Immunity From Penalty & Prosecution – Dissection Of Section 270AA Of The Income-tax Act, 1961

Section 270AA of the Income-tax Act, 1961 provides taxpayers with immunity from imposition of penalty under section 270A and prosecution under sections 276C and 276CC of the Act. Advocate Sameer Bhatia has analyzed the provision in detail and explained its nuances. He has also advised on the circumstances in which assessees should, and should not, opt for the immunity and should instead choose to contest the penalty and prosecution on merits

Prologue of the Provisions in General

The penalties generally imposable under the Income Tax Act, 1961 are governed by the provisions of Chapter XXI with sections ranging from 270 up to 275. A very drastic change has since been introduced in the law by way of insertion of section 270A dealing with penalty for under-reporting and misreporting of income inserted by the Finance Act, 2016 with effect from 01st April, 2017. The provisions governing penalty have since now been categorized into charge specific arena with prime focus on the cases wherein a person shall be considered to have under-reported his income and/or mis-reported his income as a consequence of under-reporting of income. Section 270AA of the Income Tax Act which got inserted in the statute by the Finance Act, 2016 with effect from 01st April, 2017 is part and parcel of its corresponding provision implanted in section 270A. Section 270AA of the Act deals with the provisions pertaining to immunity from imposition of penalty and initiation of proceedings under section 276C or section 276CC which in turn depends upon fulfillment of certain conditions prescribed therein for the so called indirect settlement.

Preface of section 270AA

 [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.]

The section as is so worded stands invoked on an application made by an assessee to the assessing officer concerned with a request to grant immunity from imposition of penalty under section 270A and initiation of prosecution under section 276C (default in respect of willful attempt of evade tax) or section 276CC (default in respect of failure to furnish returns of income). Since, the provisions of section 270A has recently been introduced and applicable with effect from 01st April, 2017, the provisions pertaining to initiation of prosecution under section 276C was the outcome of its insertion in the statute by the Taxation Laws (Amendment) Act, 1970 with effect from 01st April, 1971 as substituted by the Taxation Laws (Amendment) Act, 1975 with effect from 01st October, 1975 and section 276CC which got inserted by the Taxation Laws (Amendment) Act, 1975 with effect from 01st October, 1975. Further, the provisions of section 270AA are conditional in the sense that an assessee can be granted immunity from imposition of penalty under section 270A and initiation of proceedings under section 276C or Section 276CC, if he fulfills the undernoted conditions:-

1.The payment of tax and interest determined to be payable as per order of assessment or reassessment passed under sub-section (3) of section 143 or section 147, as the case may be and that too within the period prescribed in the notice of demand issued,
AND

2.The assessee prefers no appeal against the orders passed under section 143(3) or section 147 by virtue of which his liability of pay tax and interest arose under the statute.

Thus, on a prefatory note, satisfaction of the twin conditions mentioned above can suitably lead the assessee on the path of immunity being extended to him in so far as the imposition penalty and initiation of prosecution is concerned. Furthermore, the condition that time prescribed for in the notice of demand issued under section 156 has to followed touching upon the act of payment good the payment due in form of tax and interest liability determined on assessment.

Elucidation of the expression `has been paid within the period specified in such notice of demand as used in Clause (a) of section 270AA(1)’

In addition to the above, clause (a) of sub-section (1) of section 270AA specifically puts forward an embargo requiring the assessee to make good the payment of dues within the time prescribed in the notice of demand i.e. Form No.7 (Rule 15) of the Income Tax Rules, 1962, section 156 of the Income Tax Act, 1961. A fundamental question that arises here for consideration is what if the payment outstanding in form of tax and interest determined on assessment under section 143(3) or 147 is not paid within the time allowed/prescribed for in the notice and can the notice issued under section 156 prescribed a time period of less than thirty days in order to enable the assessee to discharge the burden of taxes/interest due.

