Penalty Provision – Section 270A- Analysis
Section 270A under Income Tax
Act, 1961, as inserted by Finance Act, 2016, seems to herald the
non-adversarial regime by introducing objectivity in subjective penalty provision
for reporting incorrect income. In this write up, attempt is made to touch upon
the finer aspects in the implementation of section 270A. The analysis is done
under following 3 categories:-
1.
Basis
of Charge & Quantification of Penalty
2.
Addition
to returned Income but not a under-reported income
3.
MAT
vs Penalty
Ø Basis of Charge & Quantification of Penalty.
Section 270A is complete code
in itself providing for basis of charge
and quantification of penalty as
under:-
a) Basis of Charge – Under-reported Income
b) Quantification basis :-
a) Under-reported
income on account of under-reporting
– 50% of tax payable on
under-reported income.
b) Under-reported
income on account of misreporting – 200% of tax payable on under-reported
income.
At this juncture, one may
argue that Under-reported income on
account of under-reporting or
Under-reported income on account of misreporting is basis of charge in itself and aspects of under-reporting & misreporting
do not fall in domain of quantification criterion.
On this basis, can one take
the position that if it is proved that there is no misreporting, then assessee
will be exonerated from penalty proceedings? To me the answer is NO, as same is
not correct interpretation emanating from section 270A, on account of following
simple reasoning:-
i)
Once it is established that there is
under-reported income, then penalty is must. The next step is only
quantification of penalty and for that purpose under-reported income has to firstly
get it filter from misreporting parameters.
ii)
If it fails, then penalty is @ 200% of tax
payable on under-reported income
iii)
If it sails through; the penalty is @ 50% of tax
payable on under-reported income.
Thus under-reporting and misreporting falls
in quantification jurisdiction only.
Now questions for consideration are as under:-
a) Whether
for initiating the penalty proceedings, Assessing Officer (AO) is required to
state basis of charge only or basis of charge is to be accompanied by
quantification basis, in assessment order?
b) If
assessment order contain the basis of charge and basis of quantification of
penalty, can in actual penalty proceedings, AO change the quantification basis?
Reply to question (a)
1. Though
in principle, at the time of initiating penalty proceeding, the only
requirement is to state the basis of charge. The quantification of penalty is
to be concluded in penalty proceedings only, based on submission and
explanation of assessee.
2. But
in view of provision of section 270AA, it seem imperative that quantification
basis is mandatory in assessment order, explained as under:-
a) Section
270AA empowers assessee to make an application to AO to grant immunity from
penalty u/s 270A.
b) AO
will not grant immunity where initiation
of penalty proceedings is on account of misreporting of income.
c) Thus
section 270AA mandates that at penalty initiation stage, stating of
quantification basis is mandatory and where penalty is on account of
misreporting of under-reported income, assessee will not be entitled to
immunity u/s 270AA.
Reply to question (b)
1. Assessment
proceedings and penalty proceedings are two different actions, assessment proceedings
leads to initiation of penalty and penalty proceedings leads to quantification
& culmination of penalty.
2. Thus
where penalty proceedings are initiated on misreporting of under-reported
income and assessee satisfied AO, that conditions of section 270A(9) for
misreporting are not applicable, he will
be justified in levying penalty on the basis of under-reporting of
under-reported income.
3. In
my opinion, theoretically reverse case is also possible i.e initiation is based
on under-reporting but the same being concluded into misreporting but its
practical happening seems remote.
4. In
the case referred to at s.no.2 assessee will lose the opportunity of availing
the benefits of obtaining penalty immunity u/s 270AA. Thus it becomes
imperative that assessee properly present his case in assessment proceedings,
so that basis of initiation of penalty proceedings, if any, is on account of
under-reporting of under-reported income.
Ø Addition to returned Income – No Under-Reported
Income
1. Section
270A(6) prescribe situations, when addition to retuned income will not be
considered as under-reported income. In this respect following two clauses
merit attention, relevant words being emphasized.
Section
270A(6) commences as under:-
“The under-reported income, for the purposes
of this section, shall not include the following, namely :-“
a) Section
270A(6)(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) Section
270A(6)(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.
2. Section 270A(6)(a) – Issue explain as under:-
a) Suppose
in assessment, there is an addition of Rs. 10,00,000 to returned income on
following grounds:-
|
S.No
|
Grounds
|
Amount
|
Remarks – penalty
Perspective
|
Under-Reported Income as
per 270A(6)(a)
|
|
1.
|
Expenditure Disallowed
|
5,00,000
|
Offers bona fide explanation
to the satisfaction of AO
|
YES
|
|
2.
|
Income Added
|
2,00,000
|
Offers bona fide explanation
to the satisfaction of AO
|
NO
|
|
3.
|
Transfer Pricing- ALP
adjustment
|
3,00,000
|
Condition of clause (d) of
section 270A(6) met
|
NO
|
b) Clause
(a) uses the words “income” not “expenditure”. Thus even where disallowance of
expenditure is satisfied to the satisfaction of AO on the basis of bona fide
explanation, possibility of the same being excluded from purview of under-reported
income seems litigative, in view of literal meaning of clause (a) of section
270A(6).
c) In
my opinion, had the word “ under-reported income” being used in place of
“income” in clause (a), as used in other
clauses of section 270A(6), the purpose would have been achieved.
d) Section
119(2) has been amended to empower CBDT to issue order for relaxation of
provision of section 270A. I hope CBDT in exercise of power u/s 119(2) will
issue appropriate order, in this context, for avoiding genuine hardship to assessee.
