PENALITI ES IN TAX LAWS

1. PENALITI ES IN TAX LAWS Ambati Chinna Gangaiah FCA

2. Regulatory enactments For appropriate regulations The entries to be interpreted as if the entry is as wide as possible Penal provisions – invoked – for violation even without financial loss Fiscal laws For augmenting revenue Charging section to be construed strictly - Beneficial legislation to be interpreted liberally. In the case of two interpretations – interpretation favouring the assessee is to be adopted Grievance financially necessary for invoking appeal provisions Penal provisions for in accurate particulars – not source of revenue REGULATORY ACTS Vs FISCAL ACTS

3. ABOUT Penalty in Tax Laws QUASI CRIMINAL IN NATURE INACCURATE PARTICULARS ADDITIONS AND REJECTIONS OF DEDUCTIONS IN ASSESSMENTS AGREED AND DONE BY AO OMMISSIONS IN SUBMISSION OF PARTICULARS - WILFUL OR BY MISTAKE

4. LEVY OF PENALTIES • For submission of inaccurate particulars • For submission of material – believing to be false. • For not filing return in time • For not presenting in the hearing given if the notice specifies. • For not responding to the summons issued • For not providing necessary information required. • Not paying admitted taxes and assessed - without - appropriate reason or stay order or pendency of stay application • NRI – TP – Advance Ruling – can be preferred

5. PHASES OF IMPOSITION OF PENALTIES . Completion of assessment • Proceeding for levy of penalty – levy of penalty – different levy through different order – normally invites objects and provide personal hearing • Normally keeps in abeyance till the appeals disposed at the request • Penalty payable only after passing the order – no advance tax provisions apply • Penalty can be challenged even if concerned assessment not challenged in appeal • Penalty can be waived by CIT U/s 273 A once in life • Penalties can be waived by CBDT U/s 119 of IT Act – relax the conditions if required. • Penalties may be imposed for reassessment or revisions cases – no express prohibition – nor express case laws • Penalties in respect of non-compliance of other provisions of Act. • Penalties for default of TDS and other provisions.

6. Submission of accurate particulars – need not proper legal inference • Calcutta Discount Company Vs ITO 41 ITR 191 “…………………. 11. Does the duty however extend beyond the full and truthful disclosure of all primary facts ? In our opinion, the answer to this question must be in the negative. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else far less the assessee to tell the assessing authority what inferences - whether of facts or law should be drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what inferences-whether of facts or law - he would draw from the primary facts 12. If from primary facts more inferences than one could be drawn, it would not be possible to say that the assessee should have drawn any particular inference and communicated it to the assessing authority. How could an assessee be charged with failure to communicate an inference, which he might or might not have drawn? 13. It may be pointed out that the Explanation to the sub-section has nothing to do with "inferences" and deals only with the question whether primary material facts not disclosed could still be said to be constructively disclosed on the ground that with due diligence the Income-tax Officer could have discovered them from the facts actually disclosed. The Explanation has not the effect of enlarging the section, by casting a duty on the assessee to disclose "inferences" to draw the proper inferences being the duty imposed on the Income-fax Officer. 14. We have therefore come to the Conclusion that while the duty of the assessee is to disclose fully and truly all primary relevant facts, it does not extend beyond this. …………….” Rule framed – duty to submit proper particulars and legal inference is duty of AO

7. CIT vs Vegetables Products Limited(1973) 88 ITR 192 SC3 Member Bench Two possible views • Income Tax and Direct Taxes - Income Tax Act, 1961, s.271(1)(a)(i) - Determination of mode of computation of penalty - Held, in order to determine amount of tax on which computation of penalty is to be based, amount of tax already paid by assessee under provisional assessment must be deducted from total amount of tax finally determined • On the other hand, if two reasonable constructions of a taxing provision a re possible that construction which favours the assessee must be adopted. This is a well 'accepted rule of construction recognised by this Court in several of its decisions. Hence all that we have to see is, what is the true effect of the language employed in s. 271 ( 1 ) (a) (i). If we find that language to be ambiguous or capable of more meanings than one, then we have to adopt that interpretation which favours the assessee, more particularly so because the provision relates to imposition of penalty. Let us now read section 271 (1 )(a) (i). The section to the extent material for our present purpose reads • At any rate, the provision in question is capable of more than one reasonable interpretation. – Tax Payable • Govind Impex (Private) Limited and others vs Appropriate Authority, Income Tax Department (SC) (dated 7/12/10) “…………..We do not have the slightest hesitation in accepting the broad submission of Mr. Salve that Penal statute which make an act a penal offence or impose penalty is to be strictly construed and if two views are possible, one favourable to the citizen is to be ordinarily preferred………….” Rule framed – two interpretations – interpretation favourable to assessee – no imposition of penalty

