Penalties and Prosecutions

1. Penalties and Prosecutions By - Pawandeep Kaur GCG-11

2. Introduction • For the purpose of effective and satisfactorily implementation of any law certain penalties & prosecutions are provided. • therefore Under the IT Act certain penalties and prosecution have been provided . • As the number of tax payers is increasing, the tax administration has necessity to rely more and more on voluntary compliance of tax laws by the assessees and therefore appropriate penal and prosecution provisions are provided.

3. PENALTY U/S 140A(3) • NATURE OF DEFAULT: • Failure to pay the whole or any part of self assessment tax or interest or both in accordance with the provisions of se. 140A(1). • MINIMUM PENALTY: • Amount impose by AO for default or continuing default. • MAXIMUM PENALTY: • Amount of tax in arrears. • WHO CAN IMPOSE PENALTY? • Assessing Officer.

4. PENALTY U/S 221(1) • NATURE OF DEFAULT: • Failure in making payment of tax within prescribed time. • MINIMUM PENALTY: • As amount impose by AO. • MAXIMUM PENALTY: • Amount of tax in arrears. • WHO CAN IMPOSE PENALTY? • Assessing Officer.

5. PENALTY U/S 271(1)(b) • NATURE OF DEFAULT: • Failure to comply with a notice u/s 142(1) or 143(2) or with a direction issued u/s 142(2A) • Sec. 142(1): regarding giving notice to the assessee for return of income, furnishing document and accounts, furnishing other information, • Sec. 143(2): regarding the producing any evidence • Sec. 142(2A): direction regarding books of accounts audited

6. MINIMUM PENALTY: • 10000 for each failure • MAXIMUM PENALTY: • 10000 for each failure • WHO CAN IMPOSE PENALTY? • Assessing Officer • Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed.

7. PENALTY U/S 271(1)(c)/(d) • NATURE OF DEFAULT: • Concealment of the particulars of income or furnishing inaccurate particulars of income. • MINIMUM PENALTY: • 100% of tax sought to be evaded • MAXIMUM PENALTY: • 300% of tax sought to be evaded • WHOCAN IMPOSE PENALTY? • AO / CIT(appeal)/ CIT

8. sec. 271(1)(c) is applicable if the following conditions are satisfied- • penalty can be imposed by AO / CIT(appeal)/CIT • It can be imposed in the course of proceedings and • Assessee has concealed particulars of his income or furnished inaccurate particulars

9. Explanations to Sec. 271(1): • Explanation 1 to sec.271 if any addition are made in the total income because of following reasons then these additon is deemed to be concealed income. • If assessee fails to offer an explanation or expalnation is offer but it found to be false. • An explanation is given by assessee but he is not able to prove that such explanation is true.

10. Judicial decisions: • Penalty should be imposed by the AO and first appeallate authority/commissioer[kamlapatMotilal v CIT(1962)] • Involumtary surrender of income does not avoid penalty [CIT v Mohd. MohtramFarooqui(2003)] • No penalty if the facts of the transation are disclosed[ChandrapalBagga v IT Appellate Trebunal (2003)] • Revised return after detection of concealed income offers no immunity from penalty [CIT v Dr. A. Mohd. Abdul Khadir (2003)]

11. No penalty for concealment if the claim of the assessee is arguable [CIT v Harshvardhan Chemicals & Minerals Ltd. (2003)] • Penalty u/s 271(1)(c) may be imposed in case of a surrender [CIT v Kerala Transport Co. (2004)] • No penalty unless there is a deliberate attempt (mens-rea) [CIT v Ashim Kumar Agarwal (2005)] Mens-rea: if a person does something incorrect deliberately even though he know that his act is against law. 8) Order of penalty must clearly state the nature of penalty [New Sorathia Engineering Co. v CIT (2006)]

12. Explanation: 2 to sec.271: Sometimes addition made by AO for purely tech. reason e.g. disallowances of certain expenses, shortfalls, presumptive rate of GP etc. No penalty shall be levied in respect of these addition if assessee provide adequate evidence. WHEN EXPLANATION : 2 IS APPLICABLE • The source of any receipt, deposit, expense or investment in any current year is claimed by assessee to be amount which had been added in computing the income or deducted the loss in the assessment of such person for any earlier year.

