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Penalties and Prosecutions Penalties and Prosecutions

introduction For the purpose of effective and satisfactorily implementation of any law certain penalties introduction For the purpose of effective and satisfactorily implementation of any law certain penalties & prosecutions are provided. therefore Under the IT Act certain penalties and prosecution have been provided. As the number of tax payers is increasing, the tax administration has necessity to rely more and more on voluntary compliance of tax laws by the assessees and therefore appropriate penal and prosecution provisions are provided.

PENALTY U/S 140 A(3) NATURE OF DEFAULT: Failure to pay the whole or any PENALTY U/S 140 A(3) NATURE OF DEFAULT: Failure to pay the whole or any part of self assessment tax or interest or both in accordance with the provisions of se. 140 A(1). MINIMUM PENALTY: Amount impose by AO for default or continuing default. MAXIMUM PENALTY: Amount of tax in arrears. WHO CAN IMPOSE PENALTY? Assessing Officer.

PENALTY U/S 221(1) NATURE OF DEFAULT: Failure in making payment of tax within prescribed PENALTY U/S 221(1) NATURE OF DEFAULT: Failure in making payment of tax within prescribed time. MINIMUM PENALTY: As amount impose by AO. MAXIMUM PENALTY: Amount of tax in arrears. WHO CAN IMPOSE PENALTY? Assessing Officer.

PENALTY U/S 271(1)(b) NATURE OF DEFAULT: Failure to comply with a notice u/s 142(1) PENALTY U/S 271(1)(b) NATURE OF DEFAULT: Failure to comply with a notice u/s 142(1) or 143(2) or with a direction issued u/s 142(2 A) Sec. 142(1): regarding giving notice to the assessee for return of income, furnishing document and accounts, furnishing other information, Sec. 143(2): regarding the producing any evidence Sec. 142(2 A): direction regarding books of accounts audited

 MINIMUM PENALTY: 10000 for each failure MAXIMUM PENALTY: 10000 for each failure WHO MINIMUM PENALTY: 10000 for each failure MAXIMUM PENALTY: 10000 for each failure WHO CAN IMPOSE PENALTY? Assessing Officer Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed.

PENALTY U/S 271(1)(c)/(d) NATURE OF DEFAULT: Concealment of the particulars of income or furnishing PENALTY U/S 271(1)(c)/(d) NATURE OF DEFAULT: Concealment of the particulars of income or furnishing inaccurate particulars of income. MINIMUM PENALTY: 100% of tax sought to be evaded MAXIMUM PENALTY: 300% of tax sought to be evaded WHO CAN IMPOSE PENALTY? AO / CIT(appeal)/ CIT

 sec. 271(1)(c) is applicable if the following conditions are satisfied penalty can be sec. 271(1)(c) is applicable if the following conditions are satisfied penalty can be imposed by AO / CIT(appeal)/CIT It can be imposed in the course of proceedings and Assessee has concealed particulars of his income or furnished inaccurate particulars

 Explanations to Sec. 271(1): Explanation 1 to sec. 271 if any addition are Explanations to Sec. 271(1): Explanation 1 to sec. 271 if any addition are made in the total income because of following reasons then these additon is deemed to be concealed income. a) If assessee fails to offer an explanation or expalnation is offer but it found to be false. b) An explanation is given by assessee but he is not able to prove that such explanation is true.

 Judicial decisions: 1) Penalty should be imposed by the AO and first appeallate Judicial decisions: 1) Penalty should be imposed by the AO and first appeallate authority/commissioer [kamlapat Motilal v CIT(1962)] 2) Involumtary surrender of income does not avoid penalty [CIT v Mohd. Mohtram Farooqui(2003)] 3) No penalty if the facts of the transation are disclosed[Chandrapal Bagga v IT Appellate Trebunal (2003)] 4) Revised return after detection of concealed income offers no immunity from penalty [CIT v Dr. A. Mohd. Abdul Khadir (2003)]

5) No penalty for concealment if the claim of the assessee is arguable [CIT 5) No penalty for concealment if the claim of the assessee is arguable [CIT v Harshvardhan Chemicals & Minerals Ltd. (2003)] 6) Penalty u/s 271(1)(c) may be imposed in case of a surrender [CIT v Kerala Transport Co. (2004)] 7) No penalty unless there is a deliberate attempt (mensrea) [CIT v Ashim Kumar Agarwal (2005)] Mens-rea: if a person does something incorrect deliberately even though he know that his act is against law. 8) Order of penalty must clearly state the nature of penalty [New Sorathia Engineering Co. v CIT (2006)]

