Penalty u/s 271.1.c for disallowance u/s 14A.

[CA DEV KUMAR KOTHARI]

Legislators must think to remove or relax provisions of penalties to avoid un-necessary notices, work by taxpayers, tax authorities and Courts leading to wastage of human resources and revenue and also causing burden on all concerned.

 CA DEV KUMAR KOTHARI

Subject matter of litigation: penalty u/s 271.1.c for disallowance u/s 14A.

Recent High Court Order dismissing appeal of revenue:

2019 (10) TMI 605 - DELHI HIGH COURT -PR. COMMISSIONER OF INCOME TAX VERSUS PUNJAB NATIONAL BANK ITA 445/2019 Dated: - 01 October 2019

Related Tribunal order in which deletion of penalty by CIT(A) was confirmed and appeal of revenue was dismissed:

2018 (8) TMI 1893 - ITAT DELHI DCIT CIRCLE-20 (1), NEW DELHI VERSUS PUNJAB NATIONAL BANK ITA No. 6596/Del/2016 : Asstt. Year : 2010-11

Dated: - 14 August 2018

Appeal was preferred by the Revenue to assail the order dated 28.10.2016 passed by the CIT (A), deleting penalty.

Earlier order of Delhi High Court in which appeal of revenue was dismissed on the same issue: 2010 (10) TMI 1021 - DELHI HIGH COURT -THE COMMISSIONER OF INCOME TAX II VERSUS LIQUID INVESTMENT & TRADING CO. ITA No.240/2009 Dated: - 05 October 2010

Relevant judgment of the Supreme Court on the same issue, which has not been mentioned in above chain of judgment / orders:

2010 (3) TMI 19 - SUPREME COURT -CIT., AHMEDABAD VERSUS RELIANCE PETRO PRODUCTS PVT. LTD. 2463 OF 2010 Dated: - 17 March 2010.

Judgments referred and applied by the Supreme Court –

2008 (9) TMI 52 - SUPREME COURT Other Citation: 2008 (13) SCC 369, [2008] 306 ITR 277 (SC), 2008 (231) E.L.T. 3 (SC), [2008] 17 STT 262 (SC), [2008] 18 VST 180 UNION OF INDIA AND OTHERS VERSUS DHARMENDRA TEXTILE PROCESSORS AND OTHERS 10289 to 10303 of 2003 with others Dated: - 29 September 2008

2009 (5) TMI 15 - SUPREME COURT Other Citation: [2009] 224 CTR 1, 2009 (238) E.L.T. 3 (SC), [2009] 20 STT 481 (SC), 2009 (13) SCC 448, 2009 (9) SCR 58, 2009 (7) JT 314, 2009 (8) SCALE 231 UNION OF INDIA VERSUS M/S RAJASTHAN SPINNING & WEAVING MILLS AND COMMISSIONER OF CUSTOMS AND CENTRAL EXCISE VERSUS M/S. LANCO INDUSTRIES LTD. 3527 OF 2009 and 3525 OF 2009 Dated: - 12 May 2009

Highly contentious provision:

Readers, tax payers and tax authorities are well aware about highly contentious issued involved in application of S.14A and computations made thereunder. Related Rules have also made issue more complex. Judgments rendered by Tribunals also lead to different interpretations.

Reported cases on this website:

On search of case laws for S.14A we find 4259 Records. And for search of penalty for S.14A we find 510 records on this website as on 6:54 AM on 22102019.

Cases not reported are likely to be more than 5 times of cases reported because in many cases elaborate discussion is not found, some are dismissed for various reasons also. Furthermore in many cases in which amount was not significant, assesses did not prefer even first appeal.

This shows that, S.14A has been very contentious provision and even experts are not sure about exact nature, applicability and computation of the provisions. As per author, even some judgments of the honourable Supreme Court need review because the case was not argued perfectly and many basic contentions were left unconsidered.

Practice of hiding adopted by officers and counsels of revenue:

It seems that just to continue and prolong litigation revenue authorities and counsels of revenue are adopting practice to hide legal position and to adopt short cut practices to file appeals even if there is no merit. From the cases in hand we find that the judgment of the Supreme Court in case of Reliance Petro products (supra.) was not mentioned before Delhi High Court and Tribunals, although it was published much earlier and should have been placed and accordingly appeal could have been withdrawn to reduce litigation.

Un-necessary litigation in case of PNB:

We find that there have been un-necessary litigation in case of PNB (supra). In view of overall tax payments made by assesse, there should have been some regard and un-n\necessary litigation should not have been carried by revenue by taking a reasonable view. By adopting unreasonable view, assesse was forced to contest litigation.

However, tax authorities have also some limitations. So long provisions are found in statute book, they have to initiate processes to discharge their duties. In practice we find many officers issuing notice of penalty for non-compliance of any notice, even when assessment proceedings are still going on and case has been adjourned and re-fixed. If an Assessing Officer fails to initiate proceedings, he can face a revision proceedings which can also lead to some disciplinary action or adverse remarks in his confidential report etc.

Guidelines for relaxation of penalty proceedings:

Where assesse had taken a reasonable view, and where there is by and large compliance, there should not be initiation or penalty proceedings. However, in practice we can find cases where assesse made compliance on say 10 occasions but failed on one occasion, the AO initiate penalty proceedings. Similarly where more than 99% additions are deleted and less than 1% is confirmed, the AO has to initiate penalty proceedings for concealment of income. Therefore, there should be guidelines and binding circulars about situations in which penalty proceedings should not be initiated.

For smaller failures on part of tax payers, a reasonable view should be taken and provisions for penalty and prosecution should not be invoked.

Penal provisions should be considered in view of overall factual matrix of assesse. For this purpose not only one year but conduct of assesse over a period of 3-5 years should be considered.

In case of penalty u/s 271.1.c number of issues decided in favor of assesse and against assesse should be considered. In other words, additions made by AO by way of number of issues and also amount involved should be considered. This will take into account complexity involved.

Action should also be taken against tax officers who made unreasonable additions or confirmed additions made by lower authorities.

Tax payers should be considered as a contributor and the movers of government. Approach that tax payer is tax evader should be avoided.

Penalty for cash transactions:

Penalty for cash transactions in excess of prescribed limits should not be involved against transactions which are recorded in books of account. Transaction recorded in books of account means that it is out of disclosed income of parties. If a transaction is not recorded in accounts of any party to transaction, that party should only be levied with penal actions. However, we find reverse situations. If an assessee has recorded a payment made in cash to other party, he may be penalized, whereas the other party who has not recorded the transaction and evaded taxes is not likely to be questioned by tax authorities. For example cash payment made in excess of prescribed limits for expenses are disallowed, but rarely attempt is made to enquiry from the recipient who might not have recorded cash receipts and disclosed the receipt as income, even though it is taxable.