Penalty U/s 271(1)(c) And S. 270A Read With S. 270AA Of The Income Tax Act, 1961- Analysis Alongwith Discussion Of Supreme Court And High Court Decisions

Advocate Arjun Gupta has provided much needed clarity on the law relating to the levy of penalty under sections 271(1)(c), 270A and 270AA of the Income-tax Act, 1961. He has put the statutory provisions in their correct perspective and also dealt with all the important judgements of the Supreme Court and High Courts as well as Circulars issued by the CBDT. He has also opined on whether an assessee should be allowed to escape penalty on the ground that the default was by “inadvertence“

Introduction- Penalty under Section 271(1)(c) of the Act

When an assessment order is made under the Income Tax Act, 1961(the “Act”) certain additions and disallowances are made which enhances the total income of the assessee. In addition to the assessment order, the Act has made provision for the imposition of various penalties to be levied by the concerned authority so as to deter the assessee from repetitious blameworthy/contumacious conduct. This Article seeks to analyse the penalty leviable under Section 271(1)(c) of the Act. The basic essentials/requirements of a penalty under Section 271(1)(c) are listed herein below:

1. A penalty is levied under Section 271(1)(c) of the Income Tax Act, 1961 if the assessee has concealed the particulars of his income or furnishes inaccurate particulars of income. Explanation 1 defines what constitutes concealment of income. If the assessee fails to offer an explanation or offers an explanation that is false; or an explanation that is not bona fide and which he is not able to substantiate and fails to prove that he has made a full and proper disclosure, then in these circumstances penalty would be leviable for concealment of income.

2. The amount of the penalty is in addition to tax, if any, payable by him and must not be less than the amount of the tax payable and cannot exceed three times such an amount.

3. The penalty can be levied only by the Assessing Officer, the Commissioner of Income Tax (Appeals), the Principal Commissioner or the Commissioner.

4. The concerned officer must be satisfied that the assessee has either concealed his income or furnished inaccurate particulars of income. By the Finance Act 2008, Section 271(1B) was introduced with retrospective effect from 1.4.1989, which states that if the Assessing Officer makes a direction in the assessment order regarding initiation of penalty proceedings, that would be deemed to be appropriate satisfaction.

5. Section 274 states inter alia that the assessee must be given an opportunity of being heard before imposing any penalty and Section 275 deals with limitation.

6. The provisions of the section shall not apply for any assessment year commencing on or after April 1, 2017.

Discussion

SUPREME COURT DECISIONS

• In the case of CIT Vs. Reliance Petroproducts Pvt. Ltd. [2010]322 ITR 158(SC), it was held that if the assessee makes a claim in the return whether towards expenses, TDS etc. and the same is not accepted by the AO, the disallowance cannot be carried out by the AO. Simply because the assessee has made a claim in the return, that cannot ipso facto said to be furnishing inaccurate particulars by the assessee, for the reason, that in every case where the AO does not accept the claim of the assessee made in the return, penalty would be levied and the levy would be justified. This cannot be the intendment of the legislature.

Though the principle set out above may seem to be the correct one in law, it has the effect of encouraging assessee’s to make fraudulent claims in the return since every assessee would know that if a wrong claim is made in the return, no penalty would be attracted. In other words, in case through inadvertence the Assessing Officer does not notice the wrongful claim made by the assessee, whether made by the assessee intentionally or unintentionally, no disallowance would be made and even further, no penalty would be attracted. Thus, the assessee can easily make the claim in the return even though he knows it not to be a correct claim and in cases where the claim is scrutinised and the amount is added back to the total income, the assessee would simply be paying the tax on that amount which it would otherwise under normal circumstances have to pay. This practice ought to be discouraged. Surely wrongful claims made intentionally by the assessee would in some cases escape disallowance. It is appropriate therefore, that wrongful claims be examined in the facts and circumstances of the case and in cases where the claim is so absurd so as to lead the Court to believe that the only reason why the assessee made the claim was to prevent paying excess tax, in those cases, even a wrongful claim could be the subject matter of penalty proceedings.

This view finds support from the case of CIT Vs. Zoom Communication Pvt. Ltd. [2010] 327 ITR 510 (Delhi), in this case, the Delhi High Court upheld the penalty addition on the ground that income tax paid could never have been availed as a deduction in view of the provisions of Section 40(ii) of the Act, and that equipment written off could never fall within the purview of Section 32(1)(iii) of the Act. Neither would any expert or auditor advise availing such a deduction. Thus, the claim of the assessee was absurd and intentional and the case of Reliance Petroproducts was distinguished. The Court held that a mere claim in the return if not bona fide would attract a penalty. The penalty was sustained and the appeal was allowed by the Court.

