Tax

CHAPTER I

INTRODUCTION

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INTRODUCTION

A tax is a financial charge or other levy imposed upon a taxpayer by a state or the

functional equivalent of a state such that failure to pay is punishable by law. Taxes are

also imposed by many administrative divisions. Taxes consist of direct or indirect

taxes and may be paid in money or as its labour equivalent.

According to Black's Law Dictionary, a tax is a "pecuniary burden laid upon

individuals or property owners to support the government a payment exacted by

legislative authority." It "is not a voluntary payment or donation, but an enforced

contribution, exacted pursuant to legislative authority" and is "any contribution

imposed by government whether under the name of toll, tribute, tallage, gabel,

impost, duty, custom, excise, subsidy, aid, supply, or other name.

Money provided by taxation has been used by states and their functional equivalents

throughout history to carry out many functions. Some of these include expenditures

on war, the enforcement of law and public order, protection of property, economic

infrastructure (roads, legal tender, enforcement of contracts, etc.), public works, social

engineering, subsidies, and the operation of government itself. Governments also use

taxes to fund welfare and public services. A portion of taxes also go to pay off the

state's debt and the interest this debt accumulates. These services can

include education systems, health care systems, pensions for the

elderly, unemployment benefits, and public transportation. Energy, water and waste

management systems are also common public utilities. Colonial and modernizing

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states have also used cash taxes to draw or force reluctant subsistence producers into

cash economies.

Governments use different kinds of taxes and vary the tax rates. This is done to

distribute the tax burden among individuals or classes of the population involved in

taxable activities, such as business, or to redistribute resources between individuals or

classes in the population. Historically, the nobility were supported by taxes on the

poor; modern social security systems are intended to support the poor, the disabled, or

the retired by taxes on those who are still working. In addition, taxes are applied to

fund foreign aid and military ventures, to influence the macroeconomic performance

of the economy (the government's strategy for doing this is called its fiscal policy; see

also tax exemption), or to modify patterns of consumption or employment within an

economy, by making some classes of transaction more or less attractive.

A nation's tax system is often a reflection of its communal values and/or the values of

those in power. To create a system of taxation, a nation must make choices regarding

the distribution of the tax burden—who will pay taxes and how much they will pay—

and how the taxes collected will be spent. In democratic nations where the public

elects those in charge of establishing the tax system, these choices reflect the type of

community that the public wishes to create. In countries where the public does not

have a significant amount of influence over the system of taxation, that system may

be more of a reflection on the values of those in power.

All large businesses incur administrative costs in the process of delivering revenue

collected from customers to the suppliers of the goods or services being purchased.

Taxation is no different, the resource collected from the public through taxation is

always greater than the amount which can be used by the government. The difference

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is called the compliance cost and includes for example the labour cost and other

expenses incurred in complying with tax laws and rules. The collection of a tax in

order to spend it on a specified purpose, for example collecting a tax on alcohol to pay

directly for alcoholism rehabilitation centres, is called hypothecation. This practice is

often disliked by finance ministers, since it reduces their freedom of action. Some

economic theorists consider the concept to be intellectually dishonest since, in reality,

money is fungible. Furthermore, it often happens that taxes or excises initially levied

to fund some specific government programs are then later diverted to the government

general fund. In some cases, such taxes are collected in fundamentally inefficient

ways, for example highway tolls.

Some economists, especially neo-classical economists, argue that all taxation

creates market distortion and results in economic inefficiency. They have therefore

sought to identify the kind of tax system that would minimize this distortion.

Since governments also resolve commercial disputes, especially in countries

with common law, similar arguments are sometimes used to justify a sales

tax or value added tax. Others (e.g., libertarians) argue that most or all forms of taxes

are immoral due to their involuntary (and therefore eventually coercive/violent)

nature. The most extreme anti-tax view is anarcho-capitalism, in which the provision

of all social services should be voluntarily bought by the person(s) using them.

PROJECT TITLE

The title of the project is “A STUDY ON VARIOUS PROVISIONS OF

PENALTIES”.

