Penalty Provision - Section 270A of Income Tax Act, 1961 - Analysis

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.