New era of Penalty Provisions under Income Tax Law

New era of Penalty Provisions under Income Tax Law Presentation by KapilGoel FCA LLB Advcoate 9910272806

Overview & Summary of the Presentation • Development and emergence of jurisprudence on penalty provisions under income tax law : a hindsight • Theory of equal hypothesis vis a vis penalty provisions • Theory of Doubtful penalization vis a vis penalty provisions • Change of basis of addition by appellate authorities : Impact on penalty • Challenge to validity of assessment per se? • Disclosure aspect in penalty • New penalty provisions : Metamorphosis and Analysis of the anatomy of provisions • Comparative analysis between old and new provisions • Concept of burden of proof in penalty provisions : the endless conundrum

Overview & Summary of the Presentation • Position of penalty on: • Addition under deeming fictions like section 50C , section 2(22)(e), section 56 etc vis a vis penalty provisons • Impact of admission of substantial question of law u/s 260A and admission of SLP before Supreme court vis a vis penalty provisons • Plea of cross examination vis a vis penalty on basis of accepted additions on basis of back material • Survey based additions : Supreme Court Mak Data 358 ITR 593 impact and ratio • Search based additions : Explanation 5A to section 271(1)(c) STATUS? • Post reopening notice u/s 148 income declared penalty exigible? • If year or head/hands in which addition is to be made is doubtful : impact on penalty? • Revision of order u/s 263 to initiate penalty ?

Delhi high court in New Holland Tractors (India) (P) Ltd. Vs. CIT : 275 CTR 291 (Delhi). • 25. “We have had the advantage of penning the judgment in the appeal preferred in relation to the quantum proceedings and have held that the assessee was wrong in not offering the whole or entire amount of the technical fee for tax in the year of receipt. But, it does not follow that penalty for concealment must be imposed as the quantum appeal is decided against the assessee. The findings in the assessment proceedings cannot be considered as conclusive and final for the purpose of imposition of penalty under section 271(1)(c) of the Act. As per opinion expressed by the Supreme Court in Commissioner of Income Tax, West Bengal I, and Anr. Vs. Anwar Ali [1970] 76 ITR 696 (SC) such findings may constitute good evidence in the penalty proceedings but it does not follow that penalty for concealment under Section 271(1)(c) is mandatory whenever an addition or disallowance is made. The language of Section 271(1)(c) has undergone substantial changes since the pronouncement of the aforementioned judgment, but the said legal position, still hold good. In assessment proceedings, we are primarily concerned with the assessment of income i.e. quantification and computation of total income as per the provisions of the Act, whereas in penalty proceedings we are primarily concerned with the conduct of the assessee. Penalty is imposed not because addition is made but because there is concealment or furnishing of inaccurate particulars by the assessee…”

Supreme court Hindustan Steel case 83 itr 26: Locus classicus • “...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 was guilty of conduct contumacious or dishonest, or act 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.”

Supreme court in Bank of Nova Scotia case 380 ITR 550 • Penalty u/s 271C-Deletion of penalty-Assessee collected tax u/s 201(1) or compensatory interest u/s 201(1A)-Assessee submitted that amounts in question had already been paid so as to end dispute with Revenue-AO levied penalty u/s 271(1)(c) on assessee and same was deleted by CIT(A)- ITAT allowed assessee’s Appeal and deleted penalty levied on assessee-Held, ITAT held that with regard to levy of penalty u/s 271-C it was necessary to establish that there was contumacious conduct on part of assessee- On similar facts Delhi High Court deleted levy of penalty u/s 271-C in case of M/s. Itochu Corporation, reported in 268 ITR 172(Del) and in case of CIT Vs. Mitsui & Company Ltd. reported in 272 ITR 545- Respectfully following aforesaid judgments of Delhi High Court and decision of ITAT, Delhi in case of Television Eighteen India Ltd., ITAT allowed assessee’s appeal and cancelled penalty as levied u/s 271-C High Court rejected appeal of revenue only on ground that no substantial question of law arose in matter- Supreme Court convinced that there was no substantial question of law arose and facts and law having properly and correctly been assessed and approached by CIT(A) as well as by ITAT-Supreme Court found no merits in appeal-Revenue’s Appeal dismissed.”