In CIT vs. S.M. Construction [2015] 233 TAXMAN 263 (Bom), the Hon’ble Bombay High Court observed that if the claim is made bona-fide, then the ratio in Zoom Communications would not apply at all. In this case, upon cancellation of a development agreement, the assessee was refunded its initial security deposit of Rs. 54 Lac and was paid a further amount of Rs. 1.11 Crores. The assessee showed 1.11 Crores as a capital receipt. However, the Assessing Officer treated it as capital gains and even initiated penalty proceedings against the assessee. The Revenue’s stand was that the assessee had shown only Rs. 1.11 Crores as against Rs. 1.65 Crores. However, the Revenue ignored that Rs. 54 Lac had been refunded to the assessee as it was the assessee’s own funds. Moreover, there was a full disclosure by the assessee of facts. It is in these circumstances, that the Hon’ble Court held the claim of the assessee to be bona-fide. The appeals were therefore dismissed as involving no substantial question of law.

• In the case of Price Waterhouse Coopers Pvt. Ltd. Vs. CIT [2012] 348 ITR 306 (SC), it was held that if the explanation provided by the assessee is proven to be bona-fide, the penalty addition would necessarily have to be deleted. Further, even if the assessee has not offered certain amounts to tax and a strong case of inadvertence on the part of one of the officers of the assessee is proven, then since the assessee has acted bona-fide there cannot be a case of furnishing inaccurate particulars of income or concealment of income. In this case, the assessee while furnishing his return pursuant to the notice issued to him under Section 148 of the Act, did not add back to his total income the provision claimed towards retired employees which was not allowable under Section 40A(7) of the Act. However, the Court did not fasten any penalty on the assesseeeven though it had the second opportunity of adding back the provision in its return filed pursuant to the notice under Section 148 of the Act. Instead, the Court remarked on the silly mistake of the assessee (which fault can only be attributed to the assessee), or that it is a reputed organisation(an irrelevant fact) and that it was acting bona fide. However, it seems that a computation error leading to inadvertence can be excused if the facts are proved and they are indisputable.

• In the case of Dilip N. Shroff Karta of N.D. Shroff Vs. JCIT and Ors. [2007] 291 ITR 519 (SC), the Supreme Court held that apart from holding that the explanation of the assessee is not bona fide, it must be established that the assessee has failed to disclose all material facts necessary for the computation of his income. The explanation must be preceded by how and in what manner have the facts been disclosed and must be analysed and the Assessing Officer must record his satisfaction in this behalf. The Supreme Court observed that the primary burden of proof is on the Revenue, and the Assessing Officer must record his satisfaction that the assessee has concealed his income or furnished inaccurate particulars of income, that this onus is primarily on the Revenue to discharge. Once the onus is discharged by the Revenue it shifts to the assessee.  The Court held that mens rea is a necessary ingredient to invoke penalty proceedings and it is on this point and this point only that the case was overruled by Dharmendra Textile Processors discussed below.

• In the case of Union of India (UOI) and Ors. Vs. Dharamendra Textile Processors and Ors. [2008] 306 ITR 277(SC), it was held that mens rea is not a condition precedent to make a penalty addition in the hands of an assessee. Overruling the case of Dilip Shroff only to the extent of holding mens rea as being essential to invoking penalty proceedings, in Dharmendra Processors the Supreme Court noted that mens rea is not essential to invoke penalty proceedings under Section 271(1)(c).The Court observed that a penalty under Section 271(1)(c) of the Act is in the nature of strict liability and must be read with Section 276C of the Act. Section 276C of the Act makes the wilful evasion of tax subject to criminal prosecution. Thus, there is no requirement of mens rea under Section 271(1)(c) since the assessee might not wilfully seek to evade tax. It is the blameworthy conduct of the assessee that must be taken into account under Section 271(1)(1)(c). However, the Supreme Court has also held that if the claim of the assessee is bona fide then no penalty can be levied, and this bona fide nature of the claim has been interpreted by the Supreme Court to include inadvertence also. (PriceWaterHouseCoopers).

