CIT - jb nagar cpe study circle of wirc of icai
CIT - jb nagar cpe study circle of wirc of icai
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J. B. Nagar CPE Study CircleWIRC <strong>of</strong> ICAISTUDY CIRCLE MEETINGOnSunday, 16 th January, 2011Penalty & ProsecutionAdvocate Paras S. Savla1
INTRODUCTIONThere are three modes built in the fiscal legislation for encouraging taxcompliance:(a)Charge <strong>of</strong> Interest,(b) Imposition <strong>of</strong> penalty –Chapter XXI Penalties imposable(c)Launching <strong>of</strong> prosecution against tax delinquentsChapter XXII –Offences and prosecutions.2
CHAPTER XXI – PENALTIES IMPOSABLE271. (1) If the Assessing Officer or the Commissioner (Appeals) or theCommissioner in the course <strong>of</strong> any proceedings under this Act, issatisfied that any person—(b) has failed to comply with a notice under sub-section (2) <strong>of</strong>section 115WD or under sub-section (2) <strong>of</strong> section 115WE or undersub-section (1) <strong>of</strong> section 142 or sub-section (2) <strong>of</strong> section 143 orfails to comply with a direction issued under sub-section (2A) <strong>of</strong>section 142,he may direct that such person shall pay by way <strong>of</strong> penalty,—[(ii) in the cases referred to in clause (b), in addition to tax, ifany, payable by him, a sum <strong>of</strong> ten thousand rupees for each suchfailure ;3
Defective notice<strong>CIT</strong> vs. Dewan Kunj Lal Kanhaiya lal 164 ITR 284 (Pat). Non compliance to the notice under section 142(1), but theassessment was completed 143(3)Akhil Bhartiya Prathmik Shikshak Sangh Bhavan Trust vs. ADIT 115TTJ 419 (Del.) 2008Parmeshwari Textiles vs. ITO 92 TTJ 764 (Jodhpur) 2005 Penal provision – whether mandatory or discretionary –<strong>CIT</strong> v. Smt. P.K. Noorjahan [1999] 237 ITR 570 (SC)<strong>CIT</strong> v. P. Natarajan [2004] 266 ITR 219 (Mad)Hindustan Steel Ltd. v. State <strong>of</strong> Orissa [1972] 83 ITR 26 (SC)5
Reasonable Cause – Section 273B<strong>CIT</strong> vs. Standard Merchantile Company 160 ITR 613 (Pat.)Punjab Silk Store vs. ITO 42 TTJ 132 (Del.) 1991). Limitation – 275 - Six months6
CONCEALMENT AND INACCURATE PARTICULARS271. (1) If the Assessing Officer or the Commissioner (Appeals) or theCommissioner in the course <strong>of</strong> any proceedings under this Act, issatisfied that any person—(c)has concealed the particulars <strong>of</strong> his income orfurnished inaccurate particulars <strong>of</strong> such income, or(d) has concealed the particulars <strong>of</strong> the fringe benefits orfurnished inaccurate particulars <strong>of</strong> such fringe benefits,he may direct that such person shall pay by way <strong>of</strong> penalty,—7
Finding on charge for penalty Penalty proceeding can be initiated on two charges i.e.(1) concealment <strong>of</strong> particulars <strong>of</strong> income and(2) furnishing <strong>of</strong> inaccurate particulars <strong>of</strong> income. There must be a clear finding about the charge <strong>of</strong> penalty In the absence <strong>of</strong> such finding, the order would be bad in law.Manu engg. Works 122 ITR 306 (Guj)New Sorathia Engg. Co 282 ITR 642 (Guj)Padma Ram Bharali 110 ITR 54 (Gau).8
Finding on charge for penalty Basis <strong>of</strong> satisfaction cannot be altered subsequently<strong>CIT</strong>-v-Kejriwal Iron Stores 168 ITR 715 (Raj). Even penalty cannot be levied for different item.<strong>CIT</strong>-V- C.K.Nehra & Bros 117 ITR 19 Cal. If proceedings are initiated on charge <strong>of</strong> concealment then penaltycannot be levied on the charge <strong>of</strong> furnishing <strong>of</strong> inaccurateparticulars <strong>of</strong> income and vice versa.<strong>CIT</strong>-v- Lakhdhir lalji 85 ITR 77(Guj)9
