Finance Bill 2016- Penal Provisions – Sections 270A & 270AA – Demystified
Finance bill ushered in new
regime whereby Penalty for concealment and furnishing of inaccurate particulars
of income has given way to Under-reporting and Misreporting of income.
Due to subjective nature of
the concept, the litigations are bound to arise as to whether there is an
under-reporting or misreporting of income
I have tried to analyze the other critical aspects in the
implementation of section 270A &
270AA.
1.
Applicability
of Section 270A
A)
Section
270A as proposed by Finance Bill 2016 is effected from 1.4.2017
B)
The sunset clause for section 271 read as “The
provisions of this section shall not apply to and in relation to any assessment for the assessment year
commencing on or after the 1st day of April, 2017”
C)
The Supreme
court in Brij Mohan v CIT 120 ITR 1 (1979)(SC) & in CIT v. Onkar Saran and Sons
(1992) 195 ITR 1 (SC) held that law applicable regarding penalty for
concealment is the law in force as on the date of filing Return of Income.
D)
The penalty provision for concealment of
income is deterrent provision and meant to prevent the assessee from indulging
in reporting of income contrary to law of land. What shall be considered
concealment of income/ reporting inaccurate particulars of
income/under-reporting of income (hereinafter
referred to as Incorrect reporting of Income) shall be known to assessee at
the time when he is reporting his income i.e filing return of income and he
cannot be punished for incorrect reporting of income, which was not incorrect
reporting at the time of reporting of income.
E)
Accordingly, following position emerges as
regard applicability of section 271(1)(c) & section 270A :-
a) Section
270(1)(c) will continue to rule the penalty proceedings for Incorrect reporting
of Income for assessment years up to 2016-17 . In other words for assessment to be done
for Assessment year 2014-15, 2015-16 & 2016-17, penalty proceedings, if
any, will be driven by section 271(1)(c) This view is based on following
reasoning:-
i)
Section 271(1)(c) was in force when Return of
income was filled for assessment year prior to assessment year 2016-17 or will
be filed for assessment year 2016-17 before 31.3.2017.
ii)
Sunset provision in section 271 also provides
the applicability of section 271 for assessment done for assessment year
2016-17 or prior to that year.
b) Accordingly,
if pursuant to re-assessment/revision/appellate proceedings for any assessment
year prior to assessment year 2017-18, penalty for incorrect reporting of
income is to be levied, the same shall be administered under provision of
section 271(1)(c).
c) As
a result thereof, provision of section 270A will regulate the penalty
proceedings for incorrect reporting of income for assessment year 2017-18 and
onwards.
d) Further
if return of income for assessment year 2016-17 is belatedly filed after
1.4.2017, then section 270A will govern the penalty proceedings for incorrect
reporting of income, if any.
2.
Time
Limit for Initiation of Penalty Proceedings U/s 270A
a) Under
Section 271, Assessing officer is
required to record his satisfaction for initiation of penalty proceedings u/s
271(1)(c ) in assessment order and thereupon in assessment order itself, AO give direction for initiation of Penalty
Proceedings.
b) U/s
275, where assessee has not appealed against assessment order, Assessing
officer is required to pass penalty order within the financial year in which
Assessment proceedings, in the course of which action for imposition of penalty
has been initiated, are completed or 6 months from the end of month in which
action for imposition of penalty is initiated, whichever period expires later. Suppose
assessment proceedings are concluded in March 2016, then penalty proceedings
are expected to be finalized by Sept 2016.
c) Due
to correlation (initiation of penalty
proceedings in assessment order) between section 275 and 271(1)( c), under existing penalty proceedings, Assessee
is sure of time period within which penalty proceedings will be culminated.
d) I
feel that TIME FRAME FOR CONCLUSION
of penalty proceedings are completely missing in section 270A on account of absence of explicit timeliness
for initiation of penalty proceedings , explained as under:-
i)
Section 270A read as “The Assessing Officer or the Commissioner (Appeals) or the Principal
Commissioner or Commissioner may 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”.
ii)
Under section 270A, there is no requirement for
Assessing offer to record his satisfaction for initiation of penalty
proceedings in Assessment order Thus post conclusion of assessment proceedings,
AO will separately assess, whether there is under-reporting of Income and if
feels so, he will issue separate notice for initiation of penalty proceedings
u/s 270A read with section 274.
iii)
One will appreciate that initiation of penalty
proceedings will be stage posterior to conclusion of Assessment proceedings and
there is no limit prescribed in section 270A or elsewhere for initiation of
penalty proceedings.
iv)
Suppose AO feels that there is no
under-reporting of Income but one year later, his successor, on review of
earlier assessment order feels that there was under-reporting of Income and he
may initiate penalty proceeding after one/two years from conclusion of
assessment proceedings
e) At
present section 275 only control the time limit for conclusion of penalty
proceedings upon initiation of the same. Unless specific time frame for
initiation of penalty proceedings is incarnated post incorporation of section
270A on statue, assessee will always be under threat for initiation of penalty
proceedings for past assessments.
3.