8. SC in K.C. Builders and another Vs ACIT {(2004) 265 ITR 562} – Penalty not to be imposed - assessment on remand directions(restored to the file of AO / Appellate Authority) • In order that a penalty under Section 271(1) (iii) may be imposed, it has to be proved that the assessee has consciously made the concealment or furnished inaccurate particulars of his income. Where the additions made in the assessment order, on the basis of which penalty for concealment was levied, are deleted, there remains no basis at all for levying the penalty for concealment and, therefore, in such a case no such penalty can survive and the same is liable to be cancelled as in the instant case. Ordinarily, penalty cannot stand if the assessment itself is set aside. Where an order of assessment or reassessment on the basis of which penalty has been levied on the assessee has itself been finally set aside or cancelled by the Tribunal or otherwise, the penalty cannot stand by itself and the same is liable to be cancelled as in the instant case ordered by the Tribunal and later cancellation of penalty by the authorities. Rule framed - Penalty has no legs to stand for judicial scrutiny if the assessment itself is set aside and restored to the file of AO / Appellate Authority

9. Penalties in the case of return of loss - SC • Messrs Virtual Soft Systems Limited Vs CIT Delhi-I (2007 (289) ITR 83) “…. 57. There is nothing in the language of Section 271(1)(c) as amended by the w.e.f. 1.4.2003 to suggest that the amendment is retrospective. The amendment in clause (iii) and simultaneously in Explanation 4(a) carried out enlarges the scope of penalty under Section 271(1)(c) to include even cases where assessment has been completed at loss. The same being in the nature of a substantive amendment would be prospective, in the absence of any indication to the contrary. The Finance Bill/ brought about many amendments in the statute, some of which had retrospective operation. The amendment in Section 271(1)(c) was consciously made applicable w.e.f. 1.4.2003 and not with retrospective date…..” • JCIT VS Saheli Leasing and Industries Limited {(2010) 324 ITR 170) (3 Member Bench) “…… 24. Whether income returned was a profit or loss, was really of no consequence. Therefore, even if no tax was payable, the penalty was still leviable. It is in that context, to be noted that even prior to the amendment it could not be read to mean that if no tax was payable by the Assessee, due to filing of return, disclosing loss, the Assessee was not liable to pay penalty even if the Assessee had concealed and/or furnished inadequate particulars……. Impugned order passed by Income Tax Appellate Tribunal and confirmed by Division Bench are hereby set aside and quashed. The Revenue, therefore, would be at liberty to proceed further against the Assessee on merits in accordance with law.….” • Rule framed – Reduction of loss or conversion of loss into profit; invites penal provision if other conditions are fulfilled.

10. PENALTIES – Observations of SC • Chairman, Sebi Vs Shriram Mutual Fund and Another (2006 (5) SCC 361) – “…Therefore, the proceedings under Chapter VI A are neither criminal nor quasi-criminal. The penalty leviable under this Chapter or under these Sections, is penalty in cases of default or failure of statutory obligation or in other words breach of civil obligation…..” • Dilip N. Shroff (Karta of N. D. Shroff Huf) Vs JCIT (2007) (291 ITR 519) –”…. Imposition of penalty is not automatic. Levy of penalty is not only discretionary in nature but such discretion is required to be exercised on the part of the Assessing Officer keeping the relevant factors in mind. Some of those factors apart from being inherent in the nature of penalty proceedings as has been noticed in some of the decisions of this court, inheres on the face of the statutory provisions. Penalty proceedings are not to be initiated, as has been noticed by the Wanchoo Committee, only to harass the assessee. The approach of the Assessing Officer in this behalf must be fair and objective……”

11. Penalties – Observations of SC • Union of India Vs Dharamendra Textile Processors(2008 (306) ITR 277) (3 Member Bench) “………. 27. Above being the position, the plea that the Rules 96ZQ and 96ZO have a concept of discretion inbuilt cannot be sustained.Dilip Shroff'scase (supra) was not correctly decided but Chairman, SEBI'scase (supra) has analysed the legal position in the correct perspectives. The reference is answered. The mater shall now be placed before the Division Bench to deal with the matter in the light of what has been stated above, only so far as the cases where challenge to vires of Rule 967Q(5)……” • (1) Union of India; (2) Commissioner of Customs and Central Excise Vs (1) Rajasthan Spinning and Weaving Mills; (2) Lanco Industries Limited (2009 (238) ELT 3 ) “…24. It must, however, be made clear that what is stated above in regard to the decision in Dharamendra Textile is only in so far as section 11AC is concerned. We make no observations (as a matter of fact there is no occasion for it!) with regard to the several other statutory provisions that came up for consideration in that decision……” • Judgment in Dharamendra Textile applies to only Section 11AC

12. Observations of SC – Assessment accepted – Penalty disputed • CIT Delhi v Atul Mohan Bindal (2009) 317 ITR 1) specifies “…. 14. It goes without saying that for applicability of Section 271(1)(c), conditions stated therein must exist. 15. Insofar as the present case is concerned, as noticed above, the High Court relied upon its earlier decision in Ram Commercial Enterprises which is said to have been approved by this Court in Dililp N. Shroff. However, Dillip N. Shroff has been held to be not laying down good law in Dharamendra Textiles. Dharamendra Textiles is explained by this Court in Rajasthan Spining and Weaving Mills. Having thoughtfully considered the matter, in our judgment, the matter needs to be reconsidered by the High Court in the light of the decisions of this Court in Dharamendra Textiles and Rajasthan Spinning and Weaving Mills……The matter is remitted back to the High Court for fresh consideration …” • Penalty can be disputed even if assessment is not challenged