"Concealment <strong>of</strong> particulars <strong>of</strong> income" and "furnishing <strong>of</strong> inaccurateparticulars <strong>of</strong> income“Dilip Shr<strong>of</strong>f [291 ITR 519](1) According to Law Lexicon, the word “Conceal” means –“to hide or keep secret. The word ‘conceal’ is con + celare which implies tohide. It means to hide or withdraw from observation; to cover or keep fromsight; to prevent the discovery <strong>of</strong>; to withhold knowledge <strong>of</strong>. The <strong>of</strong>fence <strong>of</strong>concealment is, thus, a direct attempt to hide an item <strong>of</strong> income or a portionthere<strong>of</strong> from the knowledge <strong>of</strong> the income tax authorities’.(2) In Webster’s Dictionary, ‘Inaccurate” has been defined as ;“not accurate, not exact or correct; not according to truth; erroneous; as aninaccurate statement, copy or transcript”. There must be a clear finding aboutthe charge <strong>of</strong> penalty10
The stress is on “the particulars <strong>of</strong> income” which are eitherconcealed or furnished inaccurately by the assessee. Kanbay S<strong>of</strong>tware India (P) Ltd. 122 TTJ 721(Pune).The Tribunal considered the meaning <strong>of</strong> the expression"furnishing <strong>of</strong> inaccurate particulars <strong>of</strong> income" appearing in section271(1)(c). This view is now fortified by the recent Supreme Court Judgment inthe case <strong>of</strong> Reliance Petroproducts 322 ITR 158 SC.11
Both the words concealment and inaccurate particulars indicateprima facie the intention <strong>of</strong> an assessee to hide his income orparticulars there<strong>of</strong> from the department. These words cast a burdenon the department to prove the guilty mind. To get over this difficulty, Explanation 1 was introduced in thissection. This explanation shifts the burden <strong>of</strong> pro<strong>of</strong> from A.O. to theassessee. Instead <strong>of</strong> the A.O. being under an obligation to establishthe malafides <strong>of</strong> the assessee, the burden is on the assessee toestablish his bonafides and innocence. This explanation provides a rule <strong>of</strong> evidence for raising a rebuttablepresumption in favour <strong>of</strong> the revenue.12
Explanation 1.—Where in respect <strong>of</strong> any facts material to thecomputation <strong>of</strong> the total income <strong>of</strong> any person under this Act,—(A) such person fails to <strong>of</strong>fer an explanation or <strong>of</strong>fers anexplanation which is found by the Assessing Officer or theCommissioner (Appeals) or the Commissioner to be false, or(B) such person <strong>of</strong>fers an explanation which he is not able tosubstantiate and fails to prove that such explanation is bona fideand that all the facts relating to the same and material to thecomputation <strong>of</strong> his total income have been disclosed by him,then, the amount added or disallowed in computing the total income<strong>of</strong> such person as a result there<strong>of</strong> shall, for the purposes <strong>of</strong> clause (c)<strong>of</strong> this sub-section, be deemed to represent the income in respect <strong>of</strong>which particulars have been concealed.13
After Explanation 1 Every difference between reported and assessed income needs anexplanation. If no explanation is <strong>of</strong>fered, penalty may justify penalty. If explanation is <strong>of</strong>fered, but is found to be false, penalty will beexigible. If explanation is <strong>of</strong>fered and it is not found to be false, penalty maynot be leviable, - such explanation is bona fide the assessee had made available to the A.O. all the facts andmaterials necessary in computation <strong>of</strong> income.14