• In the case of MAK Data P. Ltd. Vs. CIT [2013]358 ITR 593(SC), the Supreme Court held that any offer to buy peace, surrender, amicably settle etc. would not absolve the assessee of penalty proceedings. It was held that if the assessee wanted to voluntarily offer income to tax, it would have done so while furnishing the return. The act of trying to buy peace cannot absolve the assessee from the imposition of a penalty because in every case where the assessee offers to buy peace, the penalty proceedings cannot be withdrawn.

• In Virtual Soft Systems Ltd. Vs. CIT [2007] 289 ITR 83(SC), the Supreme Court held that where the return finally declares a loss even after re-computation by the Assessing Officer, no penalty can be levied on such a loss. Though the amendment to Section 271(1)(C)(iii) by the Finance Act, 2002 w.e.f 2003 clearly states that penalty can be levied ‘in addition to tax payable, if any’, it was held that this amendment which requires no tax to be due if penalty is leviable was prospective as it was a substantive amendment. The Court held that prior to 2003, there must be some positive income for tax to be computed and the evasion thereof for the penalty to be levied. Several judgments were cited to buttress this finding of the Supreme Court.

However, in CIT Vs. Gold Coin Health Food Pvt. Ltd. [2008] 304ITR 308(SC), a Full Bench of the Apex Court overruled the view taken in Virtual Soft and held that income would include losses also, and relying upon certain judgments and the observations of the Wanchoo Committee, held that if the total income is reduced to such an extent so as to result in a loss, then the penalty would still be leviable upto that extent as if the concealed income were the total income. Certainly, this view of the Apex Court is the correct view in law. In my view, without adverting to the provisions, it can clearly be seen that there must lie no difference between concealing losses or concealing income, since concealed losses also have an effect on income as they go to reduce the income. It is crystal clear that losses play a pivotal role in determining income and any concealment thereof must be subject to a penalty. Thus, even without adverting to any provision in law, on a general principle, concealment of losses must invite penalty.

The judgment in Gold Coin(supra) has been referred to in CIT Vs. Shree Chowatia Tubes (India) (P.) Ltd [2017] 247 TAXMAN147 (SC) wherein the Hon’ble Supreme Court held that the Tribunal was not correct in deleting the penalty addition on the ground that the returned income and assessed income was a loss since the amendment to Section 271(1)(C)(iii) by the Finance Act, 2002 w.e.f 2003 is restrospective in operation.

• In Sir Shadi Lal Sugar and General Mills Ltd. and Ors. vs. CIT[1987 ]168 ITR 705 (SC), the Supreme Court held that the finding of fact of the Tribunal cannot easily be disturbed by the Hon’ble High Court, the Tribunal being the final factfinding authority and the final adjudicator of facts. It was held that if the assessee accepts its liability to pay tax, it can be for several reasons, and it does not necessarily follow that the assessee is to be subject to penalty in every case where it has not preferred an appeal, unless the assessee has voluntarily disclosed to the authorities that it is responsible for concealment of income or furnishing of inaccurate particulars of income. It was held that the Tribunal had made a correct appreciation of the facts which did not warrant interference.

• Recently in the case of Basir Ahmed Sisodiya vs. ITO [2020] 116 taxmann.com 375 (SC), the Supreme Court held that if certain evidence is disclosed on affidavit during penalty proceedings, then although the same has not been disclosed during assessment proceedings, the evidence so disclosed is material for determination in assessment proceedings if the evidence offered is not rejected by the Assessing Officer in penalty proceedings and confirmed by the CIT(A). The quantum/assessment proceedings can then be decided on the basis of such evidence. This view of the Court in favour of the assessee seems to have added a new factor for the correct determination of tax liability and needless to state is an innovative approach in deciding tax issues.

