Levy of Penalties,Heads of Income & Aggregation of Income under Income Tax Act

Levy of Penalties,Heads of Income & Aggregation of Income under Income Tax Act Day 3 Session III & IV slide 3.4

INTRODUCTION • Increase in tax payers call for more reliance on voluntary compliance of tax laws by assessees • Appropriate penal provisions needed to impel compliance by imposing additional tax burden in case of non compliance • Penalties to be within reasonable limits to be more effective • Object should be to bend and not to break the tax payer slide 3.4

Penalties in brief slide 3.4

WHEN PENALTY IS NOT LEVIABLE • Penalty is not leviable under section 271(1)(b), 271A, 271AA† , 271B, 271BA† , 271BB, 271C, 271D, 271E, 271F, 271G† , 272A(1)(c)/(d), 272A(2), 272AA(1), 272B‡ , 272BB(1) or 272BBB(1)‡ or 273(1), (2)(b)/(c), if the assessee proves that there was reasonable cause for failure slide 3.4

Time limit for completion of penalty proceedings • Time limit for making an order imposing a penalty is : • a. within the financial year in which penalty proceedings are started ; or • b. within 6 months from the end of month in which action for imposition of penalty is initiated or within 6 months from the end of month in which order of appeal of Commissioner (Appeals) under section 246 or 246A or Tribunal under section 253 is received by Commissioner, • whichever is later. slide 3.4

Time limit for completion of penalty proceedings • However, in case the relevant assessment or other order is the subject-matter of revision under section 263 (or with effect from June 1, 2003, section 264), then the time-limit for imposing penalty is six months from the end of the month in which such order for revision is passed slide 3.4

CASE STUDY • Find out the time-limit for imposition of penalty in the following cases : • 1. On February 10, 2002, the Assessing Officer completes the assessment for the assessment year 2000-01 under section 143(3). For imposing concealment penalty under section 271(1)(c), the Assessing Officer initiates penalty proceedings on February 10, 2002. • 2. In the aforesaid case suppose the assessee files an appeal to the Commissioner (Appeals). The Commissioner (Appeals) passes the order on April 17, 2003 and which is received by the assessee and the Commissioner on April 28, 2003 and May 2, 2003, respectively. slide 3.4

CASE STUDY • An assessee files a revised return after some concealment was detected by assessing officer. The assessing officer imposed penalty u/s 271(1)(c) on the income concealed in the original return. However this is contested by the assessee on the ground that a revised return disclosing the income was filed immediately after the detection and as such he is not liable to pay penalty. Discuss. slide 3.4

CASE STUDY • It has been held by Kerala High Court in the case of P C Joseph & Bros. V CIT (2000) 243 ITR 818 that blameworthiness attached to the assessee with reference to the original return cannot be avoided by filing fresh return after concealment is detected by the assessing authority. • Therefore the assessing officer was justified in imposing the penalty in this case. slide 3.4

Heads of income (Section 14) • 1. Salaries • 2. Income from house property • 3. Profits and gains of business or profession • 4. Capital gains • 5. Income from other sources. slide 3.4

Heads of income (Section 14) • The several heads into which income is divided under the Act do not make different kinds of taxes. Tax is always one; but it may arise under different heads to which the different rules of computation have to be applied. These heads are in a sense exclusive to one another and income which falls within one head cannot be assigned to or taxed under another head—Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362 (SC). slide 3.4

Heads of income (Section 14) • Income has to be brought under one of the heads under section 14 and can be charged to tax only if it is chargeable under the computing section corresponding to that head—Nalinikant Ambalal Mody v. CIT (supra). • n The method of book-keeping followed by an assessee cannot decide under which head a particular income should go—Nalinikant Ambalal Mody v. CIT (supra slide 3.4

Aggregation of income (Section 66) • Income on which no tax is payable under Chapter VII is also to be considered while computing total income of the assessee slide 3.4

Chapter VII • Charge of tax on member’s share in AOP/BOI - The share of a member in the income of the association or body is treated in three different ways, depending upon whether the association or body is chargeable to tax at the maximum marginal rate or at the normal rate or is not chargeable to tax at all. These are : • 1. Where the association or body is chargeable to tax at the maximum marginal rate or at a rate higher than the maximum marginal rate, the share of a member therein shall not be included in his total income at all. • 2. Where the association or body is chargeable to tax at the normal rates applicable to individuals, etc., the share of a member therein shall be included in his total income, but a rebate shall be given on the same under section 86(v). slide 3.4

