Penalty for under reporting and misreporting of income
Section 98 of Finance Act 2016 has inserted New section 270A in Income Tax Act 1961
Brief of Penalty for under reporting and misreporting of income
- The Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner (‘specified authority’) are empowered to order payment of penalty
- The direction for penalty should be during any proceedings under the Act;
- The power is discretionary as Section 270A(1) uses the word ” may “.
- The power can be exercised where a person has under reported his income [Section 270A(1)];
- Cases in which it can be said that the person has under reported his income are provided in Section 270A(2) (having regard to the returned income and assessed or reassessed income)
- Quantification of under reported income Provided in Section 270A(3)
- Penalty is also provided in respect of additions made and explained as source of investments, in subsequent years and in respect of additions no penalty was levied for such preceding year [Section 270A(5) read with Section 270A(4) ];
- Certain incomes are excluded from under reported income provided the requisite explanation, disclosure of material facts, etc., are made [Section 270A(6)];
- The quantum of penalty is 50% of the amount of tax payable on the under reported income.Section 270A(7)
- The tax payable on under reported income should be calculated,as per sub-section (10) [Section 270A (10)];
- Cases in which under reported income could be regarded as misreported income provided in Section 270A(9)
- If misreporting exists, entire unreported income, without any deduction specified in sub-Section 270A (6) is treated as misreported income,
- Penalty in case of misreported income will be @ 200% of the tax payable thereon [Section 270A(8)];
- In respect of an addition or disallowance, a penalty cannot be imposed once again (if imposed earlier) [Section 270A(11)];
- The order imposing Penalty, by the specified authority, should be in writing [Section 270A(12)].
Insertion of new section 270A.
98. After section 270 of the Income-tax Act [as it stood immediately before its omission by section 105 of the Direct Tax Laws (Amendment) Act, 1987], the following section shall be inserted with effect from the 1st day of April, 2017, namely:—
‘270A. Penalty for under reporting and misreporting of income.—(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.
(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. |
(3) The amount of under-reported income shall be,—
| (i) | in a case where income has been assessed for the first time,— |
| (a) | if return has been furnished, the difference between the amount of income assessed and the amount of income determined under clause (a) of sub-section (1) of section 143; | |
| (b) | in a case where no return has been furnished,— |
| (A) | the amount of income assessed, in the case of a company, firm or local authority; and | |
| (B) | the difference between the amount of income assessed and the maximum amount not chargeable to tax, in a case not covered in item (A); |
| (ii) | in any other case, the difference between the amount of income reassessed or recomputed and the amount of income assessed, reassessed or recomputed in a preceding order: |
Provided that where under-reported income arises out of determination of deemed total income in accordance with the provisions of section 115JB or section 115JC, the amount of total under-reported income shall be determined in accordance with the following formula—
(A — B) + (C — D)
where,
A = the total income assessed as per the provisions other than the provisions contained in section 115JB or section 115JC (herein called general provisions);
B = the total income that would have been chargeable had the total income assessed as per the general provisions been reduced by the amount of under-reported income;
C = the total income assessed as per the provisions contained in section 115JB or section 115JC;
D = the total income that would have been chargeable had the total income assessed as per the provisions contained in section 115JB or section 115JC been reduced by the amount of under-reported income:
Provided further that where the amount of under-reported income on any issue is considered both under the provisions contained in section 115JB or section 115JC and under general provisions, such amount shall not be reduced from total income assessed while determining the amount under item D.
Explanation.—For the purposes of this section,—
| (a) | “preceding order” means an order immediately preceding the order during the course of which the penalty under sub-section (1) has been initiated; | |
| (b) | in a case where an assessment or reassessment has the effect of reducing the loss declared in the return or converting that loss into income, the amount of under-reported income shall be the difference between the loss claimed and the income or loss, as the case may be, assessed or reassessed. |
(4) Subject to the provisions of sub-section (6), where the source of any receipt, deposit or investment in any assessment year is claimed to be an amount added to income or deducted while computing loss, as the case may be, in the assessment of such person in any year prior to the assessment year in which such receipt, deposit or investment appears (hereinafter referred to as “preceding year”) and no penalty was levied for such preceding year, then, the under-reported income shall include such amount as is sufficient to cover such receipt, deposit or investment.
