Analysis Of Penalty Provisions U/s 270A – Shifting Of Paradigm From AY 2017-18

CA Sunil Maloo has explained the provisions of section 270A, which levies penalty for “underreporting” and “misreporting” of income, in a detailed manner. He has referred to important judicial precedents to support his contentions. He has argued that Sections 270A and 270AA serve two purposes of the Legislation, namely, that of punishing the wrongdoers and also providing immunity to occasional and unintentional defaulters

Executive Summary

Penalty u/s 271(1)(c) of the Act has been probably one of the most litigated provision of the Income Tax Act. However, to rationalize the same, Legislation has revamped the entire penalty provisions from shifting the defaults of ‘concealment or furnishing inaccurate particulars of income’ to new concepts of ‘Underreporting or Misreporting of the Income’ vide newly inserted Section 270A with effect from 01/04/2017. As the new penalty provisions is applicable from AY 2017-18 onwards, for which the Assessments are presently ongoing, it is important to analyse the new provisions at this juncture.

1. Background:

As a tax fraternity, we have read, heard and learnt a lot in respect of the penalty provisions u/s 271(1)(c) on additions made during the Assessment on account of concealment of income or furnishing inaccurate particulars of income. But with effect from Assessment Years starting from 01/04/2017 i.e. AY 2017-18 onwards the legislature has re-written the law with respect to penalty by introduction of new penalty provisions in Section 270A of the Act.

As AY 2017-18 is the first year of applicability of the newly inserted provisions of Section 270A and the Assessments for AY 2017-18 are also going to be time barred on 31/12/2019, this is high time to analyse and discuss the new provisions in detail hereunder.

2. Introduction

Section 270A of the Act was introduced in the Statue Book vide Finance Act 2016 w.e.f. 01/04/2017 with an object to rationalization of existing penalty provisions of Section 271(1)(c) of the Act. Therefore, with applicability of the New Section 270A, all the existing provisions of Section 271 has been made inoperative.(Ref: Section 271(7) of the Act)

3. Which authorities can levy penalty u/s 270A

Penalty u/s 270A of the Act can be imposed by Assessing Officer, Commissioner (Appeals) or the Principal Commissioner or Commissioner.

4. Scope of penalty u/s 270A

Penalty u/s 270A shall be levied on the under-reported Income or under-reported Income as a consequence of any misreporting thereof.

5. Penalty u/s 270A – whether discretionary or mandatory?

The earlier discretion available to authorities u/s 271(1)(c) has been continued in the new Penalty provisions u/s 270A of the Act by using the word ‘may’ therein.

6. Quantum of Penalty u/s 270A

Particulars	Quantum
Underreporting of Income	50% of the amount of tax payable on under-reported income
Underreporting of Income in consequence of any misreporting thereof	200% of the amount of tax payable on under-reported income

7. What is Under-Reporting of Income?

Ordinarily, ‘underreport’ means (as per Merriam Webster dictionary): ‘transitive verb: to report to be less than is actually the case: understate <underreport his income>’.

In following situations, a person shall be considered to have under-reported his income, if

Particulars	Income as per Normal Provision	Deemed total income u/s 115JB as per MAT Provision	Loss return
Situation – 1 When return is filed	Assessed Income > Processed Income	Deemed total income assessed / reassessed > Processed Deemed income	Income assessed or reassessed has the effect of reducing the loss or converting such loss into income
Situation – 2 When return is NOT filed	Assessed Income > maximum amount not chargeable to tax	Deemed total income assessed > maximum amount not chargeable to tax
Situation – 3 Cases of Reassessment	Reassessed Income > income assessed or reassessed immediately before such reassessment	Deemed total income reassessed > deemed total income assessed / reassessed immediately before such reassessment

8. Quantum of Under-Reported Income

Particulars	Cases where assessment has been made for the first time	Cases of Re-assessments
Situation – 1 Return Filed	Difference between the amount of income assessed [and]  return processed	Difference between the amount of income reassessed or recomputed [and] the amount of income assessed, reassessed or recomputed in a preceding order
Situation – 2 Return not filed – company, firm or local authority	Amount of income assessed
Situation – 3 Return not filed – in any other case	Difference between the amount of income assessed [and] the maximum amount not chargeable to tax

8. Penalty for Intangible additions, which becomes tangible in subsequent AY’s

On the issue of Intangible Additions, the CBDT Circular No. 204, dated 24-7-1976 explained the matter as follows:

"61.9 New Explanation 2 makes a provision in respect of ‘intangible additions’. Additions are sometimes made by the Income-tax Officers for purely technical reasons, for example, application of a presumptive rate of gross profit or of yield, or on account of estimated disallowance of certain expenses, shortfalls, wastage, etc., but no penalty for concealment is levied in respect of these additions for want of adequate evidence to establish that these additions represent the assessee’s concealed income. In later assessments, when called upon to explain certain deposits, etc., the assessees urge at times that such deposits, etc., have come out of the income represented by the aforesaid additions made earlier. Despite this virtual confession of concealment on the part of the assessee, no penalty was hitherto leviable in such cases as the time limit for initiating concealment penalty proceedings in respect of the earlier year in which the addition was made would have expired. The penalty could also not be imposed in respect of the year in which the deposit was made, as there was no concealment in that year, the deposit having been explained as out of an earlier year’s income. New Explanation 2 provides that in such cases, the assessee would become liable to penalty for concealment in respect of additions made in the earlier year in which the additions were made."

The Supreme Court in Anantharam Veerasighaiah and Co. v CIT (1980) 123 ITR 457 (SC) observed that the secret profits or undisclosed income of an assessee earned in an earlier assessment year, commonly described as intangible additions, are also the real income of the assessee. Therefore, the assessee can explain the unexplained investment, etc. of the current year to have been met out of intangible additions made in the past. 

To take care of such eventuality, sub-section (4) provides to enable the Assessing Officer to initiate penalty proceedings in respect of intangible additions made in the past which are claimed by the assessee to be the source of any receipt, deposit or outgoing or investment in any subsequent year. The penalty proceedings shall be initiated for the assessment year(s) in which such intangible additions were made and shall be leviable only on such intangible additions made in past year(s) which have been claimed to be a source of receipt, deposit or outgoing or investment of the subsequent year.

Technically, when Assessee tries to cover up any receipt, deposit or investment in any assessment year to be sourced out of the intangible addition of preceding AY’s, then Department is authorized to treat the intangible addition of such preceding AY’s now as Tangible Addition and accordingly cover the same under the glimpse of penalty in that preceding AY’s.

Example – the AO has found unexplained investment of Rs 5000000 in AY 2017-18, which the Assessee explained to be made out of the earlier intangible additions of Rs 6000000 as under: –

AY 2015-16 –        Rs 3000000
AY 2013-14 –        Rs 1000000
AY 2012-13 –        Rs 2000000

Implications of above – No further addition can be made in AY 2017-18 towards unexplained investment as source of the same is duly explained out of the earlier intangible additions. However, Penalty will now be initiated on the earlier intangible additions in the chronological reverse manner starting from AY 2016-17 unless and until the amount of unexplained investment found in AY 2017-18 is fully covered up –

Penalty in AY 2015-16 on –        Rs 3000000
Penalty in AY 2013-14 on –        Rs 1000000
Penalty in AY 2012-13 on –        Rs 1000000 (Balance amount)

The Sub Section (4) and (5) of new provisions of Section 270A are completely in line with the earlier provisions of Explanation 2 of Section 271(1)(c) of the Act. However, parallel provision of Section 271(1A) is missing in the Section 270A and its implications can be identified only with test of judicial scrutiny.

9. Transactions Specifically excluded from the under-reported income

The scope of under reported income is very wide and would technically cover each and every addition made by the AO. Therefore, it is important to keep some specific exclusions to make some bonafide transactions which resulted into addition to total income, to be out of the ambit and scope of under-reported income. Accordingly, the under-reported income shall not include –

(a) the amount of income in respect of which the assessee offers bona fide explanation and the assessee has disclosed all the material facts to substantiate the explanation offered.

Bona fide – Meaning of

GTO v. Gautam Sarabhai Ltd. [1989] 29 ITD 212 (Ahd.)

‘The words "bona fide" used in the language of clause (c) are also required to be taken due note of. These words mean "in good faith", "genuinely" which are suggestive of honesty of purpose. They convey absence of intention to deceive and connote that the transaction in question is a true and genuine transaction and not a colourable and sham one and there are no strings of any kind attached to that transaction and that there is no secret or covert arrangement.’

(b) the amount of under-reported income determined on the basis of an estimate,

(c) the amount of under-reported income determined on the basis of an estimate, if the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue, has included such amount in the computation of his income and has disclosed all the facts material to the addition or disallowance;

(c) the amount of under-reported income represented by Transfer Pricing addition, where the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X, and, disclosed all the material facts relating to the transaction; and

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

10. Situations where under-reported income is in consequence of “misreporting of income”

When the under reporting of the income is intentional or wilful on the part of the Assessee, then such under reporting is to be considered to be Misreporting of the Income. For being misreporting of income, first it has to be underreporting of the income. Underreporting is a wider term and also includes misreporting of income.