HIGH COURT DECISIONS

• In the recent case of Ventura Textiles Ltd. Vs. CIT [2020] 117 taxmann.com 182 (Bom)(HC), the Hon’ble Bombay High Court passed a detailed judgment dealing with various aspects of penalty law under Section 271(1)(c) of the Act. The Assessment year was 2003-2004.  The assessee is a resident company and had claimed deduction of Rs. 62,47,460.00 as a bad debt under Section 36(1)(vii) of the Act. The amount was infact compensation paid to M/s. JTC Ltd. for inferior supply of goods. The Assessing Officer in scrutiny proceedings under Section 143(3) of the Act, noted that this amount was not a bad debt nor did it fall within Section 37(1) of the Act. The Assessing Officer invoked Section 271(1)(c) of the Act for furnishing inaccurate particulars of income which was noted in the assessment order. However, while issuing the notice, the Assessing Officer did not strike off the inapplicable portion and the notice was sent ‘for having concealed particulars of income or furnishing inaccurate particulars of income’. In the order imposing the penalty, the Assessing Officer noted that the claim of the assessee was unsubstantiated, and had not scrutiny proceedings been invoked against the assessee, the claim would have been allowed illegally and the amount would have escaped income tax altogether. On the question whether the notice was valid even though the inapplicable portion was not struck off, the Court held that since the assessee was intimated in the assessment order that the proceedings were being initiated for furnishing inaccurate particulars of income, the assessee had notice within the meaning of the law and such notice was valid. However, the Court observed that the Assessing Officer in the order imposing penalty noted that the assessee is being charged for concealment of income as well as furnishing inaccurate particulars of income and in the opinion of the Court, this circumstance vitiated the order imposing penalty since the proceedings(notice) had been taken out for furnishing inaccurate particulars of income only.

In my view, if the Court has held that the assessee had notice of penalty for furnishing inaccurate particulars as was stated in the assessment order, and the order imposing penalty is for both concealing income as well as furnishing inaccurate particulars of income, the fact remains that the penalty proceedings were indeed invoked for furnishing inaccurate particulars. The concealment of income as recorded by the assessing officer in the order of penalty may be just incidental or auxiliary, but that by itself cannot amount to the order being vitiated when the orderinfact does mention that the assessee has furnished inaccurate particulars of income albeit it is mentioned alongwith the allegation of concealment of income. Therefore, if the assessee has notice that proceedings are being taken against it for furnishing inaccurate particulars, and the order records both the limbs of inaccurate particulars and concealment of income, the order cannot be said to be vitiated only on the ground that the Assessing Officer has alleged concealment of income in addition to inaccurate particulars of income, since the allegation of inaccurate particulars is still existent and the allegation of concealment may very well be ignored. It must be noted that these minor technicalities of such a nature not affecting the jurisdiction of the concerned authority must not go to vitiate penalty proceedings in entirety since a technicality may always exist, and it is not otherwise on the merits so as to put a quietus to any action of the authorities.

The Court then went on to examine whether a claim by itself would amount to furnishing inaccurate particulars of income and relied upon the case of Reliance Petroproducts to hold that a mere claim cannot amount to furnishing inaccurate particulars. However, in my view if the claim made by the assessee is manifestly absurd, and also if scrutiny proceedings were not taken up by the Assessing Officer, the claim would have been allowable even though it is unsubstantiated and false. The Court has also referred to the judgment of the Delhi High Court which states that if the assessee has a plausible-bona fide claim then that cannot be made the subject of a penalty. The facts of the present case indicate to the contrary. Moreover the Court notes that all the facts were before the Assessing Officer, but this is irrelevant since it is the Assessing Officer who in the first place chose to make a scrutiny assessment without which the claim would have gone un-noticed.By making the claim as aforesaid, in my view, the assessee has deliberately tried to evade payment of tax. The case would surely fall within the purview of furnishing inaccurate particulars by the assessee and such a practice of making such absurd claims ought to have been discouraged.

• In the case of CIT Vs. Samson Perinchery [2017] 392 ITR4(Bom), the Hon’ble Bombay High Court was faced with the question whether, if in the notice under Section 274 the Assessing Officer alleges that the assessee has furnished inaccurate particulars of income and in the order imposing penalty, that the assessee has concealed income, would the order be sustainable in law? Relying upon the Karnataka High Court decision in CIT v. Manjunatha Cotton and Ginning Factory [2013] 359 ITR 565(Karn) the Court held that furnishing inaccurate particulars of income and concealment of income have two separate meanings. Relying upon the decision of the Supreme Court in T. Ashok Pai v. CIT [2007] 292 ITR 11(SC), the Bench held that the Supreme Court has itself held that the two phrases have different connotations, and further that the assessee would provide its response based upon the notice served upon it under Section 274 of the Act. Therefore, in the circumstances, the Court dismissed the appeal. In my view, concealment of income means some deliberate/mala-fide omission of the assessee to include certain receipts in the return; the non-furnishing of such particulars thereby concealing the income and avoiding payment of tax. Furnishing inaccurate particulars would mean making a claim in the return, which is undoubtedly made mala-fide. Thus, if the assessee is not intimated on the specific charge, it would not be deleterious to his case, since once the meaning assigned to the words concealment of income and inaccurate particulars of income are understood, the omission to strike off the words will only be a mere technicality not vitiating the entire penalty proceedings.This for the reason, that the assessee would himself know the difference and would not be too interested in knowing the specific charge, as it would be already understood by him. His real attention would rest on other factors on the merits of the issue.

