this context it is important to note that column 1(f)(ii) of Schedule OS in ITR 4 dealing with the computation of income from other sources specifically provides for inclusion of “Any other income chargeable to tax at the rate specified under chapter XII/XII-A “. The deemed income u/s 68/69A is subjected to tax at the rate of 30% u/s 115BBE which is a part of Chapter XII. Hence it can be reasonably concluded that there is no bar on taxpayer suo moto offering income u/s 68/69A.
In one’s independent but different perspective:
As is generally observed, by and large, the ongoing discussions and debate , including in Experts’ and other circles,apart from the media, proceed on the premise that the whole object of ‘demonetisation’ and attendant exercise is ONLY with a view to/ the sole object of unearthing ‘unaccounted’- ‘money’ or ‘cash deposits’ – that is, in the sense of not having been accounted for, for the purpose of ‘taxation’. In one’s long standing conviction, however, that is not the end of the matter. For, sec. 68 and other allied sections, are intended to cover not only income that has not been duly reported in tax return, hence escaped taxation; but also ‘unexplained’ ‘income'(which would embrace also ill-gotten monies, wealth, etc.).
A brief critical study on some of the indicated aspects, as may be remembered, happens to have been personally attempted in published articles; for instance, –
(2006)156 TAXMAN 121; (2006) 160 TAXMAN 145.
To Add:
The following call for a basic study /research, if not already done completely or otherwise, in order to have an incisive understanding and intelligent appreciation, in proper light:
Historical developments of the law, and case law, the aspect of ‘onus of proving’, so on:
1. Sec 10 on ‘income’/’receipts’ partaking the nature of- ‘casual and non-recurringwindfall,etc. ;
2. Sec 68 and its allied enactments.
Incidentally, rather more importantly, the case law (cited in Text Books)on the topics of ‘High Denomination Notes’, and ‘Burden of Proof’, wprt the legal implications of sec 68, and the allied enactments, might have to be kept in the backdrop.
Over to Tax and Economic Experts, within and / or outside the government portals,if so care and
mind to look through -‘outside the box’- , for an independent study and better ‘purposeful’ conclusions.
Cross Refer, -the thoughts likewise shared on Facebook and Linkedin, also elsewhere on this website itself.
Very well written article. There is no way that under existing laws, a penalty can be levied if the income is not ‘under reported’ in terms of section 270A(1), unless Government changes law with retrospective effect. Given the current stance of the Government, a retrospective amendment seems highly unlikely. One should appreciate that more than small time black money, the target of the present demonetization exercise is political and bureaucratic corruption and terror funding.
Sir, I agree with the views of Learned CAs that no penalty u/s 270A can be levied or any other action taken by the income tax department where cash deposits are made in current year income and advance tax paid on it. I remember an incident of similar nature when I was in Hubli Karnatka in the 1980s. A feisty old man running Kalburgi Distilleries had some extra cash which he declared in his own return of income, that of his wife , seven sons and seven daughters-in-law @ Rs . 5 Lakhs per year for several years and paid tax on it. Initially all returns were accepted by ITD . Then his cases went to Special Range and the officer in charge ( name withheld) after much questioning of all u/s 131 proceeded to send proposal u/s 263 to CIT, Bangalore for reopening the assessments made and assess the amounts in the hands of the Company. When the matter came up for hearing, Shri Laxminarayan, CIT, Bangalore just asked one question to the AO as to what proof he had that the amounts belong to the Company and not the individuals in whose hands it had been declared and tax paid. AO replied that he had strong suspicion that cash declared belonged to the Company. Observing that suspicion howsoever strong cannot take the place of proof, CIT dropped the poceedings u/s 263. As the law stands today no penalty can be levied on cash deposited and tax paid in current year. A retrospective amendment would not be a very desirable thing o do!
There are strong chances that Govt will make retro amendments in section 115BBC and section 270A in the upcoming budget, to support its decision of demonstration for wipe out the black money.
Under Presumptive taxation, what scope does the A.O. have to levy Penalty as no books of accounts can be asked from the assessee.
Also, whether A.O. can ask for Invoice/Bank Statement to verify Turnover?
The views are purely personal and are not binding on the IT deptt. The department will invariably levy 200% penalty and would allow you to resort to unending litigation. The experts should prevail upon the CBDT to clarify the issue for the benefit of the assessees. If S 270A proves a burden, the government can well amend it forthwith.
I wonder if Mr Adhia, Revenue Secretary knows the nuiances of the Income tax Act or consulted with CBDT or which deals with with the IT Act or other tax experts before tweeting and creating so much panic in people.
The payment of tax at maximum marginal rate on the amount of cash deposits in bank account and disclosed as income from other source appears to be the way out, and in such case, no penalty u/s 270A, as it stands today, would be leviable. This certainly looks better option than paying tax at 45% under IDS but this is the position as it stands as per the present provisions of the IT Act, unless govt comes out with a retrospective amendment on the penalty provisions, which itself could be challenged.
IT dept. has a case for penalty in terms of section 270A(9) i.e. on account of misreporting which involves misrepresentation or suppression of facts;
failure to record investments in the books of account;claim of expenditure not substantiated by any evidence;recording of any false entry in the books of account;failure to record any receipt in books of account having a bearing on total income.
Hence the view expressed in not altogether correct.
Penalty u/s.270A is to be calculated with reference to the difference between TAX on income assessed and income returned. If there is no such difference no penalty can be levied. If such income is offerred for taxation in AY 2017-18, the AO cannot take a different view ? This is my personal opinion.
Hello,
It there any scope of amendment in section 270A by the finance act, 2017???
Dear Samir for that first AO has to refund and pass logical order.
Mere suspicion or drawing adverse inference that income relates to previous cannot fulfill the basic requirement to apply 147.Therefore he has to put some tenable/cogent material on record before invoking 147.
Indeed a good write up and interpenetration. My query is can the AO treat such unexplained income of earlier year for which return has already been filed but assessment is pending u/s. 143(3)/147 and thereby can resort penalty. Thanks