Section 67A [I.T. Act, 1961]Method Of Computing A Member's Share In Income Of Association Of Persons Or Body Of Individuals • (1) In computing the total income of an assessee who is a member of an association of persons or a body of individuals wherein the shares of the members are determinate and known [other than a company or a co-operative society or society registered under the Societies Registration Act, 1860 (21 of 1860), or under any law corresponding to that Act in force in any part of India], whether the net result of the computation of the total income of such association or body is a profit or a loss, his share (whether a net profit or net loss) shall be computed as follows, namely :- slide 3.4

Section 67A [I.T. Act, 1961]Method Of Computing A Member's Share In Income Of Association Of Persons Or Body Of Individuals • (a) any interest, salary, bonus, commission or remuneration by whatever name called, paid to any member in respect of the previous year shall be deducted from the total income of the association or body and the balance ascertained and apportioned among the members in the proportions in which they are entitled to share in the income of the association or body; slide 3.4

Section 67A [I.T. Act, 1961]Method Of Computing A Member's Share In Income Of Association Of Persons Or Body Of Individuals • (b) where the amount apportioned to a member under clause (a) is a profit, any interest, salary, bonus, commission or remuneration aforesaid paid to the member by the association or body in respect of the previous year shall be added to that amount, and the result shall be treated as the member's share in the income of the association or body; slide 3.4

Section 67A [I.T. Act, 1961]Method Of Computing A Member's Share In Income Of Association Of Persons Or Body Of Individuals • (c) where the amount apportioned to a member under clause (a) is a loss, any interest, salary, bonus, commission or remuneration aforesaid paid to the member by the association or body in respect of the previous year shall be adjusted against that amount, and the result shall be treated as the member's share in the income of the association or body slide 3.4

Section 67A [I.T. Act, 1961]Method Of Computing A Member's Share In Income Of Association Of Persons Or Body Of Individuals • (2) The share of a member in the income or loss of the association or body, as computed under sub-section (1), shall, for the purposes of assessment, be apportioned under the various heads of income in the same manner in which the income or loss of the association or body has been determined under each head of income. • (3) Any interest paid by a member on capital borrowed by him for the purposes of investment in the association or body shall, in computing his share chargeable under the head "Profits and gains of business or profession" in respect of his share in the income of the association or body, be deducted from his share. slide 3.4

Section 68 [I.T. Act, 1961]Cash Credits. • Where any sum is found credited in the books of an assessee maintained for any previous year, and assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year. slide 3.4

Section 68 [I.T. Act, 1961]Cash Credits. • Section 68 enacts deeming provisions : - Section essentially contains a deeming provision, which applies when the assessee’s explanation about a cash credit found in his books is rejected. There is no distinction to be drawn between income resulting from application of section 68 and income accruing from any other of the heads indicated in section 14. [CIT v Ganpatrai Gajanand, (1977) 108 ITR 403] (Orissa slide 3.4

Section 68 [I.T. Act, 1961]Cash Credits. • Section 68 hits also entries in own capital account: -Although the marginal note to section 68 refers to “Cash credits”, the provisions of section 68 can be invoked in relation to an entry in assessee’s capital account. In fact, an entry on the credit side of the capital account shows that the credit entries in that account are larger than the debit entries. The fact some of these credits relate to costs of assets can make no difference. [Dharmavat Provision Stores v CIT (1983) 139 ITR 700 (Bom)] slide 3.4

Section 69 [I.T. Act, 1961]Unexplained Investments • Under section 69 the value of investments made by the assessee in a financial year immediately preceding the assessment year may be deemed to be the income of the assessee of such financial year if – • i. Such investments are not recorded in the books of account, if any, maintained by him for any source of income; and slide 3.4

Section 69 [I.T. Act, 1961]Unexplained Investments • ii. (a) the assessee offers no explanation about the nature and source of the investments, or • (b) the explanation offered by him is, in the opinion of the assessing officer not satisfactory • In cases where the assessee is able to satisfy the assessing officer about the nature and source of only a part of the investment, the other unexplained portion may be added as his income (Jatindra Nath Sarmah v ITO (1978) 113 ITR 898 (Guahati). slide 3.4

Section 69A [I.T. Act, 1961]Unexplained Money, Etc • Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the Assessing Officer satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee of such financial year. slide 3.4

Section 69B [I.T. Act, 1961]Amount Of Investments, Etc., Not Fully Disclosed In Books Of Account. • Where in any financial year the assessee has made investments or is found to be the owner of any bullion, jewellery, or other valuable article, and the Assessing Officer finds that the amount expended on making such investments or in acquiring such bullion, jewellery or other valuable article exceeds the amount recorded in this behalf in the books of account maintained by the assessee for any source of income, and the assessee offers no explanation about such excess amount or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the excess amount may be deemed to be the income of the assessee for such financial year. slide 3.4

Levy of Penalties,Heads of Income & Aggregation of Income under Income Tax Act