Insights on Budget 2016 Penalty provisions BY H. Padamchand Khincha 1

 Finance Bill, 2016 proposes to replaces existing penalty provisions found in section 271 of the Income –tax Act,  Reason for such amendment – “In order to rationalize and bring objectivity, certainty and clarity in the penalty provisions” [memorandum explaining provisions]  New section 270A provides for levy of penalty in cases of under reporting and misreporting of income.  The new section uses the expressions such as 'under-reporting and misreporting of income' instead of the old expression "concealment of income or furnishing of inaccurate particulars". 2

 Levy of penalty u/s 270A(1) To any person who has under reported his income by the AO or CIT(A) or Principal Commissioner or Commissioner  As per section 270A (7) - Rate of penalty u/s 270A(1) is at 50% of the amount of tax payable on under-reported income.  As per section 270A(12) – Penalty u/s 270A(1) shall be imposed by an order in writing. 3

 As per section 270A (10) – Tax payable in respect of the under reporting income shall be calculated – i. In case of company, firm or local authority – as if under reported income were the total income ii. In other case – 30% of the amount of under-reported income. 4

When return of income is filedWhen return of income is not filed Income assessed > income processed u/s 143(1)(a); Income assessed > Maximum amount not chargeable to tax Income reassessed > income assessed or reassessed previously; Deemed total income (DTI) assessed or reassessed u/s 115JB (MAT) or 115JC (AMT) > DTI processed u/s 143(1)(a); Deemed total income (DTI) assessed u/s 115JB (MAT) or 115JC (AMT) > Maximum amount not chargeable to tax. Total income assessed or reassessed has the effect of reducing the loss or converting such loss into income. 5

 Sec 270A (3) - Amount of under reporting of income - I) Income assessed for the first time A) If ROI is filed - Difference between Income assessed and income determined u/s 143(1)(a). B) If ROI is not filed – i) In the case of a company, firm or local authority – amount of income assessed; ii) Other cases – Difference between income assessed and maximum amount not chargeable to tax. II) Any other case - Difference between income reassessed or recomputed and income assessed, reassessed or recomputed previously 6

 If under reporting arises out of deemed total income u/s 115JB or 115JC then formula (A-B)+(C-D) shall be applied to compute under reporting. where, A = Total income assessed as per the provisions excluding sec 115JB or 115JC. (herein called general provisions) B = Total income assessed as per the general provisions reduced by the amount of under-reported income. C = Total income assessed as per section 115JB (MAT) or 115JC(AMT). D = Total income assessed as per section 115JB or 115JC as reduced by the amount of under-reported income. [If amount is considered under both normal provision and MAT/AMT, then such amount shall not be reduced from total income assessed while determining item D.] 7

 As per section 270A (4) – Under reported income to include amount that sufficiently covers source of any receipt, deposit or investment added to income or deducted from loss in preceding assessment years and against which no penalty was levied in such preceding assessment year.  Section 270A(5) specifies the amount referred in sub-section (4) to follow the order of considering under reported income from the immediately preceding assessment year and then from the year preceding that and so on.  Where under reported income results from misreporting of income – penalty u/s 270A(8) shall be levied at 200% of the amount of tax payable on under-reported income. Exclusions provided in section 270A(6) shall not be applicable to cases where penalty is imposed for misreporting of income. 8

Cases of exclusions from under reported income -270A(6)  Assessee offers explanation which is bonafide and substantiated the same with material facts.  Income is computed on the basis of estimate though the accounts are correct and complete but such income not properly deducible due to the method employed.  Assessee suo moto does additions or disallowance and compute his income along with disclosure of all material facts, which disallowance is varied by the tax authorities.  Assessee maintains documentation u/s 92D and declares International transactions under chapter X along with disclosure of all material facts.  Undisclosed income is detected in search operations and penalty is leviable u/s 271AAB 9