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OBJECTIVES OF STUDY

To know what is direct and indirect tax

To know what is assessment procedure

To get the knowledge update about tax

Scope of the study:

The study was made to know the basic concepts of the income – tax law such as what

is income, whose income is taxable, income of what period is taxable, how the

income is to be computed, Penalties. The provision relating to the computation of

total income under various heads such as Salaries, Income from House Properties,

Income from business or profession, Capital gains, Income from other sources.

Limitation:

The present study has got all the limitation of case study method.

METHODOLOGY

There are two types of data namely primary data and secondary data.

Primary data

Primary data refers to those data that are collected newly and they are not

used earlier. The researcher has to gather the primary data freshly for the

specific study undertaken by him.

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The primary data can be collected by three methods namely observation

method, experimentation method and survey method.

Secondary data

The secondary data refers to those data which were gathered for some other

purpose and are already available in the firm’s internal records and

commercial trade or government publications.

PRESENTATION OF THE STUDY

The present study is arranged as follows:

Chapter 1: “Introduction” gives an introduction to the title and to the report.

Chapter 2: Deals with Concept Of Penalty.

Chapter 3: Deals with Provision s of penalty.

Chapter 4: Deals with the Case study

Chapter 5: Conclusion.

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CHAPTER II

CONCEPT OF PENALTY

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CONCEPT OF PENALTY

As per Income Tax Act 1961 “A Penalty is a punishment inflicted by a law of

violation”. The expression penalty is a word of wide significance. Sometimes, it

means recovery of an amount as a penal measures even in civil proceedings

''There is an immense need to have a proper regulatory mechanism for prevention of

anti-competitive agreement which not only affect the market economy leading to

monopolistic approach but also victimizes the consumers and thereby cause harm to

the entire economy creating hindrance to the competition in the market.''

-Adam Smith

The above quote of Adam Smith is absolutely true in today’s global conditions and

‘the Act’ takes care of the approach suggested by Adam Smith.The term ‘Penalty’ has

been defined in Oxford Dictionary as – ‘punishment imposed for breaking a law, rule,

or contract or a disadvantage or unpleasant experience suffered as the result of an

action or circumstances ‘Penalty, being punitive measure incorporated in an Act /

Law are the essence to follow a law.

Every assessee paying service tax should file their returns on time in order to avoid

interest and penalty provisions. Under service tax, non-registration, non-maintenance

of books of accounts, not furnishing proper information, etc can attract penalty. In

order to avoid these penal provisions, an assessee should properly comply with all the

provisions under service tax and avoid mistakes.

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The penalties under this are not mandatory and can be waived off or reduced for

sufficient reasons. If service tax and interest is paid before Show Cause Notice, then

penalty cannot be imposed under this section. However interest being civil liability, is

mandatory and has to be paid even if the evasion of duty is not mala fide or

intentional.

Features of penalty

Penal In nature

Quasi Criminal Proceedings

Elementary principles of criminal law applies

Conscious Act

There are three categories under the Income Tax Act, Ch. 75:01:

(i) Administrative Penalties

(ii) Specific Offences

(iii) General Penalty

1. Administrative … non compliance with requirements of the Act or Regulations

2. Specific Offences… on summary conviction in respect of particulars offences

committed under the Act.

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3. General Penalty…. Imposed on summary conviction – failure to fulfill

requirements of the Act.

Administrative

Sec. 76 S.S. (6)

Failure to furnish a return of income for the year of income 1987 and subsequent

years. Any person who fails, neglects or refuses to furnish a return of income for the

year of income 1987 and subsequent years after six (6) months from the time required

to file the return, shall thereafter in addition to any other penalty provided under this

Act, be liable to a penalty of $100. for every six (6) months or part thereof during

which such failure, neglect, or refusal continues.

Sec. 76 S.S.(7)

Failure to furnish a return for any year of income preceding the year of income

1987. Any person who has not furnished a return of income for any year of income

preceding the year of income 1987 and fails, neglects or refuses to furnish any such

return on or before October 31, 1988 shall in addition to any other penalty provided in

this Act, be liable to a penalty of $100. in respect of any such return for every six (6)

months or part thereof during which such failure, neglect or refusal continues.

