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Penalty u/s 270A of Income Tax Act, 1961

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Penalty u/s 270A of Income Tax Act, 1961
By: ROHIT KAPOOR
May 7, 2020
All Articles by: ROHIT KAPOOR       View Profile
  • Contents
  • Introduction

The Penalty u/s 271(1)(c) of the Act has been probably one of the most litigated provision of the Income Tax Act. However, to rationalize the same, Legislation has revamped the entire penalty provisions from shifting the defaults of ‘concealment or furnishing inaccurate particulars of income’ to new concepts of ‘Underreporting or Misreporting of the Income’ vide newly inserted Section 270A with effect from 01/04/2017. As the new penalty provisions is applicable from AY 2017-18 onwards, for which the Assessments are presently completed. The levy of penalty for the concealment of income in respect of the assessment year prior to assessment year 2017-18 would continue to be governed by the earlier provision, that is, section 271(1)(c) of the Act. This is also evident from the amendment in section 271 of the Act by insertion of sub-section (7), which reads as follows:

Section 271(7) 

"The provisions of this section shall not apply to and in relation to assessment for the assessment year commencing on or after the 1st day of April 2017".

  • Tax Penalty rates

The penalty in case of under reporting income is at the rate of 50% of amount of tax payable on under reported income and penalty in case of under reported income in consequence of misreporting of income is @ 200% of amount of tax payable on under reported income.

  • Satisfaction vis-a-vis mentioning separate charge as done in earlier regime.

Earlier, the penalty was for provided for two separate charges viz concealing the particulars of income or furnishing of inaccurate particulars of income. These two charges were understood to be distinct from each other. The Assessing Officer therefore was required to identify the specific charge with satisfaction and record the same in the assessment order. This enabled the assessee to know the specific charge framed against him. The new penalty now has only one charge ie under-reporting, and therefore no satisfaction is required which is evident from Section 270A(2). The same is evident from the fact that in the first instance every income is underreported income and misreporting income is out of the underreporting income. The AO may not have to arrive at a specific satisfaction in the assessment proceedings about under-reporting nonetheless the application of mind would be inevitable while initiating penalty proceedings. Therefore, the earlier ground taken by the assesse that the penalty was issued without mentioning any charge will not hold good in the new provision. 

  • The bare act of the section 270A has been reproduced in colored form and the section wise analysis has been given in normal manner in the subsequent paragraph. The interesting issue which has not been taken care in Section 270A has been separately highlighted in the analysis part.

 

270A(1) The Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner may,during the course of any proceedings under this Act, 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.

Note 1  

The section employs language "may direct" implies that the power conferred is discretionary. The same has been clarified by the Supreme court in the case of Hindustan Steel Ltd. v. State of Orissa 1969 (8) TMI 31 - SUPREME COURT Section 270 of the Income-tax Act, 1961 - Penalty - General - Penalty is not to be imposed if there is no conscious breach of law. 

"An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or guilty of conduct, contumacious or dishonest, or acted in conscious disregard to its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute" 

Note 2  

The Penalty can be levied either by A.O. or C.I.T. (Appeals) or by Pr. C.I.T/C.I.T and the proceedings may be any assessment proceeding before A.O. or proceedings before C.I.T.(Appeals) or revisionary proceedings U/s 263 before Pr. C.I.T/C.I.T.

 

270A(2)A person shall be considered to have under-reported his income, if-

 (a) 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 income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished 72[or where return has been furnished for the first time under section 148];

 (c) the income reassessed is greater than the income assessed or reassessed immediately before such reassessment;

 (d) the amount of deemed total income assessed or reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income determined in the return processed under clause (a) of sub-section (1) of section 143;

 (e) the amount of deemed total income assessed as per the provisions of section 115JB or -section 115JC is greater than the maximum amount not chargeable to tax, where 73[no return of income has been furnished or where return has been furnished for the first time under section 148];

 (f) the amount of deemed total income reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income assessed or reassessed immediately before such reassessment;

 (g) the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.