3.
Section
270(6)(c ) – Issue explain as under:-
a) Clause
(c) exclude levy of penalty in cases, where addition to returned income is on
account of difference of estimate between Assessee and AO. Let’s us take
following cases:-
|
S.No
|
Particulars
|
Assessee
Estimate
|
AO Estimate
|
Under-Reported Income as
per 270A(6)(c )
|
|
1.
|
Income attributable to
Business Connection u/s 9(1)(i)
|
NIL
|
10,00,000
|
Yes
|
|
2.
|
Income attributable to
Business Connection u/s 9(1)(i)
|
2,00,000
|
10,00,000
|
NO
|
|
3.
|
Disallowance of Personal expenditure
u/s 37
|
NIL
|
50,000
|
Yes
|
|
4.
|
Disallowance of Personal
expenditure u/s 37.
|
20,000
|
50,000
|
NO
|
b) The
clause (c) benefit will be available where assessee has estimate lower addition
to income or lower disallowance of expenditure than estimated by AO on same
issue rather NIL addition or disallowance.
c) Thus
in above example, protection under clause (c) will be denied in case mentioned
at S.No.(1) & (3) as assessee himself has estimated NIL income or NIL disallowance.
Ø Penalty vs MAT
1. Consider
the following case:-
i)
Income as per general Provision- Rs. 10,000
ii)
Book Profit u/s 115JB Rs. 1,00,000
iii)
Tax on Income as per general 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 income under
General
provision Rs. 25,000
vii)
Deemed Total Income u/s 143(3) Rs. 1,00,000
2. Section
270A proceeds in sequential manner as
under:-
a) Section
270A(2)- Provide situations when person
is considered to have Under-reported income.
b) Section
270A(3) – Determination of amount of Under-reported income.
c) Section
270A(10) – Determination of tax payable on under-reported income for
quantification of penalty i.e 50%/200% of tax payable on under-reported income.
3. On
income being assessed u/s 115JB in above example, the critical issues involved
in levy of penalty u/s 270A falls under
section 270A(2) & 270A(10) explained in ensuing paragraph
4.
Section
270A(2)
a) Clause
(a) read as under:-
“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
assessment and determination of income u/s 143(1)(a) is made on TOTAL INCOME, but legislature has intentionally
used word “income” in clause (a).
c) Clause
(d) provides that person shall be considered to have under-reported income,
when amount of deemed total income assessed as per provision of section 115JB
is greater than deemed total determined u/s 143(1)(a)
d) In
case of companies, firstly total income is computed as per normal provision of
Act and if tax payable on total income so computed is less than 18.5% of book
profit, then book profit is deemed as total income and tax @ 18.5% is payable
thereon.
e) In
above example,
i)
Deemed total income is same as per assessment
and as determined u/s 143(1)(a) and thus there is no under-reported income
based on total income, if one goes by clause (d).
ii)
Is the intention of legislature in using the
word ‘income” instead of “total income’ in clause (a) to mean income assessed
or computed as per general provision (other than section 115JB) of Act, so as
to rope in the case of above example within the ambit of Under-reported income.
iii)
Had the words Total income being used in clause
(a), it would have rendered clause (d) redundant, because when MAT is
applicable, book profit is total income under Income tax Act, which clause (a)
would have taken care of, if words ‘Total income” had been used instead of
“income”.
iv)
If comparison is confined on the basis of total
income, there would never be the case of under-reported income in example cited
above and thus penalty provision will fail on account of want of basis of
charge of penalty i.e under-reported income. I don’t think legislature intend
to exempt such cases from levy of penalty. Thus it seems that clause (a) will
provide the benchmark to determine case of under-reported income in example
coined.
v)
I hope suitable amendment or judicial
interpretation will only remove the ambiguity.
5.
Section
270A(3)
a) The said section provides for determination of
quantum of under-reported income. In case, where MAT is applicable, the amount
of under reported income is determined as under:-
i)
(A-B) + (C-D)
ii)
A = Total income
assessed as per general provision of Act other than 115JB (25,000)
iii)
B = Total income assessed as per general
provision of Act other than 115JB less under reported income (10,000)
iv)
C = Total income assessed as per provision of
section 115JB (1,00,000)
v)
D = Total income assessed as per provision of
section 115JB less under-reported income (1,00,000)
b) In
example taken, the amount of under-reported income will be Rs. 15,000 (25,000-10,000)+(1,00,000-1,00,000)
6.
Section
270A(10)
a) In
case where return is filed with positive income, the tax payable on
under-reported income will be as under:-
i)
X-Y
ii)
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
iii)
Y = the amount of tax calculated on the total income determined under clause
(a) of sub-section (1) of section 143.
b) What
command thoughtfulness at this stage is explained as under:-
i)
Section 270A(6) used the concept of total income twice – total income as
per general provision and total income as section 115JB
ii)
Section 270A(10) simply used the words total income once i.e total income, as
comprehend on the facts of the case.
iii)
For determining the tax payable on
under-reported in instance case, the total income will be book profit, as
deemed by section 115JB and tax payable thereon accordingly will be @ 18.5%.
c) The
tax payable (ignoring surcharge & education cess for illustration purpose)
on under-reported income in the instant case will be as under:-
i)
X = 18.5% of (1,00,000+15,000) = 21,275
ii)
Y = 18.5% of 1,00,000 = 18,500
iii)
Tax on under-reported income = 2,775
iv)
Penalty @ 50% of tax payable on under-reported
income will be 1388.