13. 2). in earlier year no penalty had been levied on account of such addition, etc. under sec. 271(1)(c) 3). That part of the amount so added or deducted in such earlier year which is sufficient to cover the amount represented by such receipt, Deposit or expense or value of such investment shall be treated as the income of the assessee, particulars of which had been furnished for the earlier year.

14. For example: • For the previous year 2007-08(AY 2008-09) the AO makes the following observations: • The assessee has purchased gold on 3-06- 2007 for Rs. 2 lakh for which he is unable to offer any explanation • On his daughter’s marriage, the assessee spends Rs. 12 lakh on May 15, 2007. and the assessee fails to explain the source of expenditure, • Can the AO levy penalty u/s 271(1)(c)? • Is it possible for the assessee to argue in the penalty proceedings that the aforesaid investment / expenditure have been made out of following additions made by the Department in earlier years-

15. SOLUTION: The AO can levy penalty u/s 271(1)(c) an unexplained investment / expenditure of Rs. 1400000 The assessee can explain that the investment is made out of additons made during earlier years- AnantharamVeerasinghaiah & Co. v CIT(1980). However, by adopting such plea, application of Explanation 2 to sec. 271(1) cannot be avoided Rs. 14 lakh will be treated as cancealed income of the earlier years as follows .

17. EXPLANATION 3 to sec.271: • If a person does not file a return of income for an assessment year voluntarily within 21 months from the end of the AY in which income was first assessable and no notice u/s 142(1) and 148 is issued to him till the expiry of the period of filling return, he is treated to have concealed his income and penalty is leviable. • Sec.148:regarding issue of notice where income has escaped from assessment.

18. Explanation 4 to Sec.271: SITUATION-1: Where the loss declared in the return is reduced or is converted into income: where the concealed income or inaccurate particulars has the effect of reducing the loss or converting that loss into income, then the tax sought to be evaded shall be the tax that would have been chargeable on the concealed income as total income:

19. EXAMPLE-1: determine minimum penalty and maximum penalty of assessee on tax sought to be evaded: • Return of loss furnished by assessee for AY 2009-10 :-(-)700000 • Concealed income : 300000 • SOLUTION: • In the above case the loss declared in the return has been reduced by Rs. 300000 due to concealed income. • Therefore penalty will be levied on the tax sought to be evaded Rs. 300000. Tax + EC + SHEC on Rs. 300000(160000 to 300000=10%) 14000+1%+2%=14420. Therefore, • Minimum penalty @ 100% = 14420 • Maximum penalty @ 300 %= 43260.

20. SITUATION-2: Where no return has been furnished by the assessee : amount of tax sought to be evaded = Tax on total income assessed xxxx LESS: (1)Advanced tax xx (2) TDS/ TCS xx (3) self assessment tax xx

21. SITUATION-3: any other case i.e. where total income assessed exceeds the concealed income.: amount of tax sought to be evaded = Tax on total income assessed xxxx LESS: tax on (total income assessed - concealed income) xx

22. EXAMPLE: • Compute the tax payable and penalty imposable u/s 271(1)(c)

23. SOLUTION: • TAX PAYABLE: • PENALTY PAYABLE: Minimum penalty @ 100% = 10300 Maximum penalty @ 300% = 30900

24. EXPLANATION 5 & 5A TO SEC. 271: where a search is initiated on or after 1-06-2007, the following two penalties shall be leviable: • Penalty u/s 271(1)(c) given in explanation 5A • Penalty u/s 271AAA (explanation 5A): Undisclosed income for any previous year found in search initiated on or after 1-06-2007 but the assessee did not file the return of that PY although due date of filing had expired • Any assets and the assessee claims that such assets have been acquired by him by utilizing his income for any PY; • The word assets refrred: Any money, bullion, jewellery or other valuable article or thing

25. 2) Any income based on any entry in any books of account or other documents or transactions and he claims that such entry is for an PY. Which has ended before the date of the search and • Where the return of income for such PY has been furnished before the said date but such income has not been declared in return, or • The due date for filing the return of income for such year has expired and the assessee has not filed the return, then, u/s 271(1)(c), be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income.

