{"id":3357,"date":"2016-11-16T15:22:55","date_gmt":"2016-11-16T09:52:55","guid":{"rendered":"http:\/\/www.itatonline.org\/articles_new\/?p=3357"},"modified":"2016-11-16T15:36:22","modified_gmt":"2016-11-16T10:06:22","slug":"levy-of-penalty-on-deposit-of-unaccounted-cash-us-270a-of-the-income-tax-act-opinions-of-two-eminent-experts","status":"publish","type":"post","link":"https:\/\/itatonline.org\/articles_new\/levy-of-penalty-on-deposit-of-unaccounted-cash-us-270a-of-the-income-tax-act-opinions-of-two-eminent-experts\/","title":{"rendered":"Levy Of Penalty On Deposit Of Unaccounted Cash U\/s 270A Of The Income-Tax Act: Opinions Of Two Eminent Experts"},"content":{"rendered":"

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<\/strong><\/p>\n

<\/p>\n

\"jaiprakash-bairagra\"<\/p>\n

CA Jaiprakash Bairagra<\/strong> <\/p>\n

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<\/strong><\/p>\n

1) The provisions of section 270A are inserted by the Finance Act 2016 w.e.f 1 April 2017.<\/p>\n

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.<\/p>\n

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).<\/p>\n

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). <\/p>\n

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.<\/p>\n

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 \u201cunder-reported income\u201d then question of treating the same as misreporting of income does not arise.<\/p>\n

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.<\/p>\n

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:<\/p>\n\n\n\n\n
Admits undisclosed income substantiates manner in which earned and pays tax and interest and furnishes return declaring such income<\/td>\n10% of undisclosed income
\n  <\/td>\n<\/tr>\n
Does not admit but pays tax and interest and furnishes return declaring such income<\/td>\n20% of undisclosed income<\/td>\n<\/tr>\n
Not covered in above cases<\/td>\n60% of undisclosed income<\/td>\n<\/tr>\n<\/table>\n

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:<\/p>\n

1) tax along with interest as per order u\/s 143(3) is paid within the period specified<\/p>\n

2) no appeal is filed against 143(3) order and application is made within 1 month from the month in which order is received.<\/p>\n

\n

\"Paras-Dawar\"<\/p>\n

CA Paras Dawar<\/strong><\/p>\n

200% Penalty Cannot Be Imposed If Tax Is Paid On Unaccounted Cash In Current Year<\/strong><\/p>\n

Hon\u2019ble 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\u2019ble 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.<\/p>\n

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.<\/p>\n

In this article, the possibility for levy of penalty under section 270A of the Income Tax Act, 1961 (\u2018Act\u2019) 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.<\/p>\n

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.<\/p>\n

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. <\/p>\n

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.<\/p>\n

Under-Reporting of Income<\/strong> <\/p>\n

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)<\/strong> of the Act.<\/p>\n

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<\/strong>. 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.<\/p>\n

Rates of Penalty<\/strong><\/p>\n

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. <\/p>\n

Further, sub-section 8 of section 270A of the Act provides in a case where under-reported income is in consequence of any misreporting<\/strong> thereof by any person, penalty levied shall be 200% of the tax payable on such under-reported income.<\/p>\n

Thus, even for levy of penalty at 200% of the tax payable, it is important that the there must be an under-reported income<\/strong> which must be in consequence of misreporting. <\/p>\n

Levy of penalty where tax has been duly paid<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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. <\/p>\n

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 (\u2018IDS\u2019). 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:-<\/p>\n

\u201cIf 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.\u201d<\/em><\/p>\n

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. <\/p>\n

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. <\/p>\n

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.<\/p>\n

The aforementioned legal position is author\u2019s 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. <\/p>\n

(The author is a practicing Chartered Accountant based in Delhi and can be reached atparas@parasdawar.com or +91 9711107317) <\/p>\n