270(3) The amount of under-reported income shall be,-

(i) in a case where income has been assessed for the first time,-

(a) if return has been furnished, the difference between the amount of income assessed and the amount of income determined under clause (a) of sub-section (1) of section 143;

(b) in a case where no return has been furnished,-(3

(A) the amount of income assessed, in the case of a company, firm or local authority; and

(B) the difference between the amount of income assessed and the maximum amount not chargeable to tax,

In a case not covered in item (A);

(ii) in any other case, the difference between the amount of income reassessed or recomputed and the amount of income assessed, reassessed or recomputed in a preceding order:

Provided that where under-reported income arises out of determination of deemed total income in accordance with the provisions of section 115JB or section 115JC, the amount of total under-reported income shall be determined in accordance with the following formula-

(A - B) + (C - D)

where,

A = the total income assessed as per the provisions other than the provisions contained in section 115JB or section 115JC (herein called general provisions);

B = the total income that would have been chargeable had the total income assessed as per the general provisions been reduced by the amount of under-reported income;

C = the total income assessed as per the provisions contained in section 115JB or section 115JC;

D = the total income that would have been chargeable had the total income assessed as per the provisions contained in section 115JB or section 115JC been reduced by the amount of under-reported income:

Provided further that where the amount of under-reported income on any issue is considered both under the provisions contained in section 115JB or section 115JC and under general provisions, such amount shall not be reduced from total income assessed while determining the amount under item D.

Explanation.-For the purposes of this section,-

(a) “preceding order” means an order immediately preceding the order during the course of which the penalty under sub-section (1) has been initiated;

(b) in a case where an assessment or reassessment has the effect of reducing the loss declared in the return or converting that loss into income, the amount of under-reported income shall be the difference between the loss claimed and the income or loss, as the case may be, assessed or reassessed

Note 3 :- 270A(2)

The section, as such, does not define 'underreported'; however, it provides for the circumstances in which a person shall be considered to have underreported his income. The base of penalty is finding to the effect that person has 'underreported' his income. Thus, it is only a guiding factor in the form of a fiction. Having  regard to that, prima facie, the intention of the legislature is to consider the applicability of penalty proceedings automatically and merely on the basis of the difference. To put it differently, for considering initiation of penalty proceedings, the difference would be starting point. However, that may not be necessarily conclusive, as it would be subject to other provisions of the section. One significant departure noted from the earlier provision is that recording of satisfaction by the authority, for initiating the penalty, is absent. Does this really make a difference? The authority has to find underreporting of income and based thereon take the appropriate action. That would naturally necessitate application of mind to the facts and accordingly initiate the action as well as record the same in proceedings and/or the notice to be issued to the assessee and the like.

Note 4 :-

  1. Section 270A(2)(a) r.w.t. Section 270A(3)(i)(a)The Income is assessed greater than processed Income.

The point to be noted  is that in case of first assessment, the additions  are being seen not with reference to the return filed by the assessee but with reference to the income determined after processing of return u/s. 143(1)(a). This means that in respect of any additions which occur  between returned filed by the assessee and its processing u/s. 143(1)(a), no penalty is leviable.

For Example XYZ Ltd had filed Return for ₹ 10 Lakh after claiming exemption U/s 80IAB for say ₹ 25 lakh. The return was filed in December 2017 for A.Y. 2017-18. The processing was completed on 15th April 2018 at ₹ 35 Lakh by disallowing deduction as return was filed late. The assessment U/s 143(3) was completed at ₹ 50 lakhs. The under reported income is ₹ 15 lakhs (50-35) and not ₹ 40 Lakh.

Note 5 :-

a) Section 270A(2)(b) r.w.t. Section 270A(3)(i)(b)Assessment made and where no return is filed.

1) In case of firm/company/AOP/Local authority quantum of under reported income shall be income assessed.

2) In any other case the difference between the amount of income assessed and maximum amount not chargeable to tax.