Explanation: 2 to sec. 271: Sometimes addition made by AO for purely tech. reason Explanation: 2 to sec. 271: Sometimes addition made by AO for purely tech. reason e. g. disallowances of certain expenses, shortfalls, presumptive rate of GP etc. No penalty shall be levied in respect of these addition if assessee provide adequate evidence. WHEN EXPLANATION : 2 IS APPLICABLE 1. The source of any receipt, deposit, expense or investment in any current year is claimed by assessee to be amount which had been added in computing the income or deducted the loss in the assessment of such person for any earlier year.

2). in earlier year no penalty had been levied on account of such addition, 2). in earlier year no penalty had been levied on account of such addition, etc. under sec. 271(1)(c) 3). That part of the amount so added or deducted in such earlier year which is sufficient to cover the amount represented by such receipt, Deposit or expense or value of such investment shall be treated as the income of the assessee, particulars of which had been furnished for the earlier year.

 For example: For the previous year 2007 -08(AY 2008 -09) the AO makes For example: For the previous year 2007 -08(AY 2008 -09) the AO makes the following observations: The assessee has purchased gold on 3 -06 - 2007 for Rs. 2 lakh for which he is unable to offer any explanation On his daughter’s marriage, the assessee spends Rs. 12 lakh on May 15, 2007. and the assessee fails to explain the source of expenditure, 1. Can the AO levy penalty u/s 271(1)(c)? 2. Is it possible for the assessee to argue in the penalty proceedings that the aforesaid investment / expenditure have been made out of following additions made by the Department in earlier years-

Assessment Year ADDITIONS MADE IN TOTAL INCOME Rs. PEENALTY LEVIED U/S 271(1)(c) 2002 -03 Assessment Year ADDITIONS MADE IN TOTAL INCOME Rs. PEENALTY LEVIED U/S 271(1)(c) 2002 -03 2000000 120000 2003 -04 300000 80000 2004 -05 NIL -- 2005 -06 700000 NO 2006 -07 50000 NO SOLUTION: 1. The AO can levy penalty u/s 271(1)(c) an unexplained investment / expenditure of Rs. 1400000 2. The assessee can explain that the investment is made out of additons made during earlier years- Anantharam Veerasinghaiah & Co. v CIT(1980). However, by adopting such plea, application of Explanation 2 to sec. 271(1) cannot be avoided Rs. 14 lakh will be treated as cancealed income of the earlier years as follows.

Assessment Year ADDITIONS MADE IN TOTAL INCOME PENALTY ALREADY LEVIED ON ADDITION AMOUNT OF Assessment Year ADDITIONS MADE IN TOTAL INCOME PENALTY ALREADY LEVIED ON ADDITION AMOUNT OF CONCEALED INCOME ON WHICH PENALTY SHALL BE LEVIED 2006 -07 50000 -- 50000 2005 -06 700000 -- 700000 2003 -04 300000 80000 220000 2002 -03 350000 (1400000 -50000700000 -300000) 120000 230000

 EXPLANATION 3 to sec. 271: If a person does not file a return EXPLANATION 3 to sec. 271: If a person does not file a return of income for an assessment year voluntarily within 21 months from the end of the AY in which income was first assessable and no notice u/s 142(1) and 148 is issued to him till the expiry of the period of filling return, he is treated to have concealed his income and penalty is leviable. Sec. 148: regarding issue of notice where income has escaped from assessment.

 Explanation 4 to Sec. 271: SITUATION-1: Where the loss declared in the return Explanation 4 to Sec. 271: SITUATION-1: Where the loss declared in the return is reduced or is converted into income: where the concealed income or inaccurate particulars has the effect of reducing the loss or converting that loss into income, then the tax sought to be evaded shall be the tax that would have been chargeable on the concealed income as total income:

EXAMPLE-1: determine minimum penalty and maximum penalty of assessee on tax sought to be EXAMPLE-1: determine minimum penalty and maximum penalty of assessee on tax sought to be evaded: Return of loss furnished by assessee for AY 2009 -10 : -(-)700000 Concealed income : 300000 SOLUTION: In the above case the loss declared in the return has been reduced by Rs. 300000 due to concealed income. Therefore penalty will be levied on the tax sought to be evaded Rs. 300000. Tax + EC + SHEC on Rs. 300000(160000 to 300000=10%) 14000+1%+2%=14420. Therefore, Minimum penalty @ 100% = 14420 Maximum penalty @ 300 %= 43260.