Appeal
against penalty order u/s 270A
a) Section
246A, which provides the list of orders appealable before Commissioner Appeal,
has not been amended to incorporate the penalty order section 270A passed by
assessing officer.
b) However
section 253, providing the list of order appealable before Tribunal has been
amended to include penalty order passed by Commissioner (Appeal) or Principal
Commissioner or Commissioner u/s 270A.
c) It
seems that there is an inadvertent error by not making penalty order u/s 270A
appealable before CIT(A), which I hope, will be taken care at time of passage
of Finance Act, 2016.
4.
Inconsistency
in computing under-reporting income u/s 270A, where income is computed 115JB .
a) The
itinerary of section 270A is as under:-
i)
Section 270A (1) empower Assessing Authority to
levy penalty, where there is an under-reporting of income.
ii)
Section 270A(2) lay down the exhaustive
criterion to determine the case of under-reporting of Income.
iii)
Section 270A(3) determines the quantum of
under-reported income.
iv)
Section 270A (7) levy penalty @ 50% on tax on
under-reported income.
b) The
significance of afore-said is that if at stage ii (section 270A(2)), it is
concluded that there is no under-reporting of Income, there is no need to go to
section 270A(3), as sub-section (3)
contains detailed modes-operandi for computing quantum of under-reporting
income, where section 115JB is applicable to assessee company.
c) Under
section 270A(2), if section 115JB is applicable and Return of Income is filed
by company, then there is under-reporting when deemed total income assessed u/s
115JB is greater than deemed total income determined in intimation issued u/s
143(1)(a).
d) Consider
the following case:-
i)
Income as per Normal Provision- Rs. 10,000
ii)
Book Profit u/s 115JB Rs. 1,00,000
iii)
Tax on Income as per Normal provision Rs. 3,000
iv)
Tax on books profit u/s 115JB Rs. 18,500
v)
Deemed Total income Rs. 1,00,000
vi)
Assessment u/s 143(3) on normal income Rs. 25,000
vii)
Deemed Total Income u/s 143(3) Rs. 1,00,000
·
It is assumed that Returned Income is accepted
in intimation issued u/s 143(1)(a)
·
Even after taking into account addition of Rs.
15,000 u/s 143(3) on normal income, tax on books profit is more than tax on
normal income and hence book profit is taken as deemed total income.
e) Thus
one will appreciate that there is no under-reporting of income in above case as
per measure stated in section 270A(2), as deemed total income on assessment is
same as computed in Intimation u/s 143(1)(a).
f) Thus
when it is established that there is no under-reporting of Income u/s 270A(2),
there is no need to visit section 270A(3) and detailed steps for computing
amount of under reported income in the instance case will be of no use to AO
for levying penalty.
g) Thus
there is urgent need to clear the ambiguity expected to surface again on computation
of penalty where assessee total income is determined u/s 115jB
5.
Provisions
of section 270AA.
a) Section
270AA label as “Immunity from imposition of penalty etc.” propose to be inserted from 1st
April 2017 provides as under:-
i)
An
Assessee may make an application to Assessing officer for non-imposition of
penalty u/s 270A and non-initiation of proceedings u/s 276C (Prosecution
Proceedings), upon satisfaction of following conditions (required conditions)
·
Tax and Interest payable as per assessment order
has been paid within the time allowed under notice of demand.
·
No appeal has been filed against assessment
order.
ii)
Assessing officer will accept the application of
Assessee, where he is satisfied that required conditions have been met and also
the addition to income is not on account of misreporting as per section 270A(9).
b) As
stated at point no. 2, under section 270A, initiation of penalty proceedings are
separated from assessment proceedings. Thus at the time of making application
u/s 270AA for non-imposition of penalty , assessee is not sure how AO will
treat addition to income i.e whether it
is under-reporting of Income or misreporting of income. If AO treats the
addition, as misreporting, assessee right to have non-imposition of penalty
will be lost forever , explained as under:-
i)
There is an addition to returned income and
assessee bona-fide accepts the same.
ii)
Assessee pays tax & interest on addition
carried out in assessment.
iii)
Assessee files an application for immunity from
penalty under section 270AA.
iv)
AO reject the assessee application by holding
that there is misreporting of income and levies penalty u/s 270A.
v)
Assessee files an appeal against the penalty
order and it was finally held that there was under-reporting of income and not
misreporting.
vi)
Now assessee cannot filed an application u/s
270AA again, as the required time limit has been expired and he will forced to
pay penalty @ 50% on tax on under-reported income.
vii)
If assessee application u/s 270AA has been
accepted in beginning, he would have been saved from 50% penalty.
c) Thus
there should be provision in section 270AA for revival of application, which
was rejected on account of misreporting of income, on being held that it was
under-reporting to maintain its benevolent spirit.
d) Further
on making application u/s 270AA, before disposal of application u/s 270AA(1) AO
will wait till the expiry of time for filing the appeal as per section
249(2)(b) expires i.e 30 days from the date of service of notice of demand relating
to assessment. In case assessment order is passed in pursuance of directions of
Dispute Resolution panel, the time limit for filing the appeal to Tribunal is
60 days. Thus it seems to be an error, which I hope will be taken care.