Supreme court in PWC Case 348 ITR 306 • 17. Having heard learned counsel for the parties, we are of the view that the facts of the case are rather peculiar and somewhat unique. The assessee is undoubtedly a reputed firm and has great expertise available with it. Notwithstanding this, it is possible that even the assessee could make a "silly" mistake and, indeed this has been acknowledged both by the Tribunal as well as by the High Court. 18. The fact that the Tax Audit Report was filed along with the return and that it unequivocally stated that the provision for payment was not allowable under section 40A(7) of the Act indicates that the assessee made a computation error in its return of income. Apart from the fact that the assessee did not notice the error, it was not even noticed even by the Assessing Officer who framed the assessment order. In that sense, even the Assessing Officer seems to have made a mistake in overlooking the contents of the Tax Audit Report. 19. The contents of the Tax Audit Report suggest that there is no question of the assessee concealing its income. There is also no question of the assessee furnishing any inaccurate particulars. It appears to us that all that has happened in the present case is that through a bona fide and inadvertent error, the assessee while submitting its return, failed to add the provision for gratuity to its total income. This can only be described as a human error which we are all prone to make. The calibre and expertise of the assessee has little or nothing to do with the inadvertent error. That the assessee should have been careful cannot be doubted, but the absence of due care, in a case such as the present does not mean that the assessed is guilty of either furnishing inaccurate particulars or attempting to conceal its income. 20. We are of the opinion, given the peculiar facts of this case, that the imposition of penalty on the assessee is not justified. We are satisfied that the assessee had committed an inadvertent and bona fide error and had not intended to or attempted to either conceal its income or furnish inaccurate particulars. 21. Under these circumstances, the appeal is allowed and the order passed by the Calcutta High Court is set aside. No costs.”

M/s.Chennupati Tyre & Rubber Products, Vijayawada T& AP high court I.T.T.A.No.190 of 2003 21-10-2014 • The processing of a return submitted by an assessee is a complicated exercise. More the sources of income from an assessee, higher the amount of scrutiny, that is needed. Even after taking the help of the Chartered Accountant, an assessee may not be correct in his understanding as to the scope of (a) the determination of the total income, and (b) the deductions, which he is otherwise entitled to. The interpretation placed on the respective provisions, itself is not absolute or final. The Courts and the Tribunals are not uniform in their interpretation of the relevant provisions. Obviously, to provide a deterrance to the assessees, the Parliament added Section 271 of the Act, providing for levy of penalty, in case an assessee is found to have suppressed, or concealed income, or posted the incorrect facts. Till it was amended in the year 1964, Section 271(1)(c) of the Act, brought only deliberate concealment, or furnishing of inaccurate particulars as the basis for levy of penalty. Through the Finance Act, 1964, the word deliberately was omitted. Such omission, no doubt, has added new dimensions to the provision. All the same, the revenue has to discharge its burden to prove that there was some intention to conceal or furnish inaccurate particulars on the part of the assessee before penalty is levied. In other words, an inadvertent mistake, or a bona fide belief, as to the classification, or character of an amount, cannot per se provide a ground for levy of penalty. In the ultimate analysis, the sovereign power of the State is only to levy tax, and imposition of penalty is not a principal activity, but a step in the process of collection thereof ….

M/s.Chennupati Tyre & Rubber Products, Vijayawada T& AP high court I.T.T.A.No.190 of 2003 21-10-2014 • It is, no doubt, true that the Tribunal made a reference to the judgment of the Supreme Court in Sir Shadilal Sugar and General Mills Ltd. V. Commissioner of Income Tax , which, in turn, was rendered with reference to the provisions as they stood, before Section 271(c) of the Act, was amended. It is not as if the Commissioner and Tribunal proceeded on the assumption that there was no deliberate attempt on the part of the respondent to conceal the two items. The removal of the word deliberate did not give a free hand to the Assessing Officer or exposing the assessee to a defenceless situation. The principle that runs cutting across any systems of law is that before person is visited with punishment or penalty, the wrongful act on his part must be established. If not a deliberate intention, at least, intention, as such, must be proved to be existing. The intention of this nature may not be equated to the concept of mensrea. At the same time, the minimum contrast with an instance of mere omission, or failure must be made. Otherwise, every inadvertent omission, or a bona fide understanding of a particular provision, which is not accepted by the Income Tax Officer may expose the assessee to penalty. If that time is pursued, Act may turn out to be the one of the collection of penalties than the income tax….