Sec. 83(4)

Filing an incorrect Income Tax Return. Additional tax not exceeding the amount

assessed by the Board provided that the taxpayer proves that the omission or

incorrectness of the return was not due to fraud, covin, act or contrivance, or gross or

willful neglect.

Sec 83(5)

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Neglect or refusal to file a return. Additional tax equal to three (3) times the

normal tax (unless the taxpayer can prove that neglect or refusal was not without a

reasonable cause).

Sec. 99(4)

Failure to remit the P.A.Y.E. deducted will result in a penalty of 100% or $40.00

whichever is greater.

Specific Offences

Failure to file a tax declaration.Sec. 98(2)

Any person who fails to file a declaration is liable on summary

conviction to a fine of $3000.

Sec. 99(7)

Failure to deliver account of certificate of tax deducted or

withheld.

Any person, who fails to deliver an account or certificate to any

person

from whose emoluments the tax was deducted or withheld or to the

Board for the purpose of accountability, is guilty of an offence and

is liable on summary conviction to a fine of $75. for every day during

which such failure continues.

Sec. 118(6)

Any person (officer who divulges confidential information with

regard to

any manufacturing process or trade secret obtained during the

compliance of the provisions of Section 118 re “Powers of Entry for

certain purposes” is liable to a fine of $15,000 or to imprisonment for

twelve (12) months.

Sec. 118 (7) Interference with anyone doing anything he is authorised to do

under the Income Tax Act.

Any person who hinders, molests or interferes with anyone doing

anything he is authorised to do under the Income Tax Act, is guilty of

an

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offence and liable on summary conviction to a fine of $15,000. and to

imprisonment for two (2) years.

Sec 119 Offence in respect of fraud.

Any person who knowingly or recklessly makes false or deceptive

statements or representations in a return, is guilty of an offence, and in

addition to any penalty otherwise provided is liable on summary

conviction to a fine of fifty thousand dollars $50,000 and to

imprisonment for three (3) years.

General PenaltySec. 121 Any person guilty of an offence under this Act is liable on summary

conviction to a fine of thirty thousand dollars $30,000. or toimprisonment for two years or both

Sec. 76(5) A person is guilty of an offence in each of the under-mentioned sections:(i) Any person who fails, refuses or

neglects to file a return.

Sec. 77(2) (ii) Any person who, after beingrequired by the Board to make areturn, fails or neglects to do sowithin the specific time, whether ornot he is liable to tax;

Sec. 97(2) (iii) Any person who fails to furnish theBoard with a schedule of incomewithin a specified time;

Sec. 97(4) (iv) Any person who, without lawfulexcuse, refuses or neglects to attendor give evidence or to produce booksor other documents or who willfullygives false evidence; and

Sec.117(5) (v) Any person who –(a) Fails to give to the Board any

information as required by thissection; or

(b) Fails to produce for theinspection of the Board anyrecords which he may berequired by the Board to produce.

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Other Measures

In addition to the general penalty and administrative penalty on the failure to remit

P.A.Y.E. deducted, interest is charged at the rate of twenty percent (20%) per annum

on the amount outstanding plus the penalty from the day on or before which he was

required to make the payment to the day payment.

Sec.103(1) Late payment of Income Tax outstanding at April 30. Interest is

charged on Income Tax outstanding at April 30, from May 1 to the day of payment at

the rate of twenty per cent (20%) per annum.

Sec.103(2) Late payment of Tax by Quarterly Instalment. In addition to the

interest payable under subsection (1) where any person being required by this Act to

pay a part of instalment of tax has failed to pay all or any part thereof as required, he

shall on payment of the amount he failed to pay, pay interest of twenty per cent (20%)

a year from the day on or before which he was required to make the payment or the

beginning of the period in respect of which he becomes liable to pay interest thereon

under subsection (1) whichever is earlier.

Section 79 Section 79 of the Act is amended by deleting subsection (3B) and

substituting the following subsection:

3B. Where a person to whom subsection 3A applies had paid quarterly instalments

which amount to less than the tax liability disclosed in the return of the year of

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income, such person shall, with effect from 1st January, 1992, pay interest under

section 103 on the difference between

(a) the tax liability on the chargeable income of the previous year of income plus 80%

of the increase in the tax liability of the current year on the previous year of income;

and

(b) the total amount paid by the end of the fourth quarter.