As per Merriam Webster dictionary, ‘mis-‘ is a prefix meaning: ‘1a: badly: wrongly , misjudge> b: unfavourably<misesteem> c: in a suspicious manner <misdoubt> 2 bad: wrong <misdeed> 3: opposite or lack of <mistrust> 4: not <misknow>’

Section 270A(9) lists out cases where underreporting shall be considered to be misreporting of income, which are: –

(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.

On perusal of the above listed cases, one can appreciate that any underreporting which is coupled with the mala fide intention on the part of the Assessee, will be characterized as Misreporting of Income.

11. Calculation of tax payable in respect of the under-reported income

The penalty is leviable for the underreporting and misreporting at the rate of 50% and 200% of the tax payable in respect of the under-reported income. Therefore, the quantification of tax payable in respect of the under-reported income has been provided in Section 270A(10) to be –

Situation	Quantum of tax payable in respect of the under-reported income
where no return of income has been furnished and the income has been assessed for the first time	the amount of tax calculated on the under-reported income as increased by the maximum amount not chargeable to tax as if it were the total income
where the total income determined u/s 143(1)(a) or assessed, reassessed or recomputed in a preceding order is a loss,	the amount of tax calculated on the under-reported income as if it were the total income;
in any other case	X–Y where, X = the amount of tax calculated on the under-reported income as increased by the total income determined u/s 143(1)(a) or total income assessed, reassessed or recomputed in a preceding order as if it were the total income; and Y = the amount of tax calculated on the total income determined u/s 143(1)(a) or total income assessed, reassessed or recomputed in a preceding order.

12. Section 270AA – A blessing in disguise

Special Provisions for immunity from Imposition of Penalty and Initiation of Prosecutions

Section 270AA has been inserted into the Act as a measure to reduce the litigation and to get the speedy recovery of the tax along with interest.

In section 270AA of the Act, the Assessee has been provided with option to making application to AO for granting immunity from imposition of penalty under section 270A and initiation of proceedings under section 276C or section 276CC, subject to fulfilment of following conditions: –

(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 has been filed

The application has to be made in form No. 68 within 30 days from the end of the month in which the order has been received by the Assessee. After providing opportunity to the Assessee, the AO shall pass the order either accepting the application or rejecting the same within one month from end of month in which application is made by the Assessee. The order so passed by the AO shall be final and is non appealable.

If the application is accepted by the AO, then no appeal u/s 246A or revision u/s 264 shall be admissible. However, the Assessee can file appeal u/s 246A or revision u/s 264 of the Act, if the immunity application has been rejected by the AO. The appeal in such cases has to be filed with condonation of the delay.

Immunity u/s 270AA is not available in the cases covered u/s 270A(9) i.e. misreporting of income. Accordingly, immunity from penalty can be granted only in the case where penalty has been initiated on the ground of under reporting of income.

Further, immunity is not available in piecemeal or issue wise, it has to be for the Assessment Order in its entirety. Therefore, the Assessee has to forego his right to appeal with respect to all the additions made in the Assessment Order.As per the strict interpretation of the Section, Assessee cannot pray for immunity on issue wise.

13. Conclusions and Key Takeaways

a) The earlier provisions of Section 271(1)(c) of the Act had become outdated with the passage of time, therefore it was need of the hour to introduce some new penal provisions to protect the revenue losses.

b) Section 270A of the Act can be considered to be a well written, well thought substitute for section 271(1)(c) of the Act.

c) With introduction of Section 270A, entire section 271 has been made inoperative with effect from 01/04/2017.

d) Further, there may be escapement from penalty u/s 270A of the Act in the cases where intimation u/s 143(1) has not been passed and additions have been made in the Assessment. In such cases, the calculation of underreporting mechanism fails, which may lead to non-levy of penalty u/s 270A of the Act.

e) New scheme of penalty maintains a required balance in penalizing the Assessee for underreporting of income (Section 270A) vis a vis providing an option for filing application for immunity from penalty and prosecution as per Section 270AA of the Act.

f) The new provisions of Section 270A and 270AA shall serve both the purpose of the Legislation i.e. punishing the wrongdoers and also immunity to the occasional unintentional defaulters.

g) These provisions have a long way to go and yet to face the judiciary test.

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