M/s.Chennupati Tyre & Rubber Products, Vijayawada T& AP high court I.T.T.A.No.190 of 2003 21-10-2014 • Recently, in I.T.T.A.No.180 of 2003, we observed as under: • The levy of penalty cannot be resorted to as a matter of course. By their very nature, the returns are bound to be at variance from what is contemplated under the Act or the estimates of the Assessing Officers. Many a time, the understanding of a given provision in a particular way, itself would lead to a considerable difference as to the income or the corresponding tax. The very fact that quite large number of remedies in the form of appeals at various stages is provided for, discloses that even the understanding of the assessing or adjudicatory authorities; not absolute. The levy of penalty is not going to leave the matter at that. It would expose the assessee to prosecution also by treating him as an economic offender. An assessee can be made to suffer such far reaching consequences, if only facts of the case support, and it emerges that the assessee had a clear intention to suppress the income.

Ignorance Of law whether excuse?? • It is well settled that 'Ignorantiajuris non excusat' meaning 'ignorance of law is of no excuse'. However, this maxim has been duly considered by the Hon'ble Apex Court in the case ofMotilalPadampat Sugar Mills Co. Ltd vs State of Uttar Pradesh & Ors reported in (1979) 118 ITR 326 (SC) wherein it was observed that :- “….there is no presumption that every person knows the law. It is often said that every one is presumed to know the law, but that is not a correct statement ; there is no such maxim known to the law. Over a hundred and thirty years ago , Maula J. pointed out in Martindale v Falkner Ms. LeelaMondal AY 2008-09 (1846) 2 CB 706 : " There is no presumption in this country that every person knows the law : it would be contrary to common sense and reason if it were so." Scrutton L.J. also once said : " It is impossible to know all the statutory law, and not very possible to know all the common law. " But it was Lord Atkin who, as in so many other spheres, put the point in its proper context when he said in Evans vsBartlam (1937) AC 473 :" .... The fact is that there is not and never has been a presumption that every one knows the law. There is the rule that ignorance of the law does not excuse, a maxim of very different scope and application." It is, therefore, not possible to presume, in the absence of any material placed before the court , that the appellant had full knowledge of its right to exemption so as to warrant an inference that the appellant waived such right by addressing the letter dt 25th June , 1970 . We, accordingly, reject the plea of waiver raised on behalf of the State Government…”

Equal hypothesis Angle • The Hon’ble Bombay High Court in the case of “CIT vs.Upendra V. Mithani” ITA (L) No.1860 of 2009 decided on 05.08.2009, has observed in the matter of levy of penalty under section 271(1)(c) of the Act, that if the assessee gives an explanation which is unproved but not disproved i.e. it is not accepted but circumstances do not lead to the reasonable and positive inference that the assessee’s case is false, then no penalty can be imposed in such cases. • Same ratio in National Textiles case 249 ITR Page 125 Gujarat high court

Basis of addition modified vs. penalty • IN THE HIGH COURT OF DELHI AT NEW DELHI 16. + ITA 313/2016 • FORTUNE TECHNOCOMPS (P) LTD. ..... Respondent • 13.05.2016 • . Having examined the impugned order of the ITAT and having considered the submissions of the learned counsel for the Revenue, the Court is unable to discern any legal infirmity in the analysis or conclusion reached by the ITAT. Once the assessment order of the AO in the quantum proceedings was altered by the CIT (A) in a significant way, the very basis of initiation of the penalty proceedings was rendered non-existent. The AO could not have thereafter continued the penalty proceedings on the basis of the same notice. Also, the Court concurs with the CIT (A) and the ITAT that once the finding of the AO on bogus purchases was set aside, it could not be said that there was any concealment of facts or furnishing of inaccurate particulars by the Assessee that warranted the imposition of penalty under Section 271 (1) (c) of the Act. • CIT v. AnandaBazarPatrika Pvt. Ltd. (1979) 116 ITR 416 (Cal),

Cross examination Plea : Addition accepted to delete penalty • The Hon'ble Calcutta High Court in the case of CIT Vs. RatanlalSurekha reported as 61 Taxman 133 (Cal.), while upholding the order of Tribunal in deleting the penalty u/s. 271(1)(c) where opportunity was not afforded to the assessee to cross-examine the person on whose confession penalty was levied, the Hon'ble High Court held: “6. We have already stated the facts and circumstances of this case as appearing from the order of the Tribunal. The Tribunal has found that the department has not proved by any cogent evidence that the amount credited as loan taken from Raj Kumar Jain & Co. was the income of the assessee and that the assessee failed to disclose that income in his return. The Tribunal, on the facts, came to the finding that there was no case for levying penalty. That apart, the order of penalty is vitiated because of non-compliance of the principles of natural justice. The assessee was not afforded any opportunity to cross-examine the partner whose confession was sought to be used against him. Accordingly, the confession on the basis whereof penalty was levied ought not to have been relied on by the IAC. This has vitiated the penalty proceeding. In our view, on the facts of this case, the Tribunal has come to a correct conclusion.”