For Example Mr. X (Senior Citizen) has not furnished the return of income for AY 2017-18 and the assessment has been framed u/s 144 at ₹ 10 Lakh. In this case the under reporting income shall be ₹ 7 Lakh (i.e. ₹ 10 lakh – ₹ 3 Lakh Basic exemption limit). 

Note 5A:-

However, the tax payable on the under reported income has been discussed in section 270A(10). As per the said section where the assessee has not furnished the return for the first time in that case the tax shall be calculated by increasing the under reporting income by exemption limit. Therefore, in the given case the tax payable on under reporting income shall be (₹ 7 lakh + ₹ 3 Lakh) ₹ 123600/-  The quantum of penalty will depend upon the nature i.e. under reporting income/misreporting income.

Note 5B:-

Under the earlier provisions of law penalty in search cases for non-specified years were covered u/s 271(1)(c). However, Section 271AAB deals with penalty for specified previous year being the year of search or the year which has ended before the date of search and the  due date of filing of return of income u/s.139(1) has not expired. Section 271(1)(c) covered cases of penalty in search cases for the year prior to the specified years. These provisions are covered by Explanation (5A) of section 271(1)(c).  However, it is interesting to note that the newly inserted section 270A, substituting the entire section 271(1)(c), there is no corresponding deeming fiction created for search cases for non-specified years. The specified years has duly been excluded in 270A(6) (e) therefore, the penalty for specified year  of undisclosed income as referred in Section 271AAB in case of search will be covered by Section 271AAB and not by Section 270A.

  For Example if the search took place on 4th July 2019, the specified Assessment year will be AY 2019-20 and AY 2020-21. The assessee has not filed the return for AY 2017-18 and filed the return u/s 153A and has declared the income in his 153A return. Now the larger question arise that the said case will be covered in clause (a) or clause (b) of Section 270A(3)(i). It is important to know that the amendment was made ibid in Section 270A(3)(i)(b) and the word added was that where the return was filed u/s 148 for the first time in that case it will be covered in clause (b) and not under clause (a). It is important to note that the case where return u/s 153A for non specified year is filed for the first time is not covered in clause (b).Therefore, the amount of underreported income in that case will be assessed income minus the returned income. In that case no penalty will be levied if income assessed is same as income declared in first ROI filed u/s 153A.
 

Note 5C:_

The next situation can be that in case of non specified year of search where return in response to notice u/s 153A was filed at  ₹ 10 lakh and the original return was filed at ₹ 4 lakh. The additional income offered in the return filed u/s 153A was accepted by the AO. In the given case the question arise whether the penalty shall be invoked. As per author view the AO will levy the penalty under Clause (a) of Section 270A(3)(i)(a). 

 Note 6 :- The analysis of Section 270A(2)(d)/(e)/(f) r.w.t. 270A(3)(ii).

For Example XYZ Limited has filed the return and the case was completed u/s 143(3) for AY 2017-18. The tax applicable is 31.20%.

Particulars

As per normal provision

As per MAT

Returned (Income/book profit)

700000

1900000

Addition 1 Misreporting income 

40000

40000

Addition 2 Under reporting income

50000

0

Under reported income in respect of  Deferred Tax not added in book profit for calculation of MAT.

0

60000

Total 

790000

2000000

 

A = The total income assessed as per normal provision

790000

B= (A – underreported income- misreported income) (i.e. 790000-40000-50000)

700000

C= Book profit as per assessment order

2000000

D= (C - underreported income - misreported income except the underreported income which is considered in normal provision and MAT provision.). Therefore D= ( 2000000 - 60000 – 0*)

(* i.e..₹ 40000 is ignored as it is appearing  in normal provision and MAT provision)

1940000

Underreported  Inc= (A-B)+(C-D)(790000-700000)+(2000000-1940000)

=90000+60000

150000

Computation of Penalty)

First calculate Tax on Underreported income Tax Rate 31.20

Under Reported

Miss Reported income

50000

40000

60000

0

110000

40000

31.20*110000=34320

31.20*40000=12480

Total Penalty u/s 270A

Underreported Income

50%*34320

17160

Misreporting income

200%*12480

24960

Total Penalty

 

42120

       

Note 7:- Adjustment of brought forward loss with underreporting income. Section 270A(2)(g) r.w.t. explanation clause (b) of Section 270A(3).