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CHAPTER III

PROVISION OF PENALTY

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Provision Of Penalty

With the increase in online income tax return filing, its important that every assessee

filing returns online understand the various penalty provisions.

Under the Income Tax Act,

(i) Tax should be paid proportionately over the course of the year rather than as a

lump sum amount at the time of filing of returns

(ii) Tax should be paid in full (100%)

(iii) Income tax teturns should be filed within the due dates specified by the

Act

For failure to meet these objectives, the Act lays down penalties under section (u/s)

234 A, 234 B, 234 C, 271 F. Let us look at these individually below:

234 A: Interest for defaults in furnishing return of income

If assessee has not filed income tax return before the due date specified u/s 139(1) of

the Income Tax Act (currently 31st July for Individuals; For AY 2012-13 this was

extended to 31st August,2012) then assessee is liable to pay penalty u/s 234 A

Penalty amount: Simple interest of 1% on outstanding tax liability.

Example: Assessee is filing return two months after due date and has Rs. 1,000/- as

outstanding tax liability. In this case penalty u/234 A would be 1,000 * 1% * 2 = Rs.

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20/- .

Note: This implies if assessee has no outstanding tax liability (for the year for which

assessee has delayed tax return beyond the due date), then assessee is not liable to any

penalty u/s 234 A.

234 B: Interest for defaults in payment of advance tax

Where the tax paid by the assessee before 31st March of the financial year is less than

90% of the total tax liability for the financial year, the assessee will be liable to pay

penalty u/s 234 B. Thus, if at the time of filing your return you have outstanding tax

liability and this is more than 10% of your tax liability, then you have to pay penalty

u/s 234 B.

Penalty amount: Simple interest of 1% from 1st day of assessment year (1st April) to

date of payment of tax.

Example: Assessee is filing return in June of the assessment year and had paid less

than 90% of tax by 31st March of financial year. His outstanding tax liability is Rs.

2,000/- . In this case penalty u/234 B would be 2,000 * 1% * 3 = Rs. 60/- .

234 C: Interest for deferment of advance tax

Where the assessee has not paid his tax on pro-rata basis over the course of the

financial year, the assessee has to pay interest u/s 234 C.

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Persons other than companies have to pay advance tax if their total tax liability for the

financial year is more than Rs. 10,000/-. Such persons have to pay advance tax in

three instalments.

1 30% of total tax liability by 15th September of financial year

2. 60% of total tax liability by 15th December of financial year

3. 100% of total tax liability by 15th March of financial year

Penalty amount: Simple interest @1% per month for 3 months for short payment in

first and second instalments and 1% for one month in case of 3rd instalment.

Example:

If the assessee was liable to pay Rs 20,000/- in tax for the financial year, then the

assessee should pay Rs, 6,000/- by 15th September, Rs 12,000/- by 15th December and

Rs 20,000/- by 15th March. And, if the assessee actually paid Rs. 2,000/- on 15 th

September, Rs 8,000/- on 15th December, Rs. 5,000 by 15thMarch and Rs. 5,000/- by

31st March.

Then, penalty u/s 234 C will be as follows:

1. 1st instalment -> 1% on shortfall of Rs. 4,000/- (6,000 – 2,000) for 3 months=

Rs. 120/-

2. 2nd instalment -> 1% on shortfall of Rs 2,000/- (12,000 – 2,000 – 8,000) for 3

months = Rs. 60/-

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3. 3rd instalment -> 1% on shortfall of Rs 5,000/- (20,000 – 2,000 – 8,000 –

5,000) for 1 month = Rs. 50/-

4. Total penalty u/s 234 C = 120 + 60 + 50 = Rs. 230/-

271 F: Penalty for failure to furnish return of income

If the assessee has filed return after 31st March of the assessment year then the

assessing officer (AO) may direct the assessee to pay a penalty of Rs. 5,000/-

This penalty is at the discretion of the AO and is NOT to be paid at the time of filing

your return. The liability to pay this penalty only arises if the AO imposes the penalty

on the assessee. Further where the assessee has had valid reasons for delay in filing

return, no penalty shall be imposed (Sec 273 B)

A brief on Penalties under the Income tax Act, 1961

There are three modes built in the fiscal legislation for encouraging tax compliance:

(a) Charge of Interest, (b) imposition of penalty (c) launching of prosecution against

tax delinquents.  While charging of interest is compensatory on character, the

imposition of penalty and institution of prosecution proceedings act as strong

deterrents against potential tax delinquents.