13. Amount specified in the books of Accounts – bonafide relief in specifying in returns • Sree Krishna Electricals Vs State of Tamil Nadu and Another 2009 (23) VST 249“….The conclusions arrived at by the revenue authorities and the High Court that in fact what was sold was a complete wet grinder which was a new commodity and not merely parts thereof. This being a factual finding, there is no scope for interference in these appeals so far levy of tax is concerned…..……So far as the question of penalty is concerned the items which were not included in the turnover were found incorporated in the appellant's account books. Where certain items which are not included in the turnover are disclosed in the dealer's own account books and the assessing authorities include these items in the dealer's turnover disallowing the exemption, penalty cannot be imposed. The penalty levied stands set aside…." Rule framed – Penalty can not be imposed in respect of items not shown in return on belief of non-taxability

14. Observation of SC– misuse of Forms Under CST Act • (1) Commissioner of Sales Tax, Uttar Pradesh; (2) Hari Oil and General Mills Vs (1) Sanjiv Fabrics; (2) Commissioner of Sales Tax, Uttar Pradesh (2010) 35 VST 1) “….. 17. To put it succinctly, in examining whether mens rea is an essential element of an offence created under a taxing statute, regard must be had to the following factors: (i) the object and scheme of the statute; (ii) the language of the section and; (iii) the nature of penalty……….…22. In view of the above, we are of the considered opinion that the use of the expression "falsely represents" is indicative of the fact that the offence under Section 10(b) of the Act comes into existence only where a dealer acts deliberately in defiance of law or is guilty of contumacious or dishonest conduct. Therefore, in proceedings for levy of penalty under Section 10A of the Act, burden would be on the revenue to prove the existence of circumstances constituting the said offence. Furthermore, it is evident from the heading of Section 10A of the Act that for breach of any provision of the Act, constituting an offence under Section 10 of the Act, ordinary remedy is prosecution which may entail a sentence of imprisonment and the penalty under Section 10A of the Act is only in lieu of prosecution. In light of the language employed in the Section and the nature of penalty contemplated therein, we find it difficult to hold that all types of omissions or commissions in the use of Form 'C' will be embraced in the expression "false representation". In our opinion, therefore, a finding of mens rea is a condition precedent for levying penalty under Section 10(b) read with Section 10A of the Act. …………..” • Rule framed – False declaration invites penalty.

15. Observation of SC – Additions in the assessment • C.I.T., Ahmedabad Vs Reliance Petroproducts Private Limited (2010 (322) ITR 158)“…..Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not, in our opinion, attract the penalty under Section 271(1)(c). If we accept the contention of the Revenue then in case of every Return where the claim made is not accepted by Assessing Officer for any reason, the assessee will invite penalty under Section 271(1)(c). That is clearly not the intendment of the Legislature……” • Criminal offence – not created retrospective – hence penalty not to be imposed for retrospective amendment - Star India Private Limited v Commissioner of Central Excise, Mumbai and Goa [(reported in 1 STR 73 and 3 VST 39 (SC) specified “………………….It is well established that while it is permissible for the legislature to retrospectively legislate, such retrospectivity is normally not permissible to create an offence retrospectively………..” Rule Framed - In respect additional of lack of evidence to the satisfaction of AO, penalty can not be imposed. Rejection of claim or addition can not lead to furnishing inaccurate particulars – Retrospective amendment can not be taken to specify inaccurate particulars

16. Section 273 (A)/ 119 of IT Act • CIT can waive penalty once in life time of the assessee. • Assessee can apply any number of times till the disposal of the petition. • Once the petition is disposed, the assessee can not apply for any other reason. • Normally be disposed – getting report from AO • Not appeable to ITAT – Writ Maintainable Under Article 226 of Constitution - due to non-existence of appeal mechanism • Assessee approach to CBDT – no restriction for waiver – to be decided case by case

17. Deletion of penalty Income Tax • Dropping by AO • Set aside (restore to the file of AO) or delete by Appeal orders • Waiver by CIT U/s 273 A or CBDT U/s 119 • Not outside per view of Settlement Commission • Quashing in Writ Petition VAT (i) Dropping the AA (ii) set aside by ADC /STAT /HC/SC (iii) penalty arises from the date of serving notice – no interest for prior period (iv) Payment of 50% disputed penalty in respect of cases of imposition of penalty for period after May 2009 – No stipulation to first appeal before ADC (iv) quashing in Writ Petition (v) Advance ruling can be preferred

18. Factual presentation On direct or circumstances or possible evidence Not perverse Be reasonable Legal precedents / rules following Within time allowed not violating principles of natural justice To specify particulars presented - accurate Legal inferences To suit the facts of presentation Drawing appropriate inference from the case law presented Applying the logic of the case laws To specify the legal interpretation favourable. Steps to be taken

19. THANK YOU 19