It may a case where there is opening brought forward loss and the addition has been suggested by the AO during the current year. The interesting issue fall out would be if due to carry forward losses, despite of additions made during assessment year under consideration, income assessed remains Nil, nothing would get quantify as unreported income due to  methodology prescribed u/s 270A(2).

Note 8 :-

The one more which has not been plugged u/s 270A(2) in that if the assessee addition is made and subsequently income is exempt due to deduction as referred in chapter VI(A) under heading C. If the addition has been made under normal provision and the same has been exempt due to deduction linked with heading C under chapter VI then despite of additions made during assessment year under consideration, income assessed remains Nil, nothing would get quantify as unreported income due to  methodology prescribed u/s 270A(2).

 

 

270(4)Subject to the provisions of sub-section (6), where the source of any receipt, deposit or investment in any assessment year is claimed to be an amount added to income or deducted while computing loss, as the case may be, in the assessment of such person in any year prior to the assessment year in which such receipt, deposit or investment appears (hereinafter referred to as “preceding year”) and no penalty was levied for such preceding year, then, the under-reported income shall include such amount as is sufficient to cover such receipt, deposit or investment.

270(5) The amount referred to in sub-section (4) shall be deemed to be amount of income under-reported for the preceding year in the following order-

(a) the preceding year immediately before the year in which the receipt, deposit or investment appears, being the first preceding year; and

(b) Where the amount added or deducted in the first preceding year is not sufficient to cover the receipt, deposit or investment, the year immediately preceding the first preceding year and so on.

Note:-9

This provision takes care of  what is typically called “intangible additions in earlier years” i.e. any additions in earlier years, which have not been peanlised then and now used to explain source of any receipt/deposit/investment etc. in any subsequent year.” This is akin to the provisions of Expl. 2 to sec. 271(1).

Example – The AO has found unexplained investment of ₹ 30 lakh in AY 2019-20, which the Assessee explained to be made out of the earlier intangible additions of ₹ 30 lakh as under: –

AY 2018-19 –        ₹ 15 Lakh

AY 2017-18 –        ₹ 10 Lakh

AY 2016-17 –        ₹ 5 Lakh

Implications of above – No further addition can be made in AY 2019-20 towards unexplained investment as source of the same is duly explained out of the earlier intangible additions. However, Penalty will now be initiated on the earlier intangible additions in the chronological reverse manner starting from AY 2018-19 unless and until the amount of unexplained investment found in AY 2019-20 is fully covered up –

Penalty u/s 270A(5) in AY 2018-19 on –        ₹ 15 Lakh

Penalty u/s 270A(5) in AY 2017-18 on –        ₹ 10 Lakh

Penalty u/s 271(1)(c) in AY 2016-17 on –        ₹ 5 Lakh (Balance amount)

The Sub Section (4) and (5) of new provisions of Section 270A are completely in line with the earlier provisions of Explanation 2 of Section 271(1)(c) of the Act. However, It is important to know that parallel provision of Section 271(1A) is missing in the Section 270A and its implications can be identified only with test of judicial scrutiny. Therefore, the litigation will be as there is no section embedded in the section  270A which says that the penalty proceeding will be initiated for earlier years even if the earlier years assessment has been completed.

Note 9A :-

The Section 271AAC has been inserted by taxation law (Second Amendment) Act,2016 and is applicable from AY 2017-18. By virtue of this amendment the penalty u/s 270A cannot be imposed if income is taxable u/s 68 to 69D and the tax has been determined u/s115BBE. In the example mentioned in note 9 the AO has not made any addition for AY 2019-20.Therefore, the question of applicability of Section 271AAC is not applicable here. But if AO has made addition u/s 68 to 69D then in that case the penalty u/s 270A cannot be invoked.