(5) The amount referred to in sub-section (4) shall be deemed to be amount of income under-reported for the preceding year in the following order—
| (a) | the preceding year immediately before the year in which the receipt, deposit or investment appears, being the first preceding year; and | |
| (b) | where the amount added or deducted in the first preceding year is not sufficient to cover the receipt, deposit or investment, the year immediately preceding the first preceding year and so on. |
(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 fide and 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; | |
| (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. |
(7) The penalty referred to in sub-section (1) shall be a sum equal to fifty per cent of the amount of tax payable on under-reported income.
(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. |
(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; and | ||
| Y = 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. |
(11) No addition or disallowance of an amount shall form the basis for imposition of penalty, if such addition or disallowance has formed the basis of imposition of penalty in the case of the person for the same or any other assessment year.
(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.”.
Memorandum explaining the provisions of the Finance Bill, 2016 :Section 270A Penalty for under reporting and misreporting of income.
“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 1st day of April, 2017 and subsequent assessment years and penalty be levied under the newly inserted section 270A with effect from 1st April, 2017. The new section 270A provides for levy of penalty in cases of under reporting and misreporting of income.”
Finance Bill 2016 Clauses on Section 270A Penalty for under reporting and misreporting of income.
Clause 62
Clause 62 of the Bill seeks to amend section 119 of the Income- tax Act relating to instructions to subordinate authorities.
Clause (a) of sub-section (2) of the aforesaid section empowers the Board to issue directions or instructions for the purpose of proper and efficient management of the work of assessment and collection of revenue provided such directions are not prejudicial to the assessee.
It is proposed to make a reference to section 270A in the said clause (a) of sub-section (2) of section 119, so as to enable the Board to issue directions and instructions in respect of section 270A of the Income-tax Act, as well.
The proposed amendment is consequential to the insertion of a new section 270A in the Income-tax Act which provides for levy of penalty for under-reporting and misreporting of income.
This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-2018 and subsequent years.
Clause 93
Clause 93 of the Bill seeks to amend section 253 of the Income- tax Act relating to appeals to the Appellate Tribunal.
Sub-clause (A) of the said clause seeks to amend clauses (a) and (c) of sub-section (1) of the said section.
Clause (a) and clause (c) of sub-section (1) of the aforesaid section, inter alia, provides for an appeal to the Appellate Tribunal, against an order passed under section 271of the Income-tax Act.
It is proposed to amend the said clauses of sub-section (1) of section 253 so as to provide that an assessee aggrieved by an order passed by the Commissioner (Appeals) or the Principal Commissioner or Commissioner under section 270A, may also appeal to the Appellate Tribunal against such order.
The proposed amendments are consequential to the insertion of a new section 270A in the Income-tax Act which provides for levy of penalty for under-reporting and misreporting of income.
These amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017- 2018 and subsequent years.
Sub-clause (B) of the said clause seeks to omit sub-sections (2A) and (3A) and to substitute sub-section (4) of the said section.
Sub-section (2A) of the aforesaid section provides that the Principal Commissioner or Commissioner may, if he objects to any direction issued by the Dispute Resolution Panel under sub-section (5) of section 144C in respect of any objection filed on or after the 1st day of July, 2012, by the assessee under sub-section (2) of section 144C in pursuance of which the Assessing Officer has passed an order completing the assessment or reassessment, direct the Assessing Officer to appeal to the Appellate Tribunal against the order.
Further, sub-section (3A) of the said section provides that every appeal under sub-section (2A) shall be filed within sixty days of the date on which the order sought to be appealed against is passed by the Assessing Officer in pursuance of the directions of the Dispute Resolution Panel under sub-section (5) of section 144C.
It is proposed to omit the said sub-sections (2A) and (3A) to do away with the filing of such appeal by the Assessing Officer.
It is also proposed to consequently amend sub-section (4) of the aforesaid section so as to exclude therefrom the reference relating to direction of the Dispute Resolution Panel, sub-section (2A) and the order of the Assessing Officer (in pursuance of the directions of the Dispute Resolution Panel).
These amendments will take effect from 1st June, 2016.