Cross examination Plea : Addition accepted to delete penalty • The Hon'ble Bombay High Court in the case of Shree Nirmal Commercial Limited. Vs. CIT 308 ITR 406 (Bom); deleted the penalty levied u/s. 271(1)(c) on the ground that the assessee was not given opportunity to confront the depositors by way of cross-examination. • Also refer : CIT Vs. M/s Bhimji Bhanjee & Co. (1984)(146 ITR 145)(Bom)

Theory of doubtful penalization : 370 ITR 454 (Delhi high court) • 17. Another reason why we feel Section 40(a)(ia) of the Act should not have been invoked in the present case is the principle of doubtful penalization which requires strict construction of penal provisions. The said principle applies not only to criminal statutes but also to provisions which create a deterrence and results in punitive penalty. Section 40(a)(ia) is a deterrent and a penal provision. It has the effect of penalising the assessee, who has failed to deduct tax at source and acts to the detriment of the assessee‟s property and other economic interests. It operates and inflicts hardship and deprivation, by disallowing expenditure actually incurred and treating it as disallowed. The Explanation, therefore, requires a strict construction and the principle against doubtful penalization would come into play. The detriment in the present case, as is noticeable, would include initiation of proceedings for imposition of penalty for concealment, as was directed by the Assessing Officer in the present case. The aforesaid principle requires that a person should not be subjected to any sort of detriment unless the obligation is clearly imposed. When the words are equally capable of more than one construction, the one not inflicting the penalty or deterrent may be preferred. In Maxwell‟s The Interpretation of Statutes, 12th edition (1969) it has been observed:- • "The strict construction of penal statutes seems to manifest itself in four ways: in the requirement of express language for the creation of an offence; in interpreting strictly words setting out the elements of an offence; in requiring the fulfilment to the letter of statutory conditions precedent to the infliction of punishment; and in insisting on the strict observance of technical provisions concerning criminal procedure and jurisdiction."

Challenge to validity of assessment in penalty proceedings • Karnataka high court in case of BTP Structural India Pvt Ltd order dated 23/07/2008 (ITA 99/2003) • Allahabad High Court in the case of Jai DayalPyareLal vs. CIT, 1972 UPTC 596 (Alld)"It is thus clear that regular assessment order is not a final word upon the plea taken therein or which might have been taken at this stage. The assessee is entitled to show cause in penalty proceedings and to establish the above material and relevant facts which may go to effect his liability or the quantum of penalty. He cannot be held to be debarred from taking appropriate plea simply on the ground that such a plea was not taken in the regular assessment proceedings." • In the case of Deep Chand Kothari vs. CIT [1988] 171 ITR 381 (Raj.), the Hon'ble Rajasthan High Court held that an order passed by an authority without jurisdiction is a nullity, and that its invalidity could be set up whenever and wherever it is sought to be enforced or relied upon • ITAT Delhi Bench in the case of Tidewater Martine International Inc. Vs. DCIT, [2005] 96 ITD 406 (Del.), • Contra:Hon'ble Jammu & Kashmir High Court in the case of CIT vs. Hotel Highland Park [2000] 246 ITR 130 (J&K)

Karnataka high court in Manjunath case a blow to revenue : epic tome on penalty 359 ITR 565 (a) Penalty under Section 271(l)(c) is a civil liability. (b) Mensrea is not an essential element for imposing penalty for breach of civil obligations or liabilities. (c) Wilful concealment is not an essential ingredient for attracting civil liability. (d) Existence of conditions stipulated in Section 271(l)(c) is a sine qua non for initiation of penalty proceedings under Section 271. (e) The existence of such conditions should be discernible from the Assessment Order or order of the Appellate Authority or Revisional Authority. (f) Even if there is no specific finding regarding the existence of the conditions mentioned in Section 271(l)(c), at least the facts set out in Explanation 1(A) & (B) it should be discernible from the said order which would by a legal fiction constitute concealment because of deeming provision. (g) Even if these conditions do not exist in the assessment order passed, at least, a direction to initiate proceedings under Section 271(l)(c) is a sine qua non for the Assessment Officer to initiate the proceedings because of the deeming provision contained in Section 1(B). (h) The said deeming provisions are not applicable to the orders passed by the Commissioner of Appeals and the Commissioner. (i) The imposition of penalty is not automatic.