Explanation 1 to section 271(1)(c) cannot be applied where chargeagainst the an assessee is furnishing <strong>of</strong> inaccurate particulars <strong>of</strong>income since it provides a deeming fiction qua concealment <strong>of</strong>particulars <strong>of</strong> income only and consequently cannot be extended to acase where charge against furnishing <strong>of</strong> inaccurate particulars <strong>of</strong>income. Dilip Shr<strong>of</strong>f [291 ITR 519], it held that the order imposing penalty isquasi criminal in nature and the burden lies on the department toestablish that the assessee has concealed his income. Union <strong>of</strong> India vs. Dharmendra Textiles Processors [306 ITR 277]has held that wilful concealment is not an essential ingredient forlevy <strong>of</strong> penalty u/s 271(1)(c).15
After decision <strong>of</strong> SC in Dharamendra Textile Processor - Whether levy <strong>of</strong> penalty is automatic ? UOI v. Rajasthan Spinning & Weaving Mills (SC) 317 ITR 1(SC)Not automatic - explained the decision rendered in DharamendraTextile Processor Conditions expressly mentioned in particular provision needs toapplied Reliance Petro-products 322 ITR 158 (SC) Kanbay S<strong>of</strong>tware India P. Ltd. v. D<strong>CIT</strong> - Pune ITAT A<strong>CIT</strong> v. VIP Industries Ltd. (2009) 21 DTR 153 (Mum) Mimosa Investment Co. P. Ltd. v. ITO (2009) 28 SOT 470 (Mum)16
Explanation 1 - how to judge whether the explanation given by anassessee is bonafide or not. National Textiles vs. <strong>CIT</strong> [249 ITR 125 (Guj)] Shiv Lal Tak vs. <strong>CIT</strong> [251 ITR 373 (Raj)] <strong>CIT</strong> vs. Mussaddilal Ram Bharose [165 ITR 14 ](SC) - theburden placed upon the assessee is not discharged by anyfantastic explanation. Whether express invocation <strong>of</strong> explanation 1 necessary <strong>CIT</strong> vs. P. M. Shah [203 ITR 792] and <strong>CIT</strong> vs. DharamchandShah [204 ITR 462] K.P.Madhusudan-v-<strong>CIT</strong> 251 ITR 99 (SC).17
SATISFACTION - SECTION 271(1B) <strong>CIT</strong> vs. Ram Commercial Enterprises Ltd. (2000) 246 ITR 568 (Del) Sub-section (1B) was inserted in section 271 by the Finance Act,2008 with retrospective effect from 1st April, 1998 to provide that ifthe assessment order contained a direction for initiation <strong>of</strong> penaltyproceedings under section 271(1)(c), it would be deemed to constitutesatisfaction <strong>of</strong> the Assessing Officer. Ms. Madhushree Gupta vs. Union <strong>of</strong> India (2009) 317 ITR 143 (Del).18
DEEMED CONCEALMENT – EXPLANATION 3, 5, & 5A. Explanation 3 Effect- This explanation provides for the case <strong>of</strong> a new assessee who hasnot been previously assessed to income tax.- Deemed concealment <strong>of</strong> income for non-filing <strong>of</strong> return <strong>of</strong> incomebefore time limit prescribed u/s.153(1) i.e. completion <strong>of</strong> assessment. Reasonable Cause specifically provided20
S.P. Hinduja (Bigger HUF) vs. ITO (2005) 279 ITR (AT) 178 (Mum) Salvi Divakar Shankar vs. A<strong>CIT</strong> (1999) 72 ITD 552 (Pune) When tax is deducted at source, though no return was filed, salary incomecannot be treated as undisclosed source. - Shri Terry J. Mendonca vs. D<strong>CIT</strong>,ITA No. 779/Mum/2003, Bench ‘A’ dated 27-3-07. Advance tax paid, return not filled – to the extent <strong>of</strong> advance tax cannot betreated as undisclosed income. - P. R. Patel vs. Dy. <strong>CIT</strong> (2001) 78 ITD 51(Mum.) ITO vs. Bombaywala Readymade Stores (Ahd.-ITAT) (2004) 271 ITR 577AY (TM) 1985-8621