Sub-clause (C) of the said section seeks to substitute the proviso to sub-section (6) of the said section so as to provide that no fee shall be payable in the case of an appeal under sub-section (2A) of the said section also, as it stood before the commencement of the Finance Act, 2016.
This amendment will take effect retrospectively from 1st July, 2012.
Clause 96
Clause 96 of the Bill seeks to insert section 270A in the Income- tax Act relating to penalty for under-reporting and misreporting of income.
Under the existing provisions, penalty on account of concealment of particulars of income or furnishing inaccurate particulars of income is leviable under clause (c) of sub-section (1) of section 271 of the Income-taxAct. In order to rationalize the penalty provisions, it has been provided that section 271 shall not apply to and in relation to any assessment for the assessment year commencing on or after the 1st day of April, 2017.
It is proposed to insert a new section 270A for under-reporting and misreporting of income.
Sub-section (1) of the proposed new section seeks to provide that the Assessing Officer, Commissioner (Appeals) or the Principal Commissioner or Commissioner may have the power to levy penalty if a person has under reported his income.
Sub-section (2) of the proposed new section seeks to provide that a person shall be considered to have under reported his income if,–
| (i) | the income assessed is greater than the maximum amount not chargeable to tax, where no return of income is filed; | |
| (ii) | the assessed income is greater than the income determined upon processing under clause (a) of sub-section (1) of section 143, where return is filed; | |
| (iii) | the income assessed is greater than the income assessed or reassessed immediately before such reassessment; | |
| (iv) | the income assessed or reassessed has the effect of reducing the loss or converting such loss into income, |
Appropriate provisions to cover minimum alternate tax and alternate minimum tax cases on the above lines are proposed to be provided.
Sub-section (3) of the proposed section seeks to provide that the amount of under-reported income shall be, in a case where income has been assessed for the first time and the return has been furnished, the difference between the amount of income assessed and the income determined under clause (a) of sub-section (1) of section 143. In a case where no returns has been furnished and income is assessed for the first time, the amount of under-reported income shall be the income assessed, in the case of a company, firm or local authority, and in any other case the difference between the amount of income assessed and the maximum amount not chargeable to tax.
It is further proposed that in a case where income is not assessed for the first time, the under-reported income is proposed to be the difference between the amount of income assessed, reassessed or recomputed in a preceding order.
Appropriate provisions for calculating the amount of under- reported income in a case of applicability of provisions of section 115JB or section 115JC or in case of loss have also been provided.
Sub-section (4) of the proposed new section seeks to provide for calculation of under reported income in case where the source of any receipt, deposit or investment linked to earlier year is proposed to be provided based on the existing Explanation 2 to sub-section (1) of section 271(1).
Sub-section (6) of the proposed new section seeks to provide that under – reported income under this section shall not include certain cases mentioned therein.
Sub-section (7) of the proposed new section seeks to provide that the rate of penalty shall be fifty per cent. of the tax payable on under – reported income.
Sub-section (8) of the proposed new section seeks to provide that the cases of under – reported income falling under misreporting of income shall be liable for penalty at the rate of two hundred per cent. of the tax payable on such misreported income.
Sub-section (9) of the proposed new section seeks to specify the cases of misreporting of income referred to in sub-section (8).
Sub-section (10) of the proposed new section seeks to provide that the tax payable on under-reported income shall be calculated as if such under-reported income was the total income in case of a company, firm or local authority, and at the rate of thirty per cent. of under-reported income in any other case based on the tax rate applicable in case of company, firm or local authority, and in other cases.
Sub-section (11) of the proposed new section seeks to provide that no addition or disallowance of an amount shall form the basis for imposition of penalty, if such addition or disallowance has formed the basis of imposition of penalty in the case of the person for the same or any other assessment year.
Sub-section (12) of the proposed new section seeks to provide that the penalty under the said section shall be imposed by an order in writing.
These amendments will take effect from the 1st day of April, 2017 and will, accordingly, apply in relation to the assessment year 2017-2018 and subsequent years.
Clause 97
Clause 97 of the Bill seeks to insert a new section 270AA in the Income-tax Act relating to immunity from imposition of penalty etc.