Karnataka high court in Manjunath case a blow to revenue : epic tome on penalty 359 ITR 565 (j) Imposition of penalty even if the tax liability is admitted is not automatic. (k) Even if the assessee has not challenged the order of assessment levying tax and interest and has paid tax and interest that by itself would not be sufficient for the authorities either to initiate penalty proceedings or impose penalty, unless it is discernible from the assessment order that, it is on account of such unearthing or enquiry concluded by authorities it has resulted in payment of such tax or such tax liability came to be admitted and if not it would have escaped from tax net and as opined by the Assessing Officer in the assessment order. (l) Only when no explanation is offered or the explanation offered is found to be false or when the assessee fails to prove that the explanation offered is not bonafide, an order imposing penalty could be passed. (m) If the explanation offered, even though not substantiated by the assessee, but is found to be bonafide and all facts relating to the same and material to the computation of his total income have been disclosed by him, no penalty could be imposed.

Karnataka high court in Manjunath case a blow to revenue : epic tome on penalty 359 ITR 565 (n) The direction referred to in Explanation IB to Section 271 of the Act should be clear and without any ambiguity. (o) If the Assessing Officer has not recorded any satisfaction or has not issued any direction to initiate penalty proceedings, in appeal, if the appellate authority records satisfaction, then the penalty proceedings have to be initiated by the appellate authority and not the Assessing Authority. (p) Notice under Section 274 of the Act should specifically state the grounds mentioned in Section 271(l)(c), i.e., whether it is for concealment of income or for furnishing of incorrect particulars of income (q) Sending printed form where all the ground mentioned in Section 271 are mentioned would not satisfy requirement of law. (r) The assessee should know the grounds which he has to meet specifically. Otherwise, principles of natural justice is offended. On the basis of such proceedings, no penalty could be imposed to the assessee. (s) Taking up of penalty proceedings on one limb and finding the assessee guilty of another limb is bad in law. (t) The penalty proceedings are distinct from the assessment proceedings. The proceedings for imposition of penalty though emanate from proceedings of assessment, it is independent and separate aspect of the proceedings. (u) The findings recorded in the assessment proceedings insofar as "concealment of income" and "furnishing of incorrect particulars" would not operate as res judicata in the penalty proceedings. It is open to the assessee to contest the said proceedings on merits. However, the validity of the assessment or reassessment in pursuance of which penalty is levied, cannot be the subject matter of penalty proceedings. The assessment or reassessment cannot be declared as invalid in the penalty proceedings.

CIT vs. Pilani Investments & Industries Corporation Ltd. : reported in (2016) 383 ITR 635 (Cal): Disclosure aspect in penalty law • “Hence, the Assessing Officer himself admitted that the assessee had disclosed the said interest income. Disclosure and concealment cannot co-exist. When a finding is recorded that disclosure was indeed made then the conclusion as regards concealment is bad. Furthermore, it cannot also be said that the assessee had furnished inaccurate particulars of income. This is so because there was no material on record to indicate that the particulars furnished by the assessee were factually incorrect. As held in Reliance Petroproducts (supra) merely making a claim which is not sustainable in law by itself will not amount to furnishing inaccurate particulars regarding the income of the assessee.”

CIT Vs. Jai Laxmi Rice Mills, 379ITR 521 (SC) • In the case of Jai Laxmi Rice Mills decided by the Hon’ble Apex Court the question was whether a satisfaction has to be recorded in the assessment order for initiation of enalty u/s 271E of the Act. In the said case, after the levy of penalty u/s 271E of the Act, the original assessment wherein satisfaction regarding initiation of penalty proceedings was expressed, was set aside on appeal filed by the assessee. In the fresh assessment order, there was no expression of any satisfaction regarding initiation of penalty proceedings u/s 271E of the IT Act.

CIT Vs. Jai Laxmi Rice Mills, 379ITR 521 (SC) • “3. After remand, the AO passed a fresh assessment order. In this assessment order, however, no satisfaction regarding initiation of penalty proceedings u/s 271E of the Act was recorded. It so happened that on the basis of the original assessment order dated February 26, 1996, show cause notice was given to the assessee and it resulted in passing the penalty order dated September 23, 1996. Thus, this penalty order was passed before the appeal of the assessee against original assessment order as heard and allowed thereby setting aside the assessment order itself. It is in this backdrop, a question has arisen as to whether the penalty order, which was passed on the basis of the original assessment order and when that assessment order had been set aside, could still survive. 4. The Tribunal as well as the High Court has held that it could not be so for the simple reason that when the original assessment order itself was set aside, the satisfaction recorded therein for the purpose of initiation of the penalty proceedings u/s 271E would also not survive. This, according to us, is the correct propositions of law stated by the High Court in the impugned order. • 5. As pointed out above, in sofaras, the fresh assessment order is concerned, there was no satisfaction recorded regarding the penalty proceedings u/s 271E of the Act though in that order the AO wanted penalty proceeding to be initiated u/s 271(1)( c) of the Act. Thus, in so far as penalty u/s 271E is concerned, it was without any satisfaction and therefore, no such penalty could be levied.”