• In the case of PCIT Vs.Abode Construction Ltd.(Income Tax Appeal No. 794 of 2017 decided on 16.09.2019), the Hon’ble Bombay High Court held that if the assessee bona fide did not offer certain income to tax, that the bona fides in the facts and circumstances were well established and if the matter was debatable, no penalty addition could be made on the assessee. In this case, the assessee did not offer to tax income on account of completion of a construction project as it was following the project completion method of accounting. The Court held that since a Special Bench of the ITAT had been set up to decide when the project in fact was completed for the purposes of revenue recognition, and since there was ongoing litigation between the parties, it was indeed difficult for the assessee to account for and offer the amounts to tax. The bona fides of the assessee were therefore established and consequentially no penalty could be levied. The appeals were therefore dismissed.

• In the case of CIT Vs. Nalwa Sons Investments Ltd[2010]327 ITR 543(Delhi), the Hon’ble Delhi High Court held that when the book profit is deemed to be the total income of the assessee and tax has been paid under the provisions of Section 115JB, then there can be no evasion of income tax and consequentially, no liability to penalty. The Court observed that although it can be said that there was evasion of tax under the normal procedure or under the total income, once the assessee has been assessed under Section 115JB of the Act and the tax thereon has been paid, there can be no concealment of income since the tax due had already been paid to the Department. The SLP filed against this decision has been dismissed by the Supreme Court. In my view, the decision of the Delhi HC is correct in law there being no scope for alleging concealment of income.

• In the case of Samson Maritime Ltd. Vs. CIT [2017]393 ITR 102(Bom), the assessee had tonnage income and non-tonnage income. The foreign exchange fluctuation loss from tonnage income was debited against non-tonnage income to reduce the income. No foreign exchange loss was found over the non-tonnage income. The Hon’ble Bombay High Court observed that this action was deliberate and the ratio of Price Waterhouse Coopers would not assist the assessee since in this case, there is no valid explanation from the assessee as to why the amount was debited. In Price WaterHouse Coopers, there was a mere computation error since the tax audit report had already indicated that the deduction was not allowable and on account of a silly mistake, the amount had been debited and not added back. Moreover, the defence of a mistake was raised by the assessee for the first time during assessment proceedings pursuant to a notice issued under section 142(1) of the Act and not during the filing of the return. Therefore, even the decision of MAK Data of the Supreme Court applied on all fours to the case of the assessee. In the circumstances, the Court was of the opinion that the penalty was justified. In my view, the reasoning of the Hon’ble Court is not in accordance with law. Simply because the assessee had debited the amount against other income, that per se would not invite penalty inasmuch as the assessee could be under a bona fide belief that his income is one and the same and the debit under another head is allowable. Thus, no penalty is justified.

• In PCIT vs. M/s Shree Gopal Housing & Plantation Corporation, Mumbai(Income Tax Appeal 701 of 2015 dated 6.2.2018), the Hon’ble Bombay High Court has held that it cannot be a universal rule that once the quantum appeal is admitted, the penalty proceedings have to be dropped. However, if the appeal in quantum proceedings is admitted and requires a pure interpretation of law, or is admitted on a claim of deduction on which full disclosure is made, the issue is debatable and the penalty can be deleted. There may be cases where an appeal in quantum proceedings is against an order of the Tribunal which is perverse. Thus, the appeal against the deletion of the penalty may then also be required to be admitted. In other words, the penalty proceedings cannot be dropped ipso facto by the admission of the quantum appeal. The case of CIT vs. M/s. Nayan Builders and Developers[2014] 368 ITR 722 (Bom)(HC) was distinguished as in that case, the Tribunal had rightly deleted the penalty and the claim of deduction was bona fide.

A brief examination of the newly added penalty provisions: Section 270A and Section 270AA of the Act.

• Section 270A of the Act was introduced by the Finance Act, 2016 w.e.f April 1, 2017. Only the Assessing Officer, Commissioner(Appeals), the Principal Commissioner or Commissioner may direct that any person who has underreported his income to pay a penalty in addition to tax, if any, on the under-reported income.