 

270(6) The under-reported income, for the purposes of this section, shall not include the following, namely:-

(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) the amount of under-reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, but the method employed is such that the income cannot properly be deduced therefrom;

(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;

(d) the amount of under-reported income represented by any addition made in conformity with the arm’s length price determined by the Transfer Pricing Officer, where the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X, and, disclosed all the material facts relating to the transaction; and

(e) the amount of undisclosed income referred to in section 271AAB.

 

Note 10:- Section 270A(6)(a)

The word Bona fide has been explained in GTO v. Gautam Sarabhai Ltd. 1988 (7) TMI 87 - ITAT AHMEDABAD-C the head notes of the said judgment is as under:-

  1. ‘The words "bona fide" used in the language of clause (c) are also required to be taken due note of. These words mean "in good faith", "genuinely" which are suggestive of honesty of purpose. They convey absence of intention to deceive and connote that the transaction in question is a true and genuine transaction and not a colorable and sham one and there are no strings of any kind attached to that transaction and that there is no secret or covert arrangement.’ In the case of  Price Waterhouse Coopers (P.) Ltd. v. CIT 2012 (9) TMI 775 - SUPREME COURT held that disallowance not made though stated in Tax Audit Report could be regarded as bona fide mistake not liable to penalty.
  1. The language used in the clause through onus on the assessee for establishing to the satisfaction of the authority that the explanation given by the assessee is bonafide.
  2. The phrase 'is satisfied' means, in my view simply 'makes up its mind'; the court on the evidence comes to a conclusion which, in conjunction with other conclusions, will lead to the judicial decision and such mind should not be troubled by doubt or reach a clear conclusion on the basis of evidence before the authority.
  3. The disclosure of all the material facts should be at the time of substantiating the explanation, pursuant to the notice received under the section giving an opportunity of being heard, and not earlier. The expression "material facts" refers only to primary facts and the duty of the assessee is only to disclose primary facts and he has not also to indicate what factual or legal inference should properly be drawn from these primary facts.

Note 11:- Section 270A(6)(b)

If the underreported income is estimated and accounts are correct and complete but the method employed may not enabled proper determination. The addition is based on estimation of gross profit, as against the declared profits, without rejecting the books of account and/or without finding that the audited financial statements of the assessee are not true and correct. In such a case, the difference attributable to estimated amount of gross profit can be excluded from the underreported income.

Note 12:- Section 270A(6)(c)

The personal expenditure is estimated on the certain amount and has been disallowed in the computation of income by the assessee himself and the AO during assessment proceeding has increased the said disallowance. In such a case the increase in disallowance may not be treated as a underreported income. The prima facie facts should have been disclosed during the assessment proceeding or during penalty proceeding.

Note 13 :- Section 270A(6)(d)

  • The first requirement is factual and it is based on the addition made in conformity with arm length price determined by TPO.
  • The second requirement can be established based on the finding of the TPO about maintenance of information and documents and where there is no adverse remarks or comments, it can be inferred that the assessee has maintained the information and documents prescribed under section 92D of the Act.
  • The third requirement can be established on the basis of the Transfer pricing Report furnished by the auditors and/or the finding by the TPO or the AO to the effect that all the transactions have been reported or absence of the finding by the TPO and/or the AO that the international transactions in question were not reported.

  Note 14 :- Section 270A(6)(e)

In respect of undisclosed income, in the Act, there is a separate provision for levy of penalty, namely, section 271AAB. The undisclosed income referred in the said provision should be excluded from the amount of under-reported income [determined in terms of the provisions of sub-section (3) and sub-section (6)].

Explanation (c) below section 271AAB defines 'undisclosed income' as follows:

'"undisclosed income" means-

(i)

 

any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has-

(A)

 

not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or

(B)

 

otherwise not been disclosed to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner before the date of search; or

(ii)

 

any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted.'