Cases of misreporting of income – sec 270A (9) i. Misrepresentation or suppression of facts; ii. Failure to record investments in the books of account; iii. Claim of expenditure without substantive evidence; iv. Recording of false entry in books of account; v. Failure to record any receipt in books of account having a bearing on total income; and vi. Failure to report any international transaction or deemed international transactions or any specified domestic transaction under chapter X. 10

 To seek immunity from penalty u/s 270A - File an application to the Assessing officer.  Following are the conditions to be adhered to – i. Payment of the tax and interest payable as per the assessment order u/s 143(3) or 147 within specified time ii. iii. No filing of an appeal against assessment order; iv. Application to be filed in prescribed form and manner within one month from the end of the month from receipt of order; v. Immunity not applicable to misreporting of income; 11

 Assessing Officer to grant immunity on fulfillment of conditions and after the expiry of the period of filing the appeal.  AO shall pass an order accepting or rejecting application made for immunity from penalty.  Timeline with AO - Within a period of one month from the end of the month of the receipt of application.  No rejection of application - without providing opportunity of being heard. 12

 Amendment of section 271A – Clarifying penalty u/s 271A could be imposed in spite of the penalty leviable u/s 270A on the taxpayer  Section 271AA (2) proposes a penalty of INR 5,00,000 in case of non- furnishing of the required information/ document u/s 92D to the prescribed authority.  Penalty u/s 271AA(2) of INR 5,00,000 replaces the current penalty at 2% of the value of each such transaction.  Penalty in case of all search cases to be at 60% of tax payable.[271AAB]  No penalty u/s 270A if penalty levied u/s 271AAB. 13

 Objective - To ensure proper reporting of the international group in compliance with section 286  Section Requires maintenance and furnishing of the CbC report by multinational enterprises (MNE’s)  Penalty u/s 271GB is levied on failure in furnishing CbC report. i. A sum of Rs 5000 per day if failure does not exceed 1 month ii. A sum of Rs per day if failure exceeds 1 month iii. A sum of Rs 5000 per day - Non-submission of information called for by the prescribed authority for the period of default iv. A sum of Rs 50,000 per day - Beyond the date of service of order levying penalty, in case the default continues even after the service of order levying penalty (in the above-mentioned three cases) 14

 Reporting entity providing inaccurate information in the report furnished under section 286(2) and where the entity has a) knowledge of the inaccuracy at the time of furnishing the report but fails to inform the prescribed authority; or b) discovered the inaccuracy after the report is furnished and fails to inform the prescribed authority and furnish correct report within a period of fifteen days of such discovery; or c) furnished inaccurate information or document in response to the notice issued under sub-section (6) of section 286  The prescribed authority may impose a penalty of Rs.5 lakhs on such reporting entity. [271GB (4) ] 15

 Section 272A - Penalty of Rs 10,000 shall be levied in case of failure to comply with a notice issued by the Income tax authority under a) sub-section (1) of section 142 or b) sub-section (2) of section 143 or c) to comply with a direction issued under sub-section (2A) of section 142  Sub - section (4A) to section 273A has been inserted providing specific time lines of twelve months from the end of the month in which such application is received to reduce or waive penalty levied.  Sub –section 3A to section 273AA has been inserted providing specific time lines of twelve months from the end of the month in which such application is received for passing order to grant immunity. [w.e.f ] 16

 Opportunity of being heard should be provided before passing an adverse order rejecting the application of waiver (273A) or grant of immunity (273AA).  Amendment to Section 273B - No penalty if there exists a reasonable case for any failure referred in section 271GB. 17

 Whether ‘satisfaction’ is still a requirement for initiating penalty proceedings?  Is levy of penalty discretionary?  Whether levy of penalty is possible in case of non positive income ?  Whether Mens Rea is a necessary ingredient for imposing penalty? 18

 Whether application u/s 270AA can be dealt in parts or it shall be qua Assessment / Reassessment order ?  Can AO accept the application u/s 270AA in part?  Can penalty proceedings be independent of Assessment proceedings ?  Can voluntary disclosure absolve the assessee from penal proceedings? 19

THANK YOU 20