• A person is considered to have under-reported his income if:

(a) The income assessed is greater than the income determined in the return processed under Section 143(1)(a).

(b) The income assessed is greater than the maximum amount not chargeable to tax, where no return has been furnished, or where return has been furnished for the first time under Section 148 of the Act.

(c) The income reassessed is greater than the income assessed or reassessed immediately before such reassessment.

(d) The amount of deemed total income assessed or reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income determined in the return processed under clause (a) of sub-section (1) of section 143;

(e) The amount of deemed total income assessed as per the provisions of section 115JB or section 115JC is greater than the maximum amount not chargeable to tax, where 16[no return of income has been furnished or where return has been furnished for the first time under section 148];

(f) the amount of deemed total income reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income assessed or reassessed immediately before such reassessment;

(g) the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.

In my view, the above situations are exhaustive. The Act has provided for the above situations and the above situations only where a person may be subject to a penalty for underreporting of income. This is clear with the deliberate omission of the words shall include while drafting the above provision. The assessee would not be chargeable to a penalty in the absence of any one of the above situations in the facts and circumstances of its case.

• Sub-section (6) of Section 270A states what will constitute under-reporting of income

• The amount of under-reported income is provided for in Section 270A(3) of the Act.

• The penalty leviable shall be a sum of 50% of the amount of tax payable on the under-reported income.

• If the under-reporting of income is on account of misreporting thereof, the tax payable on such income shall be @ 200% thereof.

• The cases of misreporting of income 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.

• The tax payable on the under-reported income is provided for in sub-section 10.

• An interesting part of the new provision is sub-section 11 which states that, no addition or disallowance of an amount shall form the basis for imposition of penalty, if such addition or disallowance has formed the basis of imposition of penalty in the case of the person for the same or any other assessment year.

In other words, it states that the penalty cannot be levied twice over for the same default on the part of the assessee. This applies whether the penalty is for the same or any other assessment year. It does not mean that if the assessee under-reports its income for any financial year, and in the second year again deliberately under-reports its income again, it cannot be subject to a penalty for the second year. The provision only saves the levy of penalty twice over where the assessee has underreported his income and has been penalised for a particular assessment year and therefore cannot be subject to that very same penalty again.

• Lastly, sub-section 12 states that the order of penalty shall be in writing by the Assessing Officer, Commissioner(Appeals), Commissioner, or Principal Commissioner as the case may be.

Section 270AA of the Act

• Under sub-section 1 of Section 270AA, the assessee may make an application for waiving the penalty or prosecution under Section 276C or Section 276CC of the Act if the assessee pays the assessed or reassessed tax under Section 143(3) or Section 147 within the period specified in the notice of demand AND no appeal is filed against the orders referred to above.

• As per sub-section 2 the application needs to be made within one month from the date when the above order is received and must be made in the prescribed format.

• As per sub-section 3, the Assessing Officer shall grant immunity from penalty and prosecution only if the proceedings for penalty have not been initiated as stated in sub-section 9 of 270A. Sub-section 9 of Section 270A deals with mis-reporting of income. In other words, if the penalty is imposable for under-reporting of income only and the penalty proceedings have been initiated, the immunity from penalty and prosecution shall still be granted by the Assessing Officer even though the said penalty proceedings have been initiated as per sub-section 3.

• As per sub-section 4, the Assessing Officer is required to dispose of the application referred to in sub-section 1 within one month from the end of the month in which the application is received after giving the assessee an opportunity of being heard.

• As per sub-section 5 the order referred to in sub-section 4 shall be final.

• Lastly, under sub-section 6, if the Assessing Officer by order under sub-section 4 accepts the application of the assessee, no appeal shall lie against the order of assessment or reassessment under clause(a) of sub-section 1. In other words, once the assessee has been granted immunity from penalty and prosecution by paying the tax pursuant to the order under sub-section 1, no appeal can then be filed by the assessee against such an order of assessment or reassessment, as the case may be.

Section 270AA has the laudable object of reducing litigation with the acceptance of the application by the Assessing Officer under sub-section 4. The provision is surely beneficial to the assessee. By paying the income tax on the income assessed, it will be immune from penalty as well as prosecution.

