Newly Inserted Section 270A Income Tax Act, 1961 - An analysis

Background of Section 271A:

The Income-Tax Act has inserted sub-section (7) in section 271 to provide as ‘The provision of Section 271 shall not apply to and in relation to any assessment for the assessment year commencing on or after 01.04.2017. Due to the insertion of the said sub-section in Section 271, the penalty leviable under section 271(1)(b) in respect of failure to comply with the notice under section 142(1) or Section 143(2) or failure to comply with direction issued under section 142(2A) has been merged under Section 272A(1). Further, penalty for concealment of the particulars of income or furnishing inaccurate particulars of income leviable under Section 271(1) (C) will now be levied under the newly inserted Section 270A w.e.f  01.04.2017.

The newly inserted section provides for levy of penalty in cases of under-reporting and misreporting of income instead of concealment of the particulars of income or for furnishing inaccurate particulars of income. 

Proviso of the said section says that “ the Assessing officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner may, during the course of any proceeding 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.  

Reasons for under-reporting of income:

• Where under - reported income is in consequence of misreporting of income - Section 270A r.w.s. 270A(9) : Penalty 200% of the amount of tax payable on under - reported income
• In respect of under - reported income, the assessee offers an Explanation & the relevant Income Tax Authority ***  is satisfied with the same - Section 270A (6)(a) : Penalty  Nil
• Where the method employed to determine under reported - income properly deduced there from - Section 270A (6) (b) : Penalty  Nil
• Where under - reported income determined is based on any estimate by an assessee on his own, estimated  the lower amount of addition or disallowance on the same - Section 276A(6) (c) - Penalty  Nil
• Where under - reported income is represented by any addition made in conformity with the arm’s length price determined by the Transfer Pricing officer - Section 270 A (6) (d): Penalty  Nil
• Where under - reported income is due to amount of undisclosed income referred to in Section 271AAB i.e. Penalty where search has been initiated - Section 270A(6) (e): Penalty  Nil
• Where under-reported income is for any other reason. Section 270 A (1) - Penalty 50% of the amount of tax payable on under - reported income.

Reasons for misreporting of income:  Penalty: 200% of the amount of tax payable on misreporting of income

• Misrepresentation or suppression of facts;
• Failure to record investments in the books of accounts;
• Claim of expenditure not substantiated by any evidence;
• Recording of any false entry in the books of account;
• Failure to record any receipt in books of accounts having a bearing on total income; and
• Failure to report any international transaction or any transaction deemed to be international transaction or any specified domestic transaction.

Salient Features of Section 270A

Brief analysis on the basis of present legal provisions:

1. Misreporting will not attract penalty under section 270A at 200%.
2. To attract the penalty at 200%, misreporting should result in assessed income being more than what is determined on processing under section 143(1)(a).
3. The Department may match cash deposits with returns filed for past assessment years up to and including AY 2016-17 in February 2017 itself and if it does not match, notices may be sent out.
4. In appropriate cases, surveys and raids may take place also. 2017-18. If that happens, assessee may not get a chance to say ‘As current year’s Income” in Tax Return of Assessment year 2017-18.
5. Further, Department will not accept a disproportionate compared to preceding year as current year's income unless satisfactorily explained.
6. For e.g. if ‘X’ declares a total income of Rs.5 lakhs in preceding year and declares a huge amount of Rs. 50 Lakhs including a huge cash deposit of say Rs. 25 Lakhs, the Department is unlikely to accept the same as current year’s income.
7. Further, the Department may not wait till Tax Return of current year is filed and based on report by bank it may initiate survey or search.
8. Declaring past years' income as current year's income is making false statement in verification and would attract prosecution under section 277.
9. Disclosure of huge cash deposit as “Current Year’s Income” may result in investigations under VAT, Service Tax etc.
10. Provisions of “The Prohibition of Benami Property Transactions Act, 1988 as amended by the 2016 Amendment Act” may be invoked.
11. Under the said Act, whoever is found guilty shall be punishable for rigorous imprisonment up to 7 years and fine up to 25% of fair market value of the property.
12. Benami property is liable to confiscation.

Reference:

1. Taxmann’s Income Tax Act, as amended by Finance Act, 2016, 60th Edition
2. A N Aiyar’s Indian Tax Laws - 2016, as amended by Finance Act, 2016, 53rd  Edition 
3. Direct Taxes - Laws & Practice by Dr. Girish Ahuja & Dr. Ravi Gupta, as amended by Finance Act, 2016, 7th Edition
4. Kanga & Palkhivala’s - The Law and Practice of Income Tax - Volume II, Tenth Edition
5. Latest Media Reports