What are the defaults which may invite levy of penalty?

Chapters XVII and XXI of Income-tax Act, 1961, contain various provisions

empowering an Income-tax Authority to levy penalty in case of certain defaults.  The

following defaults may invite levy of penalty:

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(i)   When the assessee is in default or is deemed to be in default in making payment

of tax, including the tax deducted at source, advance tax and the self assessment tax. 

[Section 221 read with Sec.201(1)]

(ii) Failure to pay the advance tax as directed by the Assessing Officer or as estimated

by the assessee. [Section 273(1)]

(iii) Failure to comply with a notice issued under section 142(1) or 143(2) or failure to

comply with the direction issued under section 142(2A) to get the accounts audited.

[Section 271(1)(b)]

(iv) Concealment of particulars of income or furnishing of inaccurate particulars of

income. [Section 271(1)(c)]

(v) Failure to maintain books of accounts and documents by persons carrying on

profession or business as prescribed under section 44AA. [Section 271A]

(vi) Failure to get the accounts audited in prescribed circumstances or failure to obtain

the prescribed audit report within prescribed time period of failure to furnish the audit

report along with the return, as required under section 44AB. [Section 271B]

(vii) Failure to subscribe to the eligible issue of capital [Section 271BB]

(viia) Penalty for failure to deduct tax at source. [Section 271C]

(viii) Accepting of any loan or deposit or repayment of deposit of Rs.20,000 or more

otherwise than by account payee cheque or account payee draft, in contravention of

the provisions of Section 269SS. [Section 271D]

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(viiia) Repayment of loan in contravention of the conditions imposed in section 269T.

[Section 271E]

(viiib) A. Failure of file the return of income as required under Section 239 (1), shall

entail imposition of penalty. [Section 271F]

B. Failure to file the return as required under the proviso to Section 139(1), in the

event of assessee fulfilling the prescribed conditions, i.e., certain persons in

occupation of immovable property or owner of motor vehicle or subscriber to

telephone, one who incurred expenditure on foreign travel, the holder of the

creditcard or a member of a club, subject to specific conditions, are required to file the

return as per proviso to Section 139(1), failing which penalty may be imposed. 

(Proviso to Section 271F)

(ix) Refusal to answer in contravention of legal obligation. [Section 272A(1)(a)]

(x) Refusal to sign any statement made in the course of income-tax proceedings.

[Section 272A(1)(b)]

(xi) Failure to attend or give evidence or produce books of accounts and documents in

compliance with the requirements of summons under section 131(1). [Section

272A(1)(c)]

(xii) Failure to comply with the provisions of section 139A dealing with

the application for and allotment of Permanent Account Number or General

Index Register Number. [Section 272A(1)(d)]

(xiii) Failure to furnish information regarding securities. [Section 272A(2)(a)]

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(xiv) Failure to give notice of discontinuance of business or profession. [Section

272A(2)(b)]

(xv) Failure to furnish in due time information sought under section 133 of Income-

tax Act. [Section 272A(2)(c)]

(xvi) Failure to furnish in due time prescribed returns/statements. [Section 272A(2)

(c)]

(xvii) Failure to allow inspection or take copies of registers of registers of companies. 

[Section 272A(2)(d)]

(xviii) Failure to furnish in due time the return of income by charitable or religious

institutions.  [Section 272A(2)(e)]

(xix) Failure to deliver in due time a copy of declaration of non-deduction of tax at

source u/s.197A. [Section 272A(2)(f)]

(xx) Failure to furnish a certificate of tax deducted at source to the person on whose

behalf tax has been deducted or collected as required by Section 203 or Section 206C.

[Section 272A(2)(g)]

(xxi) Failure to deduct and pay tax from salary payable to an employee as directed by

the Assessing Officer or the Tax Recovery Officer as required by Section 226(2).