As per CBDT Circular No. 5/2018 dated 16.8.2018 the CBDT has clarified that if the application under Section 270AA(1) is made, seeking exemption from penalty under Section 270A and exemption from prosecution under Section 276C and Section 276CC, then simply because there is/are penalty proceeding(s) under Section 271(1)(c) pending for earlier years on the same issue, the authority shall not take an adverse view in the those proceedings on account of the assessee having acquiesced to his liability in the later year by making the application. The CBDT has clarified that the assessee may comfortably contest the penalty proceedings under Section 271(1)(c).

This circular is a much needed restraint on the authorities from upholding the levy of penalty in proceedings under Section 271(1)(c) of the Act in a routine manner, simply because an application is preferred in a later year under Section 270AA(1) on the same issue. There is a lot of difference in the conditions precedent to invoke penalty under Section 271(1)(c) and Section 270A of the Act. Therefore, while the issues on facts are the same, in law, the facts would require separate interpretations under both the sections. Therefore, the Circular in my view has correctly distinguished penalty under Section 271(1)(c) and Section 270A of the Act. If the assessee has acquiesced by preferring an application under Section 270AA, the issue with respect to penalty under Section 271(1)(c) for earlier years is still open.

Conclusion

On a conspectus of the above judgments delivered by the Supreme Court and various High Courts, a question arises that if mens rea is not necessary to invoke penalty proceedings, what if the assessee does not offer to tax certain amounts and there is no mens rea? If there is mens rea, that would certainly weigh with the courts and the asssessee would be penalised. But what if the element of mens rea is completely absent? In Price WaterHouse Coopers the amounts in question were not offered to tax but the Supreme Court accepted the explanation of the assessee as a bona fide one. Thus, the inadvertence was excused. Similarly, in Dilip Shroff, the report of the registered valuer, an expert in the field, was accepted by the Supreme Court to the extent that it held that in such cases, the assessee cannot be blamed for relying on such a report.

There is no thinner line between what does or does not constitute a penalty in the hands of the assessee: while mens rea may not be necessary to constitute penalty, if the assessee is not acting bona fide he may be subject to a penalty under Section 271(1)(c) of the Act. Isn’t it obvious that if the assessee is not acting with any guilty intention, he is acting bona fide? Simply viewed, that seems to be the answer. But is it a valid answer? If there is no mens rea, then the assessee is acting bona fide, and if the assessee is acting bona fide, no penalty is imposable! Therefore, when is the principle applicable that if there is no mens rea, yet penalty may belevied as laid down in Dharmenrdra Textile Processors? The line grew even thinner when the Supreme Court in PriceWaterhouseCoopers quashed the penalty proceedings even when blameworthy conduct was attributable to the assessee. After all if the assessee acts inadvertently, the only conduct attributable to him is blameworthy. In this case, there was no mens rea, and of course so to say the assessee acted bona-fide. And it is precisely the bona fides of the assessee that weighed with the Hon’ble Judges to hold that even if the conduct is blameworthy, if it is bona fide, no penalty is attributable. It is not always that the penalty needs to be levied at the maximum of three times the amount of tax. If the Apex Court believed that the conduct of the assessee was bona fide but blameworthy it could have upheld the levy to the extent of the amount of tax not paid. To establish the bona fides of the assessee in every case where even though it has accepted its mistake is indeed a daunting task and the precedent has mandated precisely that. Some progress has been made as can be seen in the case of Samson Maritime where the case of Price Waterhouse Coopers was explained and clarified as a mere computation error in the return that had not been rectified leading to a bona fide mistake. On this basis, the inadvertence was genuine and excused. Yet, can inadvertence always be excused? It would be unfair to hold another assessee liable to penalty on account of inadvertence with the judgment of Price WaterHouse Coopers though it seems logically that inadvertence must not in every case be excused. If inadvertence in all cases is to be excused, that would be prejudicial to the Revenue. After all, inadvertence relates to blameworthy conduct on the part of the assesseewhich must not always be excused and the Assessing Officer with great pains realises the inadvertence on the part of the assessee. Thus, in my view the inadvertence in Price WaterHouse Coopers should not have been let off without the payment of at least 100% of the penalty. Otherwise, it is near impossible to hold the assessee liable to penalty under any circumstances in cases of inadvertence and to balance the tax equation, some amendments are necessary. Section 270A of the Act has been introduced and applies from assessment year 2017-2018 onwards. It will be of interest to see the evolution of the new penalty law in the times to come.

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