 

Thus, the above referred undisclosed income can be excluded in computing under-reported income.

  Note 15 :-

The penalty in case where assessment or reassessment is made u/s 153C will be covered in 270A itself. The provision of Section 271AAB are not applicable in case whrere assessment is framed u/s 153C.

 

 

270(7) The penalty referred to in sub-section (1) shall be a sum equal to fifty per cent of the amount of tax payable on under-reported income.

Note 16:-

The penalty in respect of underreported income is fifty percent of tax payable on underreported income. The tax payable has been discussed in detail in section 270(10). The computation of unreported income has been discussed in detail in above paragraphs.

 

 

270(8) Notwithstanding anything contained in sub-section (6) or sub-section (7), where under-reported income is in consequence of any misreporting thereof by any person, the penalty referred to in sub-section (1) shall be equal to two hundred per cent of the amount of tax payable on under-reported income.

270(9) The cases of misreporting of income referred to in sub-section (8) shall be the following, namely:-

 (a) misrepresentation or suppression of facts;

 (b) failure to record investments in the books of account;

 (c) claim of expenditure not substantiated by any evidence;

 (d) recording of any false entry in the books of account;

 (e) failure to record any receipt in books of account having a bearing on total income; and

 (f) failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.

Note 17 :- 

  • When the under reporting of the income is intentional or willful on the part of the Assessee, then such under reporting is to be considered to be Misreporting of the Income. For being misreporting of income, first it has to be underreporting of the income. Underreporting is a wider term and also includes misreporting of income.  
  • The Classification of underreported income as misreported income needs to be made notwithstanding the provisions of sub-section (6). Accordingly, in respect of different items of additions comprised in the underreported income, the matter can be examined and accordingly, regarded as misreported income. Thus, a part of underreported income may constitute misreported income. A clause beginning with the expression "notwithstanding any thing contained in this Act or in some particular provision in the Act or in some particular Act or in any law for the time being in force, or in any contract" is more often than not appended to a section in the beginning with a view to give the enacting part of the section in case of conflict an overriding effect over the provision of the Act or the contract mentioned in the non-obstante clause. It is equivalent to saying that in spite of the provision of the Act or any other Act mentioned in the non-obstante clause or any contract or document mentioned the enactment following it will have its full operation or that the provisions embraced in the non-obstante clause would not be an impediment for an operation of the enactment.The South India Corporation (P) Ltd. v. The Secretary, Board of Revenue, Trivandrum & Anr., 1963 (8) TMI 30 - SUPREME COURT.

 For example the assessee has filed a return of income for ₹ 10 Lakh and the AO has made addition of ₹ 2 lakh by estimating the disallowance and similarly has also made addition of ₹ 5 lakh on the basis of misrepresentation or suppression of facts which is squally covered by Section 270A(9).Therefore, the assessee shall be entitled for the benefit of 270A(6) even if the penalty is levied u/s 270A(8) r.w.t. section 270A(9). 

  • The cases of misreporting have been listed out in sub section 9 of Section 270A. Out of total 6 cases designated as mis-reporting, 3 relate themselves with books of accounts and remaining 3 covers conduct during assessment.  

Note 18:- The analysis of word misrepresentation or suppression of facts as dealt in Section 270A(9) 

 clause (a) is as under:-  

'The use of the word "Suppression" shows that what the assessing officer found was willful non-disclosure. If it was not a willful non-disclosure, the assessing officer would have state as merely omissions. The use of the word "suppression" clearly brings out the willful nature of the non-disclosure and, therefore, the tribunal was not right in setting aside the penalty merely on the ground that there was no finding of willful non-disclosure. 

Note 19:- FAILURE TO RECORD INVESTMENTS IN THE BOOKS OF ACCOUNT 

      Section 2(12A) defines books of account inclusively and reads:

"Includes ledgers, the books, cash books, account books and other books, with their in the written form or as printouts of data stored in a floppy, disk, tape or any other form of electromagnetic data storage device".