Literal understanding makes it clear that it is obligatory on the part of assessee to make good the payment of taxes/interest due pursuant to its determination within the time prescribed in the notice issued under section 156 in absence of which the determination of taxes/interest is not enforceable. Form No.7 specifically provides that amount due should be paid to the Manager, authorized bank/State Bank of India/ Reserve Bank of India at _____within 30 days of the service of this notice. It also provides that with the previous approval of the Joint Commissioner of Income Tax, a period of less than 30 days can be allowed for the payment of sum due. Thus, undisputedly since discretion is conferred upon the assessing officer to determine the amount payable either within 30 days or a period of less than 30 days (with the prior approval of Joint Commissioner of Income Tax), payment of taxes and interest must be made within the time prescribed in the notice issued. In the event of non-payment of taxes and interest within the period specified, no relaxation has been provided for in the provision thereby disentitling the assessee from availing the benefits of acquiring immunity from penalty under section 270AA and prosecution on two counts i.e. 276C & 276CC. The demand notice issued under section 156 must be in the prescribed form and should be properly serviced on the subject and in its absence, the assessee cannot be treated as an assessee in default and no recovery proceedings can be launched and initiated against him as settled by the Hon’ble Gujarat High Court in Bal Chandanben Jivanlal vs. L.D.Joshi, Collector, Bhavnager (1969) 74 ITR 448 (Gujarat). It has also been settled by the Hon’ble Bombay High Court in Rasiklal Amritlal Doshi vs. A.Nundy, Addll ITO (1961) 42 ITR 35 (Bom) that a valid order passed under or in pursuance to the provisions of the Act must precede (and not succeed) notice of demand issued under section 156 of the Income Tax Act.

Section 270AA (2) pertaining to filing of application in Form No.68

In addition sub-section 2 of section 270AA states that application as 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. Such application shall be in filed in Form No.68 as so prescribed for the said purposes which stands in tune with the provisions of Rule 129 of the Income Tax Rules, 1962 as notified. Rule 129 of the Income Tax Rules has been worded as under:-

129. An application to the Assessing Officer to grant immunity from imposition of penalty under section 270A and from initiation of proceedings under section 276C or section 276CC shall be made in Form No.68.]

It can be illustrated with the aid of an example as to the time by which an application under section 270AA(2) can be moved by the assessee. Supposing an order under section 143(3) or section 147 in respect an assessment year has been passed on 22nd December, 2019 and received by the assessee as on 28th December, 2019, the application is required to made within one month by the end of month in which such order is received i.e. 31st January, 2020 as the order passed on 22nd December, 2019 has been received by assessee on 28th December, 2019. In the said exercise, clear days attributable to a month has to be taken for the purposes of computing limitation and the dispute pertaining to 30 / 31 days won’t be of any considerable import keeping in view the unambiguous language of the statute.

Section 270AA (3) takes into its sweep penalty on account of `Under-reported Income and not mis-reporting of income’

Sub-section 3 of section 270AA further provides that the assessing officer shall on fulfillment of the conditions stipulated for in sub-section (1) and after the expiry of period prescribed for filing the appeal as specified in clause (b) of sub-section (2) of section 249 against the orders passed i.e. section 143(3) or section 147, grant immunity from imposition of penalty under section 270AA and initiation of prosecution proceedings under section 276C or section 276CC. The section also imposes an important rider over the power of the assessing officer to grant immunity from penalty and prosecution for which due recourse can be made to the language used in the statute

`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.

Section 270A(9) particularly states that cases of misreporting of income referred to in sub-section (8) shall be the following namely:-

(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.”

Bare language of sub-section 3 of section 270AA demonstrates that it is only in cases where proceeding for penalty under section 270A HAS NOT BEEN INITIATED under the circumstances referred to in sub-section (9) of the said section 270A, the assessing officer is empowered to grant immunity from penalty and prosecution. Sub-section 9 of section 270A deals with the provisions pertaining to imposition of penalty on account of misreported income i.e. underreporting is in consequence of misreporting. Thereby irrefutable conclusion can be drawn that in case the assessee has been show caused as to the underreported parameter of penalty coupled with satisfaction of conditions employed in sub-section (1) & (2) of section 270AA, he is empowered to grant immunity from imposition of penalty and initiation of prosecution and not in the case recruited for misreported income (i.e. underreported in consequence of misreported income i.e. section 270A(9). Therefore it is undisputable that it is on account of the penalty being fastened on the assessee on account of underreporting charge, assessing can proceed to grant immunity from penalty and not otherwise i.e. in case if misreporting as he is deprived of any power to do that statutorily. In the event, the assessing officer proceeds to grant immunity from penalty and prosecution on the strength of incorrect interpretation as to the law prevalent in light of the provisions of sub section (3) of section 270AA, it will construed as no immunity in the eyes of law and the assessee can be proceeded against under the respective provisions of statute subject to limitation available with the department.