New law of penalty provisions : Memorandum circular explaining provisions of Finance Act,2016 • Under the existing provisions, penalty on account of concealment of particulars of income or furnishing inaccurate particulars of income is leviable under section 271(1)(c) of the Income-tax Act. In order to rationalize and bring objectivity, certainty and clarity in the penalty provisions, it is proposed that section 271 shall not apply to and in relation to any assessment for the assessment year commencing on or after the 1stday of April, 2017 and subsequent assessment years and penalty be levied under the newly inserted section 270A with effect from 1stApril, 2017. The new section 270A provides for levy of penalty in cases of under reporting and misreporting of income.

Section 270A • Penalty for under reporting and misreporting of income. • 270A. (1) The Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner may, during the course of any proceedings under this Act, 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.

Crucial words in section 270A(1) • Heading of provision starts with word “PENALTY” Possible Implication: that all principles in relation to interpretation of penalty will get activated as a necessary concommitant • ‘May : Refers to discretionary aspect which must be exercised judiciously and with application of mind (refer Delhi high court Madhushree Gupta 317 ITR 107) • Direct: Requires positive and express satisfaction and recording of reasons in writing on part of authority initiating penalty for underreporting etc (refer Karnataka high court in Manjunath case)

Crucial words in section 270A(1) • During the course of any proceedings under the Act: requires live and pending proceedings during which cognizance of stipulated action can be taken; word any used there in should relate to proceedings where income assessment takes place like assessment, revision and enhancement proceedings etc & may not include survey, summon, search as proceedings under the Act which are enquiry and investigation procedures • Lastly, still penalty is levied for underreporting which cannot be equated to tax, interest etc (also see un-amended section 156 etc)

Section 270A(2) • A person shall be considered to have under-reported his income, if— • (a) the income assessed is greater than the income determined in the return processed under clause (a) of sub-section (1) of section 143;(b) the income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished;(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 no return of income has been filed;(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.

Section 270A(6) • (6) The under-reported income, for the purposes of this section, shall not include the following, namely:— (a) the amount of income in respect of which the assessee offers an explanation and the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, is satisfied that the explanation is bona fideand the assessee has disclosed all the material facts to substantiate the explanation offered; (b) the amount of under-reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, but the method employed is such that the income cannot properly be deduced therefrom; (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;

Section 270A(6) d) the amount of under-reported income represented by any addition made in conformity with the arm's length price determined by the Transfer Pricing Officer, 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 (e) the amount of undisclosed income referred to in section 271AAB.

Crucial words used in section 270A(6) • Word “namely” • Word “estimate” • Word “Computation of income” • “Correct and complete”

Section 270A • (8) Notwithstanding anything contained in sub-section (6) or sub-section (7), where under-reported income is in consequence of any misreporting thereof by any person, the penalty referred to in sub-section (1) shall be equal to two hundred per cent of the amount of tax payable on under-reported income. • (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.

Crucial words • What is “misrepresentation and suppression”; • What is “fact” • What is “failure” • What is “not substantiated” • What is “recording” • What is “false” and what is “entry” • What is books of account; • What is meaning of receipt having bearing on “total income” • What is failure to report

Delhi high court in omaxe case Decided On: 15.04.2014 • Misrepresentation has not been defined under the Income Tax Act; importing the definition of misrepresentation or for that matter fraud from the Contract Act in the circumstances would not be appropriate. As one understands, the term “misrepresentation” would mean failure to disclose material or facts which are germane and relevant, or suppressing facts and materials which are germane and relevant or holding out a falsehood which gives the rise to an assumption that what is so stated or represented is true or correct. These are only illustrative and by no means conclusive as to what can be misrepresentation.

Other interpretation • The term suppression includes a mental element to deliberately omit to state certain things; • The settled legal position is that all receipts do not constitute income. For a receipt sought to be taxed as income, the burden lies upon the Revenue to prove that it is within the taxing provision. Among the earlier decisions of the Supreme Court is ParimisettiSeetharamamma v. CIT (1965) 57 ITR 532 (SC).