  • It suggests that where an assessee keeps books of account and any investments made are not recorded deliberately in such books, it could be treated as a failure and accordingly the value of such investments (added to the total income) could constitute underreported income on account of misreporting.
  • The clause (b)/(d) of section 270A(9) have no implication after the introduction of Section 271AAC. If the addition has been made by the AO u/s 68 to 69D in that case no penalty will be levied u/s 270A. The Section 271AAC has been inserted by taxation law (Second Amendment) Act,2016 and is applicable from AY 2017-18. By virtue of this amendment the penalty u/s 270A cannot be imposed if income is taxable u/s 68 to 69D and the tax has been determined u/s115BBE.

Note 20:- CLAIM OF EXPENDITURE NOT SUBSTANTIATED BY ANY EVIDENCE [CLAUSE (c)]

- If claim of expenditure is not substantiated by evidence, it may lead to misreporting

  • Usually, in respect of travelling and conveyance expenditure by an employee or otherwise incurred by an assessee, the relevant ticket or acknowledgement may not be available or may not be furnished or submitted by the employee or the person concerned. However, it is also usual to record such expenditure and claim. In the assessment, usually, there is a remark by the AO to the effect that in absence of vouchers or adequacy thereof, an estimated addition is made to the total income. Can such addition and a remark result in treating the addition as under reported income on account of misreporting? The position may depend on facts and the extent and nature of evidence available.

Further, it may also be argued that the user of the language 'claim of expenditure' signifies such expenditure in respect of which, as such, there is no evidence, which could substantiate the actual fact of incurrence of expenditure. In other words, it seeks to cover 'bogus' or 'false' expenditure and not any and every expenditure in respect of which, possibly, direct evidence may not be insisted or kept or led to substantiate the claim of expenditure.

Note 21

FAILURE TO RECORD ANY RECEIPT IN BOOKS OF ACCOUNT HAVING A BEARING ON TOTAL INCOME [CLAUSE (e)] - The circumstance specified is quite clear.

Suppose, an entry is made about a receipt for fees in the memorandum books of account or a rough cash book; but, not recorded in the books of account from which the financial statements are made and based on which the total income is computed. Can it be said that it may not be considered as under reported income on account of misreporting? In principle, it would depend on whether the failure could be considered as deliberate or not. If the failure could be considered as deliberate, it could be regarded as failure to record any receipt in books of account having a bearing on total income. If the failure cannot be regarded deliberate, it can be argued that it is not a case of failure to record any receipt in books of account having a bearing on total income.

In support of the above, the reasoning could be on the following lines :

In the context of the provision of the clause, it could be argued by tax department that having regard to the provisions of section 44AA of the Act, books of account means such books of account used for the purposes of computing or ascertaining total income (and not a memorandum books of account used for compiling books of account). Accordingly, it could be regarded as a case of failure to record any receipt in books of account.

However, considering the fact that the entry is made in the memorandum books of account used for the purposes of maintaining books of account it could be said that it was only an omission and not a deliberate action of not including the receipt in the books of account. 

In other words, it was not a wrong reporting but a mistake of not including the receipts in the final books of account.

 

270A(11) No addition or disallowance of an amount shall form the basis for imposition of penalty, if such addition or disallowance has formed the basis of imposition of penalty in the case of the person for the same or any other assessment year.

Note 22 :-

If any addition or disallowance has suffered or formed the basis for imposition of penalty in the case of the person for the same or any other assessment year, such addition or disallowance cannot be the basis for levying penalty under the section.

For Example, the penalty is levied under section 271(1)(c) of the Act in respect of an intangible addition, which is explained as a source for investment in assessment year 2018-19; but, not accepted and an addition is made, apparently, penalty under the section cannot be levied.

 

 

By: ROHIT KAPOOR - May 7, 2020

 

 

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