26. EXPLANATION 6 to Sec. 271: • Penalty for concealment of income shall not be imposed on so much of the income on which additional tax has been charged u/s 143(1A) • EXPLANATION 7 to Sec. 271: • where in the case of an assessee who has entered into an international transaction defined 92C(4) then the amount so added or disallowed shall be deemed to have been concealed or inaccurate particulars have been furnished. • Satisfaction of the AO or the Commissioner (Appeals) or Commissioner that the price charged (or paid) in such transaction has been determined is in good faith and with due diligence. Then no penalties is leviable under this section. • Sec.92C(4):Regarding computation of ALP.

27. PENALTY U/S 271A • NATURE OF DEFAULT: • Failure to keep, maintain or retain books of account, documents, etc. as required u/s 44AA and rules there under • MINIMUM PENALTY: • Fixed at Rs. 25000 • WHO CAN IMPOSE PENALTY? • AO / CIT (Appeal) • Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed

28. PENALTY U/S 271AA • NATURE OF DEFAULT: • Failure to keep and maintain any such information and document as required u/s 92D(1) & (2) in relation to international transaction. • MINIMUM PENALTY: • 2% of the value of each inter-national transaction. • MAXIMUM PENALTY; • Same as minimum • WHO CAN IMPOSE PENALTY? • AO / CIT (Appeal) • Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed

29. PENALTY U/S 271AAA • NATURE OF DEFAULT: Income found in course of search which is not recorded on or before the date of search in books of accounts or other documents maintained or otherwise not disclosed to CCIT/CIT. • MINIMUM PENALTY: • 10% of the undisclosed income • MAXIMUM PENALTY; • Same as minimum • WHO CAN IMPOSE PENALTY? • Assessing officer

30. PENALTY U/S 271AAA • Penalty @ 10 % of the undisclosed income of the specified PY [Sec. 271AAA(1)]: the AO may, notwithstanding anything contained in any other provisions of this Act, direct that, In a case where search has been initiated u/s 132 on or after 1-06-2007. the assessee shall pay by way of penalty, in addition to tax, if any, payable by him, a sum computed at the rate of 10%of the undisclosed income of the specified PY.

31. 2. No penalty u/s 271AAA in the following case [Sec.271AAA(2)] Where the assessee— • If the asseessee specifies the manner in which undisclosed income has been derived; • Substantiates the manner in which the undisclosed income was derived; and • Pays the tax, together with interest, if any, in respect of the undisclosed income. 3. “Specified PY” means the PY- • Which has ended before the date of search, but the date of filing the return of income us 139(1) for such year has not expired before the date of search and the assessee has not furnished the return of income for the PY before the prescribe date; or • In which search was conducted.

32. Face the challenges Confidently thinking that… “If I can’t, then who can!” And after winning be humble Enough to say.. “If I can, then who can’t”

33. PENALTY U/S 271B • NATURE OF DEFAULT: • Failure to get accounts audited or to furnish a report of such audit as required u/s 44AB • MINIMUM PENALTY: • 0.5 % of total sales, turnover or gross receipts, as the case may be. • MAXIMUM PENALTY: • Rs. 100000 • WHO CAN IMPOSE PENALTY? • Assessing Officer

34. When a person commits the offence u/s 44 AA , the offence is complete. After that there can be no possibility of any offence as contemplated by sec 44 AB and therefore, penalty cannot be imposed u/s 271 B. • Delay on part of the statutory auditors in completing audit of the assessee co-operative society would not justify levy of penalty on the assessee. - Ahmedabad Co-operative dept.stores ( Apna Bazaar) v. ITO[2001] 73 TTJ (Ahd.) 784.

35. Where the accountant left service without finalising accounts, another accountant was engaged and that resulted in delay in finalising accounts as well as getting accounts audited and assessment year under consideration was the first A.Y for compliance of Sec 44AB • Where the assessee contended that as its books of accounts were seized by Customs Department, which had been later taken over by the Income Tax Department, audit was completed late, the assessee had a reasonable and sufficient cause for not getting accounts audited in time as provided in Act.

36. Penalty is impossible in case of failure of Assessee Builder to get accounts audited on ground that it has only received Advance from Customers and as such there is no receipt , sales or turnover as required u/s 44 AB. • Where total sales by the assessee does not exceed Rs. 40 lakh but by including interest receipt, his total receipts exceed Rs.40 lakh, and the assessee is under bona fide belief that it is , in view of above position , not required to get its accounts audited , imposition of penalty on the assessee is not justified – Patel Ambalal Somnath Sarkar v. ITO (2006) 100 TTJ ( Ahd.) 735.

37. PENALTY U/S 271BA • NATURE OF DEFAULT: • Failure to furnish report from an accountant as required u/s 92E • MINIMUM PENALTY: • Fixed at Rs 100000 • WHO CAN IMPOSE PENALTY? • Assessing Officer. • Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed

38. PENALTY U/S 271C • (A) • NATURE OF DEFAULT: • Failure to deduct the whole or any part of tax as required under Chapter XVIIB • MINIMUM PENALTY: • Amount equal to tax which has not been deducted. • MAXIMUM PENALTY: • Same as minimum • WHO CAN IMPOSE PENALTY? • Joint Commissioner • Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed

39. Where tax has already been paid by the payee, on penalty can be levied on the assessee – payer for the failure to deduct tax at source – Wipro GE Medical Systems Ltd. V. Ito [2005] ( Bang.) • Penalty is leviable for default in payment of tax and not for default in payment of interest – Great Valule Foods v. CIT [2009] (Asr.) (Mag.).

40. PENALTY U/S 271C • (B) • NATURE OF DEFAULT: • Failure to pay the whole or any part of the corporate dividend tax as required u/s 115-O or 194B • MINIMUM PENALTY: • Amount equal to tax which has not been paid. • MAXIMUM PENALTY: • Same as minimum • WHO CAN IMPOSE PENALTY? • Joint Commissioner • Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed

41. PENALTY U/S 271CA • NATURE OF DEFAULT: • Failure to collect the whole or any part of tax as required under Chapter XVIIBB • MINIMUM PENALTY: • Amount equal to tax which has not been collected. • MAXIMUM PENALTY: • Same as minimum • WHO CAN IMPOSE PENALTY? • Joint Commissioner • Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed

42. PENALTY U/S 271D • NATURE OF DEFAULT: • Any loan or deposit taken or accepted in contravention of section 269SS • MINIMUM PENALTY: • Amount equal to the loan or deposit taken or accepted. • MAXIMUM PENALTY: • Same as minimum • WHO CAN IMPOSE PENALTY? • Joint Commissioner • Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed

43. PENALTY U/S 271E • NATURE OF DEFAULT: • Any loan or deposit which is repaid in contravention of section 269T • MINIMUM PENALTY: • Amount equal to the deposit which is repaid • MAXIMUM PENALTY: • Same as minimum • WHO CAN IMPOSE PENALTY? • Joint Commissioner • Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed

44. SEC – 269 SS :- • Sec 269 SS provides that if the amount of loan / deposit or the aggregate amount of such loan / deposit is Rs. 20000/- or more , then the same shall not be taken / accepted otherwise than by an account payee cheque / draft. The scheme of legislation is quite clear that no penalty is attracted with reference to amount of loan / deposit below of RS. 20000/- and that penalty would only be exigible with reference to further loan / deposit in exceed of Rs. 20000/- - Ravi Iron & Scrap Co. v. CIT [2001]

45. Ignorance of law is no excuse for violation of provisions of sections 269SS and 269TT [UdaichandSantoshkumar Jain vs ITO 2003] • Where the assessee obtains certain loans from his wife in case for construction of house which was naturally a joint venture for prosperity of family and the transaction did not involve any interest limit and there was no promise to return amount with or w/o interest , it could be said that there was reasonable causes for non complying with section 269SS.[Dr. B.G. Panda v. CIT 2000]

46. In case the assessee had accepted deposit or taken loan from agriculturalist who had no bank account default was mainly technical in nature and penalty was not attracted [ITO v. Tarlochan Singh 2003] • When the credit entry made in books of account of assessee are by way of transfer entry, there had been no deposit as per mode of section 269SS.[CIT v. Lala Murari Lal and Sons 2004]

47. No penalty can be levied where the loan had been received by the assessee in a case exceeding the prescribed limit from the family member on a Sunday, to be kept in safe custody and use in business.[CIT v. T. R. Renagrajan 2005]

48. PENALTY U/S 271F • NATURE OF DEFAULT: • Failure to furnish a return of income as required by section 139(1) before the end of the relevant assessment year. • MINIMUM PENALTY: • Fixed at Rs. 5000 • WHO CAN IMPOSE PENALTY? • Assessing Officer. • Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed

49. THANK YOU…!