[Section 272A(2)(h)]

(xxii) Failure to allow an Income-tax Authority to collect any information useful or

relevant to the purposes of Income-tax Act u/s.133B. [Section 272AA)]

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(xxiii) Failure to comply with the provisions of section 203a dealing with tax

Deduction Account Number [Section 272BB]

Is the levy of penalty automatic?

No penalty under the Income-tax Act is imposed unless the person concerned has

been given reasonable opportunity of being heard.

What is the minimum and maximum penalty leviable?

The quantum of penalty leviable depends upon the nature of default.  The relevant

section of Income-tax Act prescribe the minimum and maximum penalties which can

be levied.

Can the penalty be reduced or waived?

The Commissioner of Income-tax may reduce or waive the amount of any penalty

imposed or imposable, if prescribed conditions are satisfied.  The assessee should

voluntarily and in good faith make full and true disclosure of income prior to the

detection of concealment by the Assessing Officer.  In certain cases of genuine

hardship,  the penalty levied can be reduced/waived if the assessee has co-operated in

any enquiry relating to the assessment and recovery of taxes.  The waiver/reduction of

penalties is discretionary and dependent upon satisfaction or

prescribed conditions.  No assessee can, a matter of right, claim waiver or reduction

of penalty imposed or imposable upon him.  [Section 273A]

Office and prosecution under the income tax act.  why is prosecution necessary?

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In the fight against tax evasion, the imposition of monetary penalty alone is not

sufficient.  A calculating tax evader finds it profitable to evade tax for years, if he

knows that he may get away with it by paying penalty in the year in which he is

caught.  However, the prospect of landing in jail is a far more dreaded consequence

and works as a deterrent.  Further, for more serious defaults, sometimes launching of

prosecution is prescribed without prescribing monetary penalties.

The Parliament has, therefore, been enacting deterrent laws for effective

implementation of tax laws.  The Income-tax Act contains a separate chapter XXII

wherein offences have been defined and punishment provided.

What are the offences punishable under the income tax act?

The following offences committed by a person are punishable:

(i) Removal, parting with or otherwise dealing with books of accounts, documents,

money, bullion, jewellery or other valuable article or thing put under restraint during

the search. [Section 275A]

(ii) Fraudulent removal, concealment, transfer or delivery of any property or

any interest in the property with the intention to thwart recovery of tax. [Section 276]

(iii) Failure on the part of a liquidator or receiver of a company to give notice of

his appointment to the Assessing Officer or failure to set apart amount notified by the

Assessing Officer, or parting away of company’s properties in contravention of

income-tax provision. [Section 276A]

(iv) Failure to enter into written agreement or failure to furnish the statement of

immovable property intended to be transferred u/s.269UC, or failure to surrender or

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deliver the property u/s.269UE, purchased by the Appropriate Authority or doing or

omitting to do anything u/s.269UL, which will have the effect oftransfer of

property without the permission of the Appropriate Authority (under the provisions of

Chapter XX-C) [Section 276AB]

(v) Failure to pay to the credit of the Central Government the tax deducted at source.  

[Section 276B]

(va) Failure to pay the tax collected at source. [Section 276BB]

(vi) Willful attempt to evade any tax, penalty or interest [Section 276C(1)]

(vii) Willful attempt to evade the payment of any tax, penalty or interest levied under

Income Tax Act. [Section 276C(2)]

(viii) Willful failure to furnish in due time return of income.  [Section 276CC)]

(viiia) Failure to furnish return of income in Search Cases as required under section

158BC [Section 276CCC]

(ix) Willful failure to produce accounts and documents as directed by issue of notice

under section 142(1) [Section 276D]

(x) Willful failure to get the accounts audited as directed by the Assessing Officer

under section 142(2A). [Section 276D]

(xi) Making of a statement in verification or delivery of an account or statement

which is false and which the concerned person knows or believes to be false or does

not believe to be true. [Section 277]

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(xii) Abetting or inducing another person to make and deliver an account or statement

or declaration relating to any taxable income which is false and which he either knows

or believes to be false. [Section 278]

(xiii) Punishment for 2nd & subsequent offences in cases of certain defaults. [Section

278A]. No person shall be punished for any failure if he proves that there is

reasonable cause failure. [Section 278AA].