SITUATION-2: Where no return has been furnished by the assessee : amount of tax SITUATION-2: Where no return has been furnished by the assessee : amount of tax sought to be evaded = Tax on total income assessed xxxx LESS: (1)Advanced tax xx (2) TDS/ TCS xx (3) self assessment tax xx

 SITUATION-3: any other case i. e. where total income assessed exceeds the concealed SITUATION-3: any other case i. e. where total income assessed exceeds the concealed income. : amount of tax sought to be evaded = Tax on total income assessed LESS: tax on (total income assessed concealed income) xxxx xx

 EXAMPLE: PARTICULARS Rs. Return of income submitted by assessee for AY 2010 -11 EXAMPLE: PARTICULARS Rs. Return of income submitted by assessee for AY 2010 -11 AMOUNT Rs. 170000 Addition made by the assessing officer (1) Wrong application of law unknowingly and the explanation offered is not found as false by the assessing officer 50000 (2) Deliberate attempt to conceal income by applying law incorrectly, even no explanation is offered 90000 Assessed income 150000 310000 Compute the tax payable and penalty imposable u/s 271(1)(c)

 SOLUTION: TAX PAYABLE: PARTICULARS Tax payable on assessed income of Rs. 310000 ADD: SOLUTION: TAX PAYABLE: PARTICULARS Tax payable on assessed income of Rs. 310000 ADD: EC + SHEC (1% + 2%) Tax liability AMOUNT 16000 480 16480 PENALTY PAYABLE: PARTICUYLARS AMOUNT tax on assessed income 16480 LESS: tax on (total income assessed - concealed income) [tax on Rs. 220000 (310000 - 90000)] 6180 Tax sought to be evaded 10300 Minimum penalty @ 100% = 10300 Maximum penalty @ 300% = 30900

 EXPLANATION 5 & 5 A TO SEC. 271: where a search is initiated EXPLANATION 5 & 5 A TO SEC. 271: where a search is initiated on or after 1 -06 -2007, the following two penalties shall be leviable: Penalty u/s 271(1)(c) given in explanation 5 A Penalty u/s 271 AAA (explanation 5 A): Undisclosed income for any previous year found in search initiated on or after 1 -06 -2007 but the assessee did not file the return of that PY although due date of filing had expired 1. Any assets and the assessee claims that such assets have been acquired by him by utilizing his income for any PY; 2. The word assets refrred: Any money, bullion, jewellery or other valuable article or thing

2) Any income based on any entry in any books of account or other 2) Any income based on any entry in any books of account or other documents or transactions and he claims that such entry is for an PY. Which has ended before the date of the search and a) Where the return of income for such PY has been furnished before the said date but such income has not been declared in return, or b) The due date for filing the return of income for such year has expired and the assessee has not filed the return, then, u/s 271(1)(c), be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income.

 EXPLANATION 6 to Sec. 271: Penalty for concealment of income shall not be EXPLANATION 6 to Sec. 271: Penalty for concealment of income shall not be imposed on so much of the income on which additional tax has been charged u/s 143(1 A) EXPLANATION 7 to Sec. 271: where in the case of an assessee who has entered into an international transaction defined 92 C(4) then the amount so added or disallowed shall be deemed to have been concealed or inaccurate particulars have been furnished. Satisfaction of the AO or the Commissioner (Appeals) or Commissioner that the price charged (or paid) in such transaction has been determined is in good faith and with due diligence. Then no penalties is leviable under this section. Sec. 92 C(4): Regarding computation of ALP.

PENALTY U/S 271 A NATURE OF DEFAULT: Failure to keep, maintain or retain books PENALTY U/S 271 A NATURE OF DEFAULT: Failure to keep, maintain or retain books of account, documents, etc. as required u/s 44 AA and rules there under MINIMUM PENALTY: Fixed at Rs. 25000 WHO CAN IMPOSE PENALTY? AO / CIT (Appeal) Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed

PENALTY U/S 271 AA NATURE OF DEFAULT: Failure to keep and maintain any such PENALTY U/S 271 AA NATURE OF DEFAULT: Failure to keep and maintain any such information and document as required u/s 92 D(1) & (2) in relation to international transaction. MINIMUM PENALTY: 2% of the value of each inter-national transaction. MAXIMUM PENALTY; Same as minimum WHO CAN IMPOSE PENALTY? AO / CIT (Appeal) Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed

PENALTY U/S 271 AAA NATURE OF DEFAULT: Income found in course of search which PENALTY U/S 271 AAA NATURE OF DEFAULT: Income found in course of search which is not recorded on or before the date of search in books of accounts or other documents maintained or otherwise not disclosed to CCIT/CIT. MINIMUM PENALTY: 10% of the undisclosed income MAXIMUM PENALTY; Same as minimum WHO CAN IMPOSE PENALTY? Assessing officer

PENALTY U/S 271 AAA 1. Penalty @ 10 % of the undisclosed income of PENALTY U/S 271 AAA 1. Penalty @ 10 % of the undisclosed income of the specified PY [Sec. 271 AAA(1)]: the AO may, notwithstanding anything contained in any other provisions of this Act, direct that, In a case where search has been initiated u/s 132 on or after 1 -06 -2007. the assessee shall pay by way of penalty, in addition to tax, if any, payable by him, a sum computed at the rate of 10% of the undisclosed income of the specified PY.

2. No penalty u/s 271 AAA in the following case [Sec. 271 AAA(2)] Where 2. No penalty u/s 271 AAA in the following case [Sec. 271 AAA(2)] Where the assessee— i. If the assee specifies the manner in which undisclosed income has been derived; ii. Substantiates the manner in which the undisclosed income was derived; and iii. Pays the tax, together with interest, if any, in respect of the undisclosed income. 3. “Specified PY” means the PYi. Which has ended before the date of search, but the date of filing the return of income us 139(1) for such year has not expired before the date of search and the assessee has not furnished the return of income for the PY before the prescribe date; or ii. In which search was conducted.

“If I can’t, then who can!” “If I can, then who can’t” “If I can’t, then who can!” “If I can, then who can’t”

PENALTY U/S 271 B NATURE OF DEFAULT: Failure to get accounts audited or to PENALTY U/S 271 B NATURE OF DEFAULT: Failure to get accounts audited or to furnish a report of such audit as required u/s 44 AB MINIMUM PENALTY: 0. 5 % of total sales, turnover or gross receipts, as the case may be. MAXIMUM PENALTY: Rs. 100000 WHO CAN IMPOSE PENALTY? Assessing Officer

 When a person commits the offence u/s 44 AA , the offence is When a person commits the offence u/s 44 AA , the offence is complete. After that there can be no possibility of any offence as contemplated by sec 44 AB and therefore, penalty cannot be imposed u/s 271 B. Delay on part of the statutory auditors in completing audit of the assessee co-operative society would not justify levy of penalty on the assessee. - Ahmedabad Co-operative dept. stores ( Apna Bazaar) v. ITO[2001] 73 TTJ (Ahd. ) 784.

 Where the accountant left service without finalising accounts, another accountant was engaged and Where the accountant left service without finalising accounts, another accountant was engaged and that resulted in delay in finalising accounts as well as getting accounts audited and assessment year under consideration was the first A. Y for compliance of Sec 44 AB Where the assessee contended that as its books of accounts were seized by Customs Department, which had been later taken over by the Income Tax Department, audit was completed late, the assessee had a reasonable and sufficient cause for not getting accounts audited in time as provided in Act.

 Penalty is impossible in case of failure of Assessee Builder to get accounts Penalty is impossible in case of failure of Assessee Builder to get accounts audited on ground that it has only received Advance from Customers and as such there is no receipt , sales or turnover as required u/s 44 AB. Where total sales by the assessee does not exceed Rs. 40 lakh but by including interest receipt, his total receipts exceed Rs. 40 lakh, and the assessee is under bona fide belief that it is , in view of above position , not required to get its accounts audited , imposition of penalty on the assessee is not justified – Patel Ambalal Somnath Sarkar v. ITO (2006) 100 TTJ ( Ahd. ) 735.

PENALTY U/S 271 BA NATURE OF DEFAULT: Failure to furnish report from an accountant PENALTY U/S 271 BA NATURE OF DEFAULT: Failure to furnish report from an accountant as required u/s 92 E MINIMUM PENALTY: Fixed at Rs 100000 WHO CAN IMPOSE PENALTY? Assessing Officer. Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed

PENALTY U/S 271 C (A) NATURE OF DEFAULT: Failure to deduct the whole or PENALTY U/S 271 C (A) NATURE OF DEFAULT: Failure to deduct the whole or any part of tax as required under Chapter XVIIB MINIMUM PENALTY: Amount equal to tax which has not been deducted. MAXIMUM PENALTY: Same as minimum WHO CAN IMPOSE PENALTY? Joint Commissioner Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed

 Where tax has already been paid by the payee, on penalty can be Where tax has already been paid by the payee, on penalty can be levied on the assessee – payer for the failure to deduct tax at source – Wipro GE Medical Systems Ltd. V. Ito [2005] ( Bang. ) Penalty is leviable for default in payment of tax and not for default in payment of interest – Great Valule Foods v. CIT [2009] (Asr. ) (Mag. ).