Section 270AA (4) deals with the passing of order granting/rejecting application filed under sub-section (1)

Sub-section (4) of section 270AA further provides that the assessing officer shall within a period of one month from the end of month in which the application under sub-section (1) is received, pass an order accepting or rejecting the application filed by the assessee. This provision clarifies that passing of an order under section 270AA accepting/rejecting the stand of assessee is at the discretion/mercy of the assessing officer who may or may not accept the declaration filed under sub-section (1) in Form No.68. This provision also contains a rider that no order rejecting the application moved by assessee shall be passed unless the assessee has been afforded an opportunity of being heard in the matter. There is nothing new in the so called provision extending opportunity as it stands in compliance with the principles of natural justice, equity & fair-play. Likewise, if the application has been filed with the assessing officer in the month of January, 2020, then the assessing officer is supposed to pass an order by February, 2020 as in due compliance with the provisions of section 270AA(4) of the Act.

Though law do provides the time within which such an order can accordingly be passed by the assessing officer but it does not take care of the situation where such order is not passed beyond the time prescribed in the statute. Apart from this, whether the assessing officer can go in for stretching/extending the time available to him under section 270AA(4) again is amenable to the litigious front and the gaps is seriously required to be filled in either by way of legislative amendment to the provision by way of an explanation or through interpretation accorded to the provisions by courts.

Section 270AA (5) provides that the order passed under section 270AA(4) will be final.

Sub-section (5) of section 270AA provides that the order passed under section 270AA(4) by the assessing officer shall be final and further recourse in respect of the same will not available to the assessee concerned. However the said provision in any manner cannot oust the jurisdiction of the writ courts to step in on account of any breach committed in the course of proper exercise of power by the assessing officer concerned. In literal sense, it does get conveyed that order passed by the assessing officer under section 270AA(4) whether accepting the prayer of assessee or rejecting it will be final on its terms.

Section 270AA (6) restricts the right of assessee to contest the order passed under section 143(3) or section 147 of the Act in the event of an acceptance of application under section 270AA(4) is passed.

Sub-section (6) of section 270AA provides that no appeal under section 246A or an application for revision under section 264 shall be admissible against the order of assessment or reassessment passed under section 143(3) or 147 in the event application filed by the assessee under section 270AA(4) is accepted by the assessing officer concerned. This provision has the impact of restricting the right of assessee lawfully to contest the findings of assessment order passed under section 143(3) or 147 where immunity proceedings arising out of such assessment or reassessment have been decreed in favour of assessee by the assessing officer concerned under section 270AA(4).  This provision by itself has the scope of restricting the purview of section 264 of the Income Tax Act, 1961 which is wide enough to cover any order passed by the Income Tax authority however at the same time leaving the scope for invoking of the power under section 263 by the department. It must be borne in mind that powers under section 264 of the Income Tax Act, 1961 are wider in scope when compared with the powers available to department under section 263 and can be inferred from the following pronouncements of various writ courts:-

Hitech Analystical Services v. Pr. CIT [2017] 251 Taxman 60/86 taxmann.com 164 (Guj) ,  C. Parikh & Co. v. CIT [1980] 122 ITR 610/4 Taxman 224 (Guj), Parekh Bros. v. CIT [1984] 150 ITR 105/ [1983] 15 Taxman 359 (Kerala), Digvijay Cement Co. Ltd. v. C.B. Rathi, CIT [1994] 210 ITR 797/75 Taxman 355 (Guj.),Vijay Gupta v. CIT [2016] 386 ITR 643/238 Taxman 505/68 taxmann.com 131 (Delhi), Rites Ltd. v. CIT [2017] 83 taxmann.com 267 (Delhi) and Sri Selvamuthukumar v. CIT [2017] 394 ITR 247/246 Taxman 185/79 taxmann.com 113 (Madras).

The provision of section 270AA(6) itself plays foul by impleading section 264 as restricting provision wherein no recourse to the assessee is available in the event of arbitrary rejection of its application moved in Form No.68 with the assessing officer as the order passed is a final order. However the assessee can challenge the order passed under section 270AA(4) by taking recourse to the writ/constitutional courts whose jurisdiction cannot be intelligently inferred to have been ousted by conjoint reading of section 270AA(5) and 270AA(6) of the Income Tax Act, 1961 even though the order passed under section 270AA(5) is a final order.