It is proposed to provide that an assessee may make an application to the Assessing Officer for grant of immunity from imposition of penalty under section 270A and initiation of proceedings under section 276C, provided he pays the tax and interest payable as per the order of assessment or reassessment within the period specified in such notice of demand and does not prefer an appeal against such assessment order. The assessee can make such application within one month from the end of the month in which the order of assessment or reassessment is received in the form and manner, as may be prescribed.
It is proposed that the Assessing Officer shall, on fulfilment of the above conditions and after the expiry of period of filing appeal as specified in sub-section (2) of section 249, grant immunity from imposition of penalty and initiation of proceedings under section 276C, where the penalty proceedings under section 270A has not been initiated on account of the circumstances of misreporting as laid in sub-section (9) of section 270A.
It is also proposed that the Assessing Officer is required to pass an order accepting or rejecting such application, as the case may be, within a period of one month from the end of the month in which such application is received. However, no order rejecting the application shall be passed by the Assessing Officer unless the assessee has been given an opportunity of being heard and the said order shall be final.
This amendment will take effect from 1st April, 2017 and will accordingly, apply in relation to the assessment year 2017-2018 and subsequent years.
Clause 99
Clause 99 of the Bill seeks to amend section 271A of the Income-tax Act relating to failure to keep, maintain or retain books of account, documents, etc.
The aforesaid section provides for penalty in case of failure to keep and maintain any such books of account and other documents as required under section 44AA or the rules made thereunder, or to retain books of account or documents for the period specified.
It is proposed to amend the said section so as to provide that section 271A shall be applicable without prejudice to the provisions of section 270A.
The proposed amendment is consequential to the insertion of a new section 270A in the Income-tax Act which provides for levy of penalty for under-reporting and misreporting of income.
This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-2018 and subsequent years.
Clause 101
It is proposed to amend the said sub-section (2) so as to provide that no penalty shall be levied under section 270A also in respect of the undisclosed income referred to in sub-section (1) of section 271AAB.
Clause 104
Clause 104 of the Bill seeks to amend section 273A of the Income-tax Act relating to power to reduce or waive penalty, etc., in certain cases.
Sub-clause (i) of the said clause seeks to amend sub-section (1) of the said section.
Clause (ii) of sub-section (1) of section 273A provides for reduction or waiver of penalty imposed or imposable under clause (iii) of sub-section (1) of section 271. Explanation to the said sub-section clarifies that if the nature of income assessed over the returned income is such that it does not attract provisions of clause (c) of sub-section (1) of section 271, then, the person shall be deemed to have made full and true disclosure for the purposes of sub-section (1) of the said section 271.
Further, clause (b) of sub-section (2) of section 273A provides for condition, wherein penalty shall not be waived and reduced under sub-section (1) of section 273A.
It is proposed to make a reference of section 270A in clause (ii) and in the Explanation to sub-section (1) and in clause (b) of sub-section (2) of section 273A, owing to insertion of a new section 270A which provides for levy of penalty for under-reporting or misreporting of income and ceasing of operation of section 271, for the assessment year commencing on or after 1st April, 2017.
This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-2018 and subsequent years.
Sub-clause (ii) of the said clause seeks to insert a new sub-section (4A) in the said section so as to provide that an order accepting or rejecting application of an assessee shall be passed by the concerned Principal Commissioner or Commissioner within a period of twelve months from the end of the month in which such application is received. It is further proposed to provide that no order shall be passed without giving the assessee an opportunity of being heard. However, in respect of applications pending as on 1st day of June, 2016, the order shall be passed on or before 31st May, 2017.
This amendment will take effect from 1st June, 2016
Clause 107
Clause 107 of the Bill seeks to amend section 279 of the Income-tax Act relating to prosecution to be at instance of Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner.
Sub-section (1A) of the aforesaid section provides that prosecution proceeding shall not be proceeded against a person for offences under section 276C or section 277 in respect of whom penalty under clause (iii) of sub-section (1) of section 271 has been reduced or waived under section 273A.
It is proposed to amend the said sub-section so as to provide that the prosecution proceeding shall not be proceeded against a person for offences under section 276C or section 277 in respect of whom penalty under section 270A has also been reduced or waived under section 273A.
This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-2018 and subsequent years.
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