Explanation 5 Applicable only in case <strong>of</strong> search action Prior to deletion, the provision contained for levy <strong>of</strong> penalty in searchcases where assets are found and which are acquired out <strong>of</strong>undisclosed income Immunity is provided from levy <strong>of</strong> penalty upon fulfillment <strong>of</strong> certainconditions22
Explanation 5 – Immunity if- income or transaction resulting in income is recorded in the books <strong>of</strong>account before the date <strong>of</strong> search action; or such income is disclosed to the Chief Commissioner or Commissionerbefore the date <strong>of</strong> search action; or in the search action, disclosure is made in statement recorded u/s.132(4)and specifying therein the manner <strong>of</strong> earning the income disclosed andalso pays tax together with interest in respect <strong>of</strong> such income.23
Third condition consists <strong>of</strong> 3 parts- Disclosure made in statement recorded u/s.132(4); Recording <strong>of</strong> statement only by authorised <strong>of</strong>ficer as per132(4) Disclosure thus only in statement u/s.132(4) & nototherwise Disclosure by way <strong>of</strong> letter or statement u/s.131 -immunity may not be available24
Manner <strong>of</strong> earning the income to be disclosed; To be specified in the statement recorded & not later If not specified or where no such question asked - immunity stillavailable<strong>CIT</strong> v. Mahendra C. Shah [2008] 299 ITR 305 (Guj);<strong>CIT</strong> v. E.V. Balashanmugham [2006] 286 ITR 626 (Mad);<strong>CIT</strong> v. Nem Kumar Jain [2006] 151 Taxman 187 (All);<strong>CIT</strong> v. Radha Kishan Goel [2005] 278 ITR 454 (All);Gulabrai V. Gandhi v. A<strong>CIT</strong> [2003] 84 ITD 370 (Mum)Also refer – Indus Engg. Co. v. A<strong>CIT</strong> (Inv) 184 Taxman 269 (Bom)25
Payment <strong>of</strong> tax with interest in respect <strong>of</strong> income disclosed. When to be paid Payment <strong>of</strong> interest suggests can be paid later<strong>CIT</strong> v. Mahendra C. Shah [2008] 299 ITR 305 (Guj) Immunity available for which income ? Undisclosed income earned in year <strong>of</strong> search or Earlier year if due date for filing return has not expired ondate <strong>of</strong> search action26
Issue is whether immunity still available for earlier years also <strong>CIT</strong> v. Kanhaiyalal Saruparia [2008] 299 ITR 19 (Raj) <strong>CIT</strong> v. S.D.V. Chandru [2004] 266 ITR 175 (Mad) <strong>CIT</strong> v. Chhabra Emporium [2003] 264 ITR 249 (Del) A<strong>CIT</strong> v. Rupesh Bholidas Patel (2008) 16 DTR 369 (Ahd) –Not available followed in A<strong>CIT</strong>159 (Ahd)(TM)v. Kirit D. Patel 121 ITD27
Explanation 5A Found to be owner <strong>of</strong> assets or Income included in books <strong>of</strong> account Return filed before date <strong>of</strong> search but income (whether recorded in booksor not) not disclosed therein OR No return <strong>of</strong> income filed before date <strong>of</strong>search action & due date expired Deemed to be concealed income even if entries recorded in books <strong>of</strong>account The term reasonable cause is not provided. Hence even delay in filingreturn <strong>of</strong> income may attract penalty. Analogy <strong>of</strong> Explanation 4(b) could be made for credit <strong>of</strong> payment <strong>of</strong>advance tax / TDS etc. – however no such specific relief provided28
Section 271AAA Inserted w.e.f. 1-6-2007, thus applicable to search actionconducted on or after 1-6-2007 Penalty at 10% <strong>of</strong> undisclosed income <strong>of</strong> specified previousyear/s – i.e. year <strong>of</strong> search or immediate prior year if duedate <strong>of</strong> filing return u/s.139(1) not expired & no return filed(word used AO ‘may’ direct … assessee ‘shall’ pay)29