Implication of Circular No.5/2018 dated 16th August, 2018

The Central Board of Direct Taxes had issued Circular dated 16th August, 2018 in context of the provisions of section 270AA of the Income Tax Act, 1961 (Contents produced below). The CBDT has clarified through the Circular No.5/2018 issued that merely because the assessee intended or is desirous of availing the benefit of the provisions of section 270AA seeking immunity from penalty and prosecution under the respective provisions, it will not restrict the right of the assessee to contest the same issue in any earlier year falling under the erstwhile provision section 271(1)(c). The assessee regardless of its action under section 270AA can still challenge the proceedings under section 271(1)(c) pertaining to earlier years and the Income Tax authority cannot possibly draw adverse inference by taking undue advantage of the application moved by assessee under section 270AA(2) in Form No.68.

Circular No. 5/2018
F. No. 370149/155/2018-TPL
Government of India
Ministry of Finance
Department of Revenue
(Central Board of Direct Taxes)

New Delhi, Dated 16th August, 2018

Clarification on the immunity provided u/s 270AA of the Income-tax Act, 1961 Section 270AA of the Income-tax Act, 1961 (the Act) inter alia provides that w.e.f. 1 st April, 2017, the Assessing Officer, on an application made by an assessee, may grant immunity from imposition of penalty under section 270A (not being penalty for misreporting) and initiation of proceedings under section 276C or section 276CC, subject to the conditions specified therein. 2. Apprehensions have been raised that where an assessee makes an application seeking immunity under section 270AA of the Act, and in the earlier year(s) penalty under section 271(1)(c) of the Act has been initiated on the same issue, the Income-tax Authority may contend that the assessee has acquiesced on the issue in such earlier year (s), by seeking immunity under section 270AA of the Act and therefore, take an adverse view in the proceedings for penalty under section 271(1)(c) of the Act. 3. In this matter, it is hereby clarified that where an assessee makes an application seeking immunity under section 270AA of the Act, it shall not preclude such assessee from contesting the same issue in any earlier assessment year. Further, the Income-tax Authority, shall not take an adverse view in the proceedings for penalty under section 271(1)(c) of the Act in earlier assessment years merely on the ground that the assessee has acquiesced on the issue in any later assessment year by preferring an immunity on such issue under section 270AA of the Act.

(Sanyam Suresh Joshi)
DCIT (OSD) (TPL)-III

Epilogue

Provisions of section 270AA dealing with the immunity from imposition of penalty under section 270A and prosecution under section(s) 276C and 276CC no doubt provide the assessee with a ray of hope that there can be an end to the vicious circle of litigation surrounding him. But the same has to be thoughtfully read in the governing circumstances of the case specifically where the charge of penalty is restricted to under-reported income. The said provision in its restrictive application applies to imputation arising out of penalty qua under-reported income and prosecution on account of willful attempt to evade tax and failure to furnish return of income. The Hon’ble Supreme Court in a recent pronouncement titled Basir Ahmed Sisodia vs. Income Tax Officer (2020) 116 Taxman.com 375 (SC) dated 24th April, 2020 introduced significant back-pedal for the assessee touching upon the penalty proceedings to help battle out the case of assessment proceedings. Thus where the issues are covered in favour of the assessee by the pronouncements of writ courts/tribunal(s), it will not be in the fitness of things to go for settlement under section 270AA specifically when the assessee can  lead fresh evidence in penalty proceedings counter the findings of assessment. Apart from this, the under noted jurisprudence settled by the Hon’ble Supreme Court in Hindustan Steel Limited vs. State or Orissa (1972) 83 ITR 26 (SC) in context of penalty still holds the field and can suitably apply to contest the proceedings initiated pursuant to section 270AA of the Income Tax Act both in respect of the charge of under-reported income & mis-reported income.

`An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or guilty of conduct, contumacious or dishonest, or acted in conscious disregard to its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute.’

Thus, it is clear that in light of the discussion made above that immunity can be granted only in the prescribed circumstances and that too in the prescribed manner as the discretion of the asessing officer. Section 270AA restricts in its import the liability towards tax and the interest determined and payable subject to the outcome of proceedings either under section 143(3) or section 147, but does not come within the purview of the provision of section 144. In the event of an-exparte assessment, the assessee will not be in a position to file an application for seeking immunity from imposition of penalty and initiation of prosecution proceedings under section 270A and 276C/276CC of the Act.

Sameer Bhatia,
Advocate, Punjab & Haryana High Court,
R/o 158/2, Guru Teg Bahadur Nagar,
Opposite Mata Gujri Park,
Jalandhar  – 144003
Contact No: 90413-04900 / 98142-18476
Email address: adv.sameerbhatia@gmail.com

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