Computation of penalty : • (10) The tax payable in respect of the under-reported income shall be— • (a)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;(b)where the total income determined under clause (a) of sub-section (1) of section 143 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;(c)in any other case determined in accordance with the formula—(X-Y)where,X = the amount of tax calculated on the under-reported income as increased by the total income determined under clause (a) of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order as if it were the total income; andY = the amount of tax calculated on the total income determined under clause (a) of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order.

Under reoperting of penalty u/s 270A • (12) The penalty referred to in sub-section (1) shall be imposed, by an order in writing, by the Assessing Officer, the Commissioner (Appeals), the Commissioner or the Principal Commissioner, as the case may be. • “Order” ingredients • Application of mind • Consideration of assessee’s reply • Independent Reasons to be given • Natural Justice to strictly adhered to (giving of show cause notice etc)

Approach in penalty imposition • it has been held by the Hon’ble Apex Court that taxing authorities exercise quasi-judicial powers and in doing so they must act in a fair and not a partisan manner. Although it is part of their duty to ensure that no tax which is legitimately due from the assessee should remain unrecovered, they must also at the same time not act in a manner as might indicate that scales are weighted against the assessee. It is impossible to subscribe to the view that unless those authorities exercise the power in a manner most beneficial to the revenue and consequently most adverse to tile assessee. they should be deemed to have exercised it in a proper and judicious manner {CIT v. Simon Carves Ltd. 1]9761 105 ITR 212 (SC)}.

Income Tax Appellate Tribunal - MumbaiQpro Infotech Ltd, Mumbai 13 July, 2016 • 3.7. In our country's legal and constitutional frame work, the role assigned to the income tax department is to act like a 'watch dog' to ensure that tax evasion is checked and legitimate tax collection is augmented, but not to act like a 'scare crow'. In our view, it has been observed on the basis of past experience that by passing such orders which are in blatant disregard of law, the Revenue does not gain anything substantive, but it surely scares away even sincere and honest tax payers. In our considered view, such kind of approach should be avoided in all circumstances so that faith of the tax payers upon the income tax department for its fair, transparent and hassle-free functioning can be increased and as a result of it, voluntary tax compliance can also be strengthened.

New legislation : rule of interpretation The Apex Court in the matter of Directorate of Enforcement Vs. Deepak Mahajan reported in 1994(3) SCC 440 observed as under: “Though the function of the Court is only to expound the law and not legislate, none the less the legislature cannot be asked to sit to resolve the difficulties in the implementation of its intention and the spirit of the law. In such circumstances, it is the duty of the Court to mould or creatively interpret the legislation by liberally interpreting the statue”

Comparision : Key differences

Section 270AA • 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 276C, 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: Providedthat 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.

Burden of Proof • Shifting onus; • Primary burden on revenue to prove under-reporting of income was with animus and intentional by cogent material on records; • Secondary burden on assessee vide section 270A(6) to give explanation –bonafide- with attendant disclosure- substantiated; • Burden on revenue to establish how assessee’s case falls under mis-reporting if so alleged (refer 131 ITR 597 burden to prove positive fact on one who so alleges) • Rebuttable charge

Position in new law of penalty on: • Deeming fictions: earlier position should continue that is addition u/s 50C simplicitor not good enough to levy penalty ; like wise disallowance u/s 40(a)(ia) also not a good ground to levy penalty , section 14A disallowance etc; • Refer RenuHingorani (ITAT Mum), ChimanlalManilal Patel (ITAT Ahd) & Madan Theatres 260 CTR (Cal) 75 etc

Position in new law of penalty on: • Impact of admission of substantial question of law u/s 260A to insulate from penalty: same old position should continue • Refer Bombay high court in cases of : Immortal Financial Services Pvt. Ltd : 21ST MARCH, 2016; Aditya Birla Power Co. Ltd 2nd DECEMBER, 2015.; Thistle Properties Pvt Ltd 22/03/2016;Nayan Builder and Developer Pvt. Ltd.( 231 taxmann 665 • CIT versus HB leasing and finance Co Ltd 334 ITR 367 Delhi high court • Karnataka high court Ankita Electronics (ITA 297/2014) 3.3.2015; Dr HarshaBiliangady 10/03/2015 in ITA 292/2014 • Hon'ble High Court as held in the case of CIT-II vs Liquid Investment and Trading Co. (ITA 240/2009) (Del.) (HC).