Immunity given from levy <strong>of</strong> penalty @10% if- Disclosure is made in statement recorded u/s.132(4) & specifies manner<strong>of</strong> earning such income Substantiates the manner <strong>of</strong> earning such income Pays tax with interest on such undisclosed income Provision <strong>of</strong> section 271(1)(c) not to apply in respect <strong>of</strong> the yearscovered u/s.271AAA Undisclosed income defined – similar to one provided in s.158B(b) &also includes expenses found to be false30
How to substantiate and till what stage Since case <strong>of</strong> undisclosed income, may not have anyevidence to substantiate Substantiation may be required only in the course <strong>of</strong> searchaction Substantiation only if asked / required by search party whilerecording statement u/s.132(4)31
Explanation 4 Covers loss to loss cases Provision amended by Finance Act 2002, w.e.f. 1/4/2003 - clause (a)substituted Law was then settled in Virtual S<strong>of</strong>t Systems Ltd. v. <strong>CIT</strong> [2007] 289 ITR83 (SC) (no penalty in loss to loss case) However, this was then reversed by larger bench <strong>of</strong> SC in <strong>CIT</strong> v. GoldCoin Health Food P. Ltd., 304 ITR 308 (SC) (penalty justified even inloss to loss cases) Explanation 6Clarifies that No penalty in case <strong>of</strong> adjustments made u/s 143(1)(a).32
Explanation 7Where any amount is added or disallowed in computing the total incomeunder sub-section (4) <strong>of</strong> section 92C, then, the amount so added ordisallowed shall, for the purposes <strong>of</strong> clause (c) <strong>of</strong> this sub-section, bedeemed to represent the income in respect <strong>of</strong> which particulars have beenconcealed or inaccurate particulars have been furnished, unless theassessee proves to the satisfaction <strong>of</strong> the Assessing Officer or theCommissioner (Appeals) or the Commissioner that the price charged or paidin such transaction was computed in accordance with the provisionscontained in section 92C and in the manner prescribed under that section, ingood faith and with due diligence. Also See 92C(3)(d) , 92D & 271G33
CASE LAWS FOR DIFFERENT SITUATIONS Succeeding Officer to give fresh hearing if sought by the assessee Murlidhar Tejpal vs. <strong>CIT</strong> (1961) 42 ITR 129 (Pat). (135) <strong>CIT</strong> vs. Shankar D. Dhanwatey (1995) 212 ITR 150 (Bom) (153) Unsigned notice Umashankar Mishra vs. <strong>CIT</strong> (1982) 136 ITR 330 (MP) No Penalty on protective basis <strong>CIT</strong> vs. Behari lal (1983), 141 ITR 32 (Punj.)34
Quantum two views / Debatable point Durga Kamal Rice Mills vs. <strong>CIT</strong> (2004) 265 ITR 25 (Bom) Nuchem Ltd. v. D<strong>CIT</strong> [1994] 49 ITD 441 (Del) <strong>CIT</strong> v. Harshvardhan Chemicals & Minerals Ltd. [2003] 259 ITR 212(Raj.) <strong>CIT</strong> v. Ram Singhani Dall Mills [2002] 254 ITR 264 (MP) Chandrapal Bagga v. ITAT [2003] 261 ITR 67 (Raj.) <strong>CIT</strong> v. Calcutta Credit Corporation (1987) 166 ITR 29 (Bom) A<strong>CIT</strong> v. Porrittis & Spencer (A) Ltd. (2008) 22 SOT 281 (Del)35
Agreed assessment and penalty. Sir Shadilal Sugar and General Mills Ltd vs. <strong>CIT</strong> (1987) 168 ITR 705(SC) & K. P. Madhusudan, [251 ITR 99] ITO vs. Smt. Devibai Parmani [84 ITD 342] Dy. Director <strong>of</strong> Income Tax vs. Chirag Metal Rolling Mills Ltd. [305 ITR29 (MP)] <strong>CIT</strong> vs. P. Govindswamy [263 ITR 509] Smt. Brij Bala Choudhary vs. ITO [82 TTJ 355] <strong>CIT</strong> vs. S. V. Electricals [274 ITR 334] <strong>CIT</strong> vs. M. M. Gujamgadi [290 ITR 168]36