Who is liable to be prosecuted?

Any person, committing the offence is liable to be prosecuted.  In this connection it is

not necessary that the person should be an assessee under the Income-tax Act.  In the

case of an offence committed by a Company, Firm, Association of Persons or Body of

Individuals, every person in charge of or responsible for the conduct of the business

of the concern as well as the concern are deemed to be guilty.  Similarly, in the case

of an offence by a Hindu Undivided Family, the karta thereof is deemed to be guilty

of the offence.

Is mens rea or culpable mental state or guilty intention necessary?

In case of willful act of omission or commission, the court shall presume the existence

of culpable mental state.  However, the accused can rebut this presumption by

producing necessary evidence before the court.  (Section 278E).

Can the offence be compounded?

Section 279(2) of Income-tax Act empowers a Chief Commissioner of Director

General of Income-tax to compound an offence either before or after the institution of

prosecution proceeding.

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When public servant liable to be prosecuted?

If a public servant furnishes any information in contravention of the provisions of

Section 138(2), prosecution may be instituted against him with the previous sanction

of the Central Government. (Section 280).

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CHAPTER IV

CASE STUDY

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Case Study

Sec 271- Failure to furnish returns, Comply with notices, concealment of income

etc.

If the Assessing Officer or Commissioner (Appeals) or Commissioner in the course of

any proceedings under this Act, is satisfied that any person –

(a) has failed to comply with a notice

(b) has concealed the particulars of his income or furnished inaccurate particulars of

such income, or

(c) has concealed the particulars of the fringe benefits or furnished inaccurate

particulars of such fringe benefits

Observation of Supreme Court in Anvar Ali Case, 76 ITR 696

Gist of the offence under section 28(1)(c) is that the assessee has concealed the

particulars of his income or deliberately furnished inaccurate particulars of such

income and, therefore, the department must establish that the receipt of the amount in

dispute constitutes income of the assessee. If there is no evidence on the record except

the explanation given by the assessee, which explanation has been found to be false, it

does not follow that the receipt constitutes his taxable income.

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Judgment – Prior to explanation to Sec 271

Hindustan Steel Ltd, 83 ITR 26- SC observed:

Penalty will not be imposed because it is lawful to do so. It is a matter of

discretion of the authority to be exercised judicially

Anwar Ali 76 _ ITR 696 –discussed earlier

Khoday Eswara & Sons, 83 ITR 369- SC : It is clear that penalty proceedings

being penal in character, the department must establish that the receipt in

dispute constitutes income of the assessee

Explanation 4 to section 271 (1) (c)

For the purposes of clause (iii) of this sub-section, the expression "the amount of tax

sought to be evaded",- in any case where the amount of income in respect of which

particulars have been concealed or inaccurate particulars have been furnished has the

effect of reducing the loss declared in the return or converting that loss into income,

means the tax that would have been chargeable on the income in respect of which

particulars have been concealed or inaccurate particulars have been furnished had

such income been the total income; in any case to which Explanation 3 applies, means

the tax on the total income assessed as reduced by the amount of advance tax, tax

deducted at source, tax collected at source and self-assessment tax paid before the

issue of notice under section 148 ; in any other case, means the difference between the

tax on the total income assessed and the tax that would have been chargeable had such

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total income been reduced by the amount of income in respect of which particulars

have been concealed or inaccurate particulars have been furnished.

Explanation 5 A to section 271 (1) (c)

In the course of search initiated after 01.06.2007, assessee found to be the owner of :

Any money, bullion, jewellery etc.. And assessee claims that such asset have been

acquired by him utilising wholly or partly his income for previous year; or Any

income based on any entry in any books of account or other documents or transactions

and he claims that such entry represents his income wholly or partly for any previous

year, ended before search date and

Where return of income has been furnished before the said date without

declaring the said income;

Where return of income has not been filed and due date has expired.

Notwithstanding that income has been declared by him, in return furnished on or

before the date of search, he shall for the purpose of penalty u/s 271(1)(c) be deemed

to have concealed the particulars of income.