Position in new law of penalty on: • Survey based additions • Delhi high court SAS Pharmaceuticals 335 ITR 239; • Vizag bench ITAT in case of Dr VempalaBalaManohardt. 12.08.2016 (bonafide explanation diff. in receipts on basis of impounded documents and books – referral fees paid to doctors is good enough) • Calcutta high court in case of Arun Kumar Khewat (2/12/2015) Held post survey before beginning of assessment u/s 148, income declared – no penalty leviable ;

HIGH COURT OF GUJARAT SHREE SIDHNATH ENTERPRISE : 28/03/2016 • In the opinion of this court, in case of a survey under section 133A of the Act, what is material are the suppressed transactions, if any, which are discovered as a result of the survey. In the present case, no material has been discovered during the survey warranting any further inquiry by the survey party. If consequent upon the survey, the survey party discovers any incriminating material, it may call upon the assessee to explain the same, but when no incriminating material is found, the survey party cannot assume thejurisdiction of the Assessing Officer and call for information in relation to the material which is already on record. In case any concealed income has been discovered, it may justify reopening the assessment. In the present case, no concealed income has been discovered by the survey party, but the assessment is sought to be reopened for the purpose of verification of facts

Supreme court MAK DATA 358 ITR 593 • Gist • “9. We are of the view that the surrender of income in this case is not voluntary in the sense that the offer of surrender was made in view of detection made by the AO in the search conducted in the sister concern of the assessee. In that situation, it cannot be said that the surrender of income was voluntary. AO during the course of assessment proceedings has noticed that certain documents comprising of share application forms, bank statements, memorandum of association of companies, affidavits, copies of Income Tax Returns and assessment orders and blank share transfer 8 deeds duly signed, have been impounded in the course of survey proceedings under Section 133A conducted on 16.12.2003, in the case of a sister concern of the assessee. The survey was conducted more than 10 months before the assessee filed its return of income. Had it been the intention of the assessee to make full and true disclosure of its income, it would have filed the return declaring an income inclusive of the amount which was surrendered later during the course of the assessment proceedings. Consequently, it is clear that the assessee had no intention to declare its true income. It is the statutory duty of the assessee to record all its transactions in the books of account, to explain the source of payments made by it and to declare its true income in the return of income filed by it from year to year. The AO in our view, has recorded a categorical finding that he was satisfied that the assessee had concealed true particulars of income and is liable for penalty proceedings under Section 271 read with Section 274 of the Income Tax Act, 1961.”

HIGH COURT OF RAJASTHANM/s Grass Field Farms & Resorts Private LimitedDate of order : 1st June 2016 • A bare perusal of the aforesaid submission of the assessee clearly makes out that in the penalty proceedings the assessee has not even attempted to establish its bona fide nor submitted any explanation worth considering, before the AO during the penalty proceedings. In our view, when the assessee failed to discharge the onus laid down upon it, and did not offer any cogent explanation except a small letter dated 2.3.2010 which has been reproduced in para 5 hereinbefore, during the penalty proceedings before the AO, there is no option but to uphold the findings of fact by all the three Authorities confirming the levy of penalty. Even otherwise, the breach of civil obligation which attracts a penalty under the provisions of an Act would immediately attract the levy of penalty, irrespective of the fact whether contravention was made by the defaulter with any guilty intention or not. A very heavy onus was placed on the assessee to explain the difference between the assessed income and returned income and the assessee did not discharge the said onus. In the light of the discussion made above and conduct of the assessee, it is thus clear that all the material facts and particulars relating to the assessee's computation of income were never disclosed by the assessee, and it is only as a result of survey that a clear picture came out on the surface. Admittedly, the statements of the persons or/and the three Directors have never been retracted either during the assessment proceedings or during the penalty proceedings at any stage.

HIGH COURT OF RAJASTHANM/s Grass Field Farms & Resorts Private LimitedDate of order : 1st June 2016 • 18. Taking into consideration the above facts viz-a-viz the instant case, in our view the facts are exactly identical where voluminous unrecorded material was found during the course of survey which were impounded by the AO and consequent thereto a surrender was made by the assessee herein, as in the case of Mak Data P. Ltd. (supra). Rather in the instant case, we find that there are not only documents of several unrecorded purchases coupled with the statements of not only the employees and key persons who had purchased the properties but also of the three Directors accepting in unequivocal terms the undisclosed investment and detailing by way of separate annexures, the manner in which undisclosed investment was made year-wise. Therefore, the judgment of Mak Data P. Ltd. (supra) is squarely applicable.

New era of Penalty Provisions under Income Tax Law