PENALTY U/S 271 C (B) NATURE OF DEFAULT: Failure to pay the whole or PENALTY U/S 271 C (B) NATURE OF DEFAULT: Failure to pay the whole or any part of the corporate dividend tax as required u/s 115 -O or 194 B MINIMUM PENALTY: Amount equal to tax which has not been paid. MAXIMUM PENALTY: Same as minimum WHO CAN IMPOSE PENALTY? Joint Commissioner Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed

PENALTY U/S 271 CA NATURE OF DEFAULT: Failure to collect the whole or any PENALTY U/S 271 CA NATURE OF DEFAULT: Failure to collect the whole or any part of tax as required under Chapter XVIIBB MINIMUM PENALTY: Amount equal to tax which has not been collected. MAXIMUM PENALTY: Same as minimum WHO CAN IMPOSE PENALTY? Joint Commissioner Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed

PENALTY U/S 271 D NATURE OF DEFAULT: Any loan or deposit taken or accepted PENALTY U/S 271 D NATURE OF DEFAULT: Any loan or deposit taken or accepted in contravention of section 269 SS MINIMUM PENALTY: Amount equal to the loan or deposit taken or accepted. MAXIMUM PENALTY: Same as minimum WHO CAN IMPOSE PENALTY? Joint Commissioner Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed

PENALTY U/S 271 E NATURE OF DEFAULT: Any loan or deposit which is repaid PENALTY U/S 271 E NATURE OF DEFAULT: Any loan or deposit which is repaid in contravention of section 269 T MINIMUM PENALTY: Amount equal to the deposit which is repaid MAXIMUM PENALTY: Same as minimum WHO CAN IMPOSE PENALTY? Joint Commissioner Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed

 SEC – 269 SS : Sec 269 SS provides that if the amount SEC – 269 SS : Sec 269 SS provides that if the amount of loan / deposit or the aggregate amount of such loan / deposit is Rs. 20000/or more , then the same shall not be taken / accepted otherwise than by an account payee cheque / draft. The scheme of legislation is quite clear that no penalty is attracted with reference to amount of loan / deposit below of RS. 20000/- and that penalty would only be exigible with reference to further loan / deposit in exceed of Rs. 20000/- - Ravi Iron & Scrap Co. v. CIT [2001]

 Ignorance of law is no excuse for violation of provisions of sections 269 Ignorance of law is no excuse for violation of provisions of sections 269 SS and 269 TT [Udaichand Santoshkumar Jain vs ITO 2003] Where the assessee obtains certain loans from his wife in case for construction of house which was naturally a joint venture for prosperity of family and the transaction did not involve any interest limit and there was no promise to return amount with or w/o interest , it could be said that there was reasonable causes for non complying with section 269 SS. [Dr. B. G. Panda v. CIT 2000]

 In case the assessee had accepted deposit or taken loan from agriculturalist who In case the assessee had accepted deposit or taken loan from agriculturalist who had no bank account default was mainly technical in nature and penalty was not attracted [ITO v. Tarlochan Singh 2003] When the credit entry made in books of account of assessee are by way of transfer entry, there had been no deposit as per mode of section 269 SS. [CIT v. Lala Murari Lal and Sons 2004]

 No penalty can be levied where the loan had been received by the No penalty can be levied where the loan had been received by the assessee in a case exceeding the prescribed limit from the family member on a Sunday, to be kept in safe custody and use in business. [CIT v. T. R. Renagrajan 2005]

PENALTY U/S 271 F NATURE OF DEFAULT: Failure to furnish a return of income PENALTY U/S 271 F NATURE OF DEFAULT: Failure to furnish a return of income as required by section 139(1) before the end of the relevant assessment year. MINIMUM PENALTY: Fixed at Rs. 5000 WHO CAN IMPOSE PENALTY? Assessing Officer. Sec. 273(B): if assessee having a reasonable cause for said failure then no penalty or prosecution shall be imposed