Revised return <strong>of</strong>fering income / conditional <strong>of</strong>fer – to buy peace& avoid litigation <strong>CIT</strong> v. Suresh Chandra Mittal [2001] 251 ITR 9 (SC) <strong>CIT</strong> v. Amalendu Paul (1984) 145 ITR 439 (Cal) <strong>CIT</strong> vs. Chota Nagpur Glass Works [145 ITR 225 (P & H)] <strong>CIT</strong> vs. Bhimji Bhamji & Co. [146 ITR 145 (Bom)]Celebrity Stores vs. ITO 33 ITD 41(TM) (Delhi)] Parasmal Parekh vs. A<strong>CIT</strong> [58 ITD 34(JP)]37
Survey / Search cases ITO vs. Babitaben Rameshbhai Patel [116 TTJ 421 ((Ahd)] Santosh Narain Kapoor Dy. <strong>CIT</strong> [115 TTJ 402 (Luck)] <strong>CIT</strong> vs. Sureshchandra Mittal [251 ITR 9 (SC)] <strong>CIT</strong> vs. Hukam Chand Hari Prakash [119 Taxman 822 (P & H)] Sangam Enterprises vs. <strong>CIT</strong> [288 ITR 396 (All)] Biland Ram Hargun Dave vs. ITO [81 ITD 772 (All)] Jyoti Laxman Konkar v. <strong>CIT</strong> [2007] 292 ITR 163 (Bom) Shree Nirmal Commercial Ltd. v. <strong>CIT</strong> [2008] 218 CTR 581 (Bom) <strong>CIT</strong> v. Ashok Taker [2008] 170 Taxman 471 (Del)38
Surrender <strong>of</strong> giftsSmt. Sandhya Verma vs. ITO [114 TTJ 933 (Del)]ITO vs. Dr. Sameer Kant Agarwal [113 TTJ 252 (Luck)]A<strong>CIT</strong> vs. Vishan Narayan Khanna [171 Taxman 136 (Delhi) (Mag)]<strong>CIT</strong> vs. Balbhir Singh [164 Taxman 65 (P & H)]Penalty levied. Giri Raj Gupta vs. ITO [162 Tamman 81 (Del)(Mag)] <strong>CIT</strong> vs. Master Sunil R. Kalro [292 ITR 86 (Kar)]39
Surrender <strong>of</strong> Cash Credits <strong>CIT</strong> vs. Jalaram Oil Mills [253 ITR 192 (Guj.)] <strong>CIT</strong> vs. Aggarwal Pipe Co. [240 ITR 880] <strong>CIT</strong> vs. Agro Chemicals (India) [288 ITR 149 (P & H)] V. Rajasekharan Nair vs. ITO [40 ITD 125 (Coch)] Loknath Chowdhury [155 ITR 291 (Cal.)] <strong>CIT</strong> vs. Chandulal [152 ITR 238 (AP)] <strong>CIT</strong> vs. Down Town Hospital Ltd. [171 ITR 683 (Gua)]40
Penalty Qua estimated / Adhoc addition / Disallowance Estimated income Harigopal Singh v. <strong>CIT</strong> (2002) 258 ITR 85 (P &h) <strong>CIT</strong> v. Rahamat Khan Birbal Khan Badruddin & Party (1999) 240 ITR778 (Raj.) <strong>CIT</strong> v. M.M. Rice Mills (2002) 253 ITR 17 (P & H)41
Addition made due to rejection <strong>of</strong> accounts because <strong>of</strong> nonmaintenance <strong>of</strong> stock / production register, would not justify levy<strong>of</strong> penalty. <strong>CIT</strong> v. B.D. Ramchandra 150 ITR 242 (Bom) <strong>CIT</strong> vs. Dhillon Rice Mills [256 ITR 447 (P & H)] <strong>CIT</strong> vs. Valmikbhai H. Patel [280 ITR 487] (Guj)). <strong>CIT</strong> v. Sangur Vanaspati Mills Ltd. [2008] 303 ITR 53 (P & H) – SLPrejected [2009] 308 ITR (St.) 18 Harigopal Singh v. <strong>CIT</strong> (2002) 258 ITR 85 (P&H) <strong>CIT</strong> v. Kailash Crockery House (1999) 235 ITR 544 (Pat) Rajan H. Shinde v. D<strong>CIT</strong> (2006) 103 ITD 360 (Pune)(TM) –42
Inaccurate particulars vis-à-vis deduction Atul J. Doshi vs. ITO (2005) 4 SOT 515 (Mum) Balaji Vegetable Products vs. <strong>CIT</strong> [290 ITR 172]. <strong>CIT</strong> vs. Ram Singhani Dall Mills [254 ITR 264] <strong>CIT</strong> vs. Shivananda Steels Ltd. [256 ITR 683] <strong>CIT</strong> vs. Hariyana Education Society [251 ITR 846] <strong>CIT</strong> vs. Smt. Padmadevi Jain [245 ITR 818] <strong>CIT</strong> v. International Audio Visual Co. 288 ITR 570 (Del) <strong>CIT</strong> v. Nath Bros. Exim International Ltd. 288 ITR 670 (Del) <strong>CIT</strong> v. Caplin Point Laboratories Ltd. 293 ITR 524 (Mad)43