Suresh Chandra Mittal, 251 ITR 9 –SC :

It is well settled that initial burden lies on revenue to establish that the assessee had

concealed /furnished inaccurate particulars of income. Burden shifts to assessee if he

fails to offer any explanation. However, Expl 1 provides for shifting of this burden

again where the explanation offered by the assessee is found to be bonafide.

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K C Builders & Another , 265 ITR 562 – SC :

The word "concealment" inherently carried with it the element of mens rea.

Therefore, the mere fact that some figure or some particulars have been disclosed by

itself, even if it takes out the case from the purview of nondisclosure, it cannot by

itself take out the case from the purview of furnishing inaccurate particulars.

Virtual Soft Systems, 289 ITR 83 – SC :

This court as well as the various High Courts of the country have consistently held

that the statute creating the penalty is the first and the last consideration and must be

construed within the term and language of the particular statute. In Bijaya Kumar

Agarwala v. State of Orissa [1996] 5 SCC 1 it has been held by this court in

paragraphs 17 and 18 as under: "17. Strict construction is the general rule of penal

statutes. Justice Mahajan in Tolaram Relumal v. State of Bombay, AIR 1954 SC 496,

at pages 498-499, stated the rule in the following words: 'If two possible and

reasonable constructions can be put upon a penal provision, the court must lean

towards that construction which exempts the subject from penalty rather than the one

which imposes penalty. It is not competent to the court to stretch the meaning of an

expression used by the Legislature in order to carry out the intention of the

Legislature.'

Gold Coin Health Food P Ltd , 304 ITR 308 -SC :

Whether the penalty was leviable even in a case where addition of concealed income

reduces the returned loss?

35

Finding: Yes.

The court has to analyse the nature of the amendment to come to a conclusion

whether it is in reality a clarificatory or declaratory provision. Therefore, the date

from which the amendment is made operative does not conclusively decide the

question. The court has to examine the scheme of the statute prior to the amendment

and subsequent to the amendment to determine whether the amendment is

clarificatory or substantive.

T Ashok Pai ,292 ITR 11- SC :

It is not a case where penalty has been imposed for breach or contravention of a

commercial statute where lack of intention to contravene or existence of bona fides

may not be of much importance. It is also not a case where penalty is mandatorily

imposable. It was, therefore, not a case where the enabling provision should have

been invoked.

Citi Vs Reliance Petroproducts Pvt ltd.-322 ITR 158 SC

Penalty – Concealment of “particulars” of income In order to be covered by section

271 (1)(c), there has to be concealment of particulars by the assessee. Making

incorrect claim does not amount to concealment of particulars. To attract penalty, the

details furnished in return must not be accurate or correct. Mere making of claim

which is not sustainable in law will not amount to furnishing of inaccurate particulars.

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CHAPTER V

CONCLUSION

37

Conclusion

Indian tax compliance requires careful and timely attention. Detailed understanding of

various rules and regulations often demand the study of previous tax decisions by

Indian courts. Tax litigation is common in India and can be both time-consuming and

expensive. However, with proper front-end planning and professional advice, the tax

liability and compliance costs can be kept at manageable levels. The regulations

permit taxpayers to obtain advance rulings on tax issues involving non-residents from

the authorities. The adoption of guidelines by the Authority for calculating fines

would clarify enforcement and the method for calculating penalties, thus providing

greater legal certainty for offenders. However, while imposing penalties, the principle

of proportionality should not be avoided as a whole and some regard should be given

to it in order to ensure that over-deterrence is not caused as it would discourage the

potential investors and may also lead to the closure of the enterprise.

Increase in tax payers call for more reliance on voluntary compliance of tax laws by

assesses. Appropriate penal provisions needed to impel compliance by imposing

additional tax burden in case of non compliance. Penalties to be within reasonable

limits to be more effective Object should be to bend and not to break the tax payer.

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BIBLIOGRAPHY

BIBILOGRAPHY

BOOKS

DIRECT AND INDIRECT TAX AINAPURE

ICAI TAX MODUL ICAI

TAXMANN SIGNHANIYA

WEBSITE

WWW.GOOGLE.COM

http://www.incometaxindiapr.gov.in

http://www.caclubindia.com

http://www.simpletaxindia.net