Penalties and Prosecutions

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Penalties and Prosecutions
By - Shantilal K Parasia
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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.

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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.

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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.

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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

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• 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.

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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
• WHO CAN IMPOSE PENALTY?
• AO / CIT(appeal)/ CIT

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• 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

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• 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.

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• Judicial decisions
• Penalty should be imposed by the AO and first
  appeallate authority/commissioer kamlapat
  Motilal v CIT(1962)
• Involumtary surrender of income does not avoid
  penalty CIT v Mohd. Mohtram Farooqui(2003)
• No penalty if the facts of the transation are
  disclosedChandrapal Bagga 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)

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• 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)

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• 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.

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• 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.

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• 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 daughters 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-

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Assessment Year ADDITIONS MADE IN TOTAL INCOME Rs. PEENALTY LEVIED U/S 271(1)(c)
2002-03 2000000 120000
2003-04 300000 80000
2004-05 NIL --
2005-06 700000 NO
2006-07 50000 NO

• 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-
  Anantharam Veerasinghaiah 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 .

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Assessment Year ADDITIONS MADE IN TOTAL INCOME PENALTY ALREADY LEVIED ON ADDITION AMOUNT OF CONCEALED INCOME ON WHICH PENALTY SHALL BE LEVIED
2006-07 50000 -- 50000
2005-06 700000 -- 700000
2003-04 300000 80000 220000
2002-03 350000 (1400000-50000-700000-300000) 120000 230000
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• 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.148regarding issue of notice where income
  has escaped from assessment.

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• 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

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• 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
  30000010)
• 140001214420. Therefore,
• Minimum penalty _at_ 100 14420
• Maximum penalty _at_ 300 43260.

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• 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

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• 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

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

PARTICULARS Rs. AMOUNT Rs.
Return of income submitted by assessee for AY 2010-11 170000
Addition made by the assessing officer
(1) Wrong application of law unknowingly and the explanation offered is not found as false by the assessing officer 50000
(2) Deliberate attempt to conceal income by applying law incorrectly, even no explanation is offered 90000 150000
Assessed income 310000
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• SOLUTION
• TAX PAYABLE
• PENALTY PAYABLE
• Minimum penalty _at_ 100 10300
• Maximum penalty _at_ 300 30900

PARTICULARS AMOUNT
Tax payable on assessed income of Rs. 310000 16000
ADD EC SHEC (1 2) 480
Tax liability 16480
PARTICUYLARS AMOUNT
tax on assessed income 16480
LESS tax on (total income assessed - concealed income) tax on Rs. 220000 (310000 - 90000) 6180
Tax sought to be evaded 10300
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• 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

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• 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.

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• 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.

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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

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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

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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

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PENALTY U/S 271AAA

• Penalty _at_ 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.

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• 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.

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Face the challenges Confidently thinking
that If I cant, then who can! And after
winning be humble Enough to say.. If I can,
then who cant
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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

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• 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. ITO2001 73 TTJ (Ahd.) 784.

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• 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.

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• 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.

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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

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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

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CASES

• The Tribunal held that penalty u/s 271 C cannot
  be levied in doubtful cases where the assessee
  had acted in a bona fide manner on basis of
  opinion of its counsel. - ITO v. ABN Amro Bank
  2008 23 SOT 52 ( Delhi)
• Tax is not deductible at source u/s 195 in
  respect of transaction relating to commission
  and retainer fees payable to non resident
  having no office or business operation in India,
  on export earnings . - Ind Telesoft P. Ltd . In
  re 2004 140 taxman 463 ( AAR New Delhi)

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• 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.).

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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

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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

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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

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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

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• 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

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• Ignorance of law is no excuse for violation of
  provisions of sections 269SS and 269TT Udaichand
  Santoshkumar 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

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• 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

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• 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

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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

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