Inaccurate particulars vis-à-vis loss <strong>CIT</strong> vs. S.P.K. Steels (P) Ltd. (2004) 270 ITR 156 (MP) Inaccurate particulars vis-à-vis expenditure <strong>CIT</strong> vs. Textiles & General Tdg. Co. (2000) 109 Taxman 104 / 244 ITR876 (Del.), <strong>CIT</strong> v. Ajaib Singh & Co. [2002] 253 ITR 630 (Punj. & Har.) <strong>CIT</strong> v. Goyal Gases (P.) Ltd. [2000] 241 ITR 451 (Delhi) J.K. Jajoo v. <strong>CIT</strong> [1990] 181 ITR 410, 412 (MP) <strong>CIT</strong> v. Nepani Biri Co. Trust [1991] 190 ITR 402, 403 (All) Penalty vis-à-vis exemptionChandrapal Bagga vs. ITAT (2003) 261 ITR 67 (Raj.)44
Concealment vis-à-vis retrospective amendment. <strong>CIT</strong> vs. Premier protein Ltd (2005) 278 ITR 252 (MP) Tata Tele Services (Mah.) Ltd. [2 DTR 122]. Difference in stock <strong>CIT</strong> vs. Abdul Majeed [232 ITR 50 (Ker)], <strong>CIT</strong> vs. Nellai Trading Automobile Agency [288 ITR 557 (Mad)] <strong>CIT</strong> vs. ASK Enterprises [230 ITR 48 (Bom)] Addition due to change <strong>of</strong> head <strong>of</strong> income <strong>CIT</strong> vs. Ganeshan Builders [299 ITR 403 (Mad)] <strong>CIT</strong> vs. Vamchampigons & Agri Produce [284 ITR 408 (Del)] Alpha Associates vs. Dy. <strong>CIT</strong>, [ITAT Mumbai 66 TTJ 758]45
Income not declared but a note is given to the return <strong>CIT</strong> vs. P. H. I. Seeds Ltd. [301 ITR 13 (Del)<strong>CIT</strong> vs. Mrs. Roshan D. Nariman [295 ITR 280 (Bom)] <strong>CIT</strong> vs. International Audio Visual [288 ITR 570 (Del)]. Bombay H.C. in <strong>CIT</strong> vs. Lullabhai Hirabhai [190 ITR 437(Bom)]. Dispute about year <strong>of</strong> assessment<strong>CIT</strong> vs. Manilal Tarachand [254 ITR 630 (Guj)]<strong>CIT</strong> vs. Kusum Products Ltd. [203 ITR 672 (Cal)]Niranjanlal vs. ITO [14 ITD 439 (TM)]<strong>CIT</strong> vs. Kusum Products Ltd. 203 [ITR 672 (Cal)]Jainarayan Babulal vs. <strong>CIT</strong> [170 ITR 399 (Bom)]46
Mistakes in computation <strong>of</strong> income Udayan Mukherjee [291 ITR 318 (Cal)], <strong>CIT</strong> vs. Milex Cable Industries [261 ITR 675] <strong>CIT</strong> vs. Pitambardas Dhulichand [273 ITR 271]. <strong>CIT</strong> vs. M. M. Rice Mills [253 ITR 17 (P & H)] <strong>CIT</strong> vs. Sudhitkumal Chottubhai 250 ITR 528 (Bom.) Revised returns <strong>CIT</strong> vs. Karuppasamy & Sons [254 ITR 59] G.C. Agarwal vs. <strong>CIT</strong> [186 ITR 571] <strong>CIT</strong> vs. A. Shriniwas Pai [242 ITR 29] <strong>CIT</strong> vs. Sudarshan Silks and Sarees [253 ITR 145] <strong>CIT</strong> vs. Dr. A. Mohammad Abdul Khadir [260 ITR 650]47
Addition on account <strong>of</strong> difference in cost <strong>of</strong> construction based onDVO’s Report T. P. K. Ramlingam vs. <strong>CIT</strong> [211 ITR 520 (Mad)] <strong>CIT</strong> vs. Apsara Talkies [155 ITR 303 (Mad)] Dilip Shr<strong>of</strong>f [291 ITR 519 (SC)] Cases involving deeming provisions <strong>of</strong> section 44AD, 44AE, etc. Darshan Enterprises vs. ITO [113 TTJ 857 (Pune)] –48
Addition attributable to the mistake <strong>of</strong> the tax consultant or aclaim made on the basis <strong>of</strong> advice <strong>of</strong> the consultant – gift section56 T. Ashok Pai vs. <strong>CIT</strong> [292 ITR 11 (SC)]Concord <strong>of</strong> India Insurance Co. Ltd. vs. Smt. Nirmala Devi & Others[118ITR 507 (SC)] Shyam Gopal Charitable Trust vs. Director <strong>of</strong> Income Tax [290 ITR 99(Del)]Chanabhai Virabhai vs. ITO [42 ITD 182 (Ahd)]Laxmi Cutpiece Bhandar [31 ITD 421 (Del)] Dilip N. Shr<strong>of</strong>f v. J<strong>CIT</strong> [2007 291 ITR 519 (SC) <strong>CIT</strong> vs. Rice Mills (S.D.) (2005) 275 ITR 206 (P & H) Omission v. Concealment D. M. Dahanukar vs.<strong>CIT</strong> [65 ITR 280].49
Circumstances to be considered – impossibility <strong>of</strong> performance –investment in 54EC <strong>CIT</strong> vs. Laxmi Stores [261 ITR 621 (Raj.)], Enhancement by <strong>CIT</strong>(A) The authority imposing penalty has no jurisdiction to impose penalty inrelation to an item <strong>of</strong> enhancement made by the first appellate authority <strong>CIT</strong> vs. Dwarka Prasad Subhash Chandra, (1974) 94 ITR 154 (All).50
Jurisdiction Point- Jurisdiction issue can be raised in penalty proceedings – even for first time If assessment not valid for any reason however not challenged – same canbe challenged for ground <strong>of</strong> levy <strong>of</strong> penalty and only for deletion <strong>of</strong>penalty & not for quashing assessment itself A<strong>CIT</strong> v. Smt. Surinder Kaur (2009) 18 DTR 38 (Luck) – case <strong>of</strong> blockassessment Tide Water Marine International Inc. v. D<strong>CIT</strong> (2005) 96 ITD 406 (Del) –case <strong>of</strong> reassessment Union <strong>of</strong> India v. Rai Singh Dal Singh 88 ITR 200 (SC) <strong>CIT</strong> v. Dumravan Cold Storage & Refrigerators Services 97 ITR 137 (Pat) <strong>CIT</strong> v. Hotel Highland Park (2000) 246 ITR 130 (J&K) Sambha R. Dalwati v. ITO 34 ITD 183 (Ahd) Penalty vis-à-vis statement recorded in different proceedings Akshay Bhandar vs. <strong>CIT</strong> (Gau) (1996) 220 ITR 32551
PENALTY U/S 271A When is Penalty u/s 271A leviable? Penalty for failure to keep and maintain books <strong>of</strong> account, etc, and fornot retaining them for the prescribed period. The penalty leviable isRs.25,000/- The Amritsar Tribunal in case <strong>of</strong> Sujan Singh Vs. Assessing Officer(2007) 110 TTJ (Asr) 818 held that penalty under s. 271A is not leviableupon the assessee for non-maintenance <strong>of</strong> stock register52
The Nagpur Tribunal in case <strong>of</strong> ITO vs. Dinesh Paper Mart 70 ITD 274(Nag.) held that No penalty u/s 271A is leviable for not retaining books<strong>of</strong> account in case <strong>of</strong> assessees carrying on business other than specifiedpr<strong>of</strong>essions. Unless rules prescribed for the retention <strong>of</strong> the books <strong>of</strong>account, there cannot be failure <strong>of</strong> the assessee to retain as per rules. Assistant Commissioner Of Income Tax vs. Aggarwal ConstructionCompany (2007) 107 TTJ (Chd)(TM) 623 : (2007) 106 ITD 129(Chd)(TM) The Allahabad Bench in case <strong>of</strong> Miri Lal Mulk Raj vs. ITO (1995) 52ITD 365 (All) held that Penalty proceedings u/s 271A can be validlyinitiated after assessment order even if A.O. has not expressed anyintention to do so in the assessment order.53
PENALTY U/S. 271B When is Penalty u/s 271B leviable? Fails to get audited Section 271B is not attracted in the case where no books <strong>of</strong> accountshave been maintained. Surajmal Parsuram Todi vs. <strong>CIT</strong> 222 ITR 691(Gau.); Ram Prakash C Puri vs. A<strong>CIT</strong> – 77 ITD 210 (Pune) and <strong>CIT</strong>vs. Bisauli Tractors (2008) 299 ITR 219 (All) The Hyderabad Tribunal in case <strong>of</strong> D<strong>CIT</strong> vs. Mangal Dayak Chit FundPvt. Ltd. 92 ITD 258 (Hyd.) observed that in case <strong>of</strong> chit fundcompanies, chit subscriptions are not to be treated as income or turnover.54
Hitest D. Gajaria vs. A<strong>CIT</strong> ITA No. 992/Mum/2007(BCAJ – April2008) Dr. Sunderlal Surana vs. ITO 105 TTJ 907 Publicity agents <strong>CIT</strong> vs. Heros Publicity Services 248 ITR 256 (Bom). Share broker <strong>CIT</strong> vs. Hasmukh M. Shah (2003) 80 TTJ 323 (Ahd.) Bajrang Oil Mills vs. ITO (2007) 295 ITR 314 (Raj)55
Limitation Although there is no bar for initiating proceedings even after thecompletion <strong>of</strong> the assessment proceedings, the limitation <strong>of</strong> time as laiddown in section 275(1)(c) would apply for imposing penalty. Reference can be made to Subodh Kumar Bhargava vs. <strong>CIT</strong> (2009) 309ITR 31 (Del) ; A<strong>CIT</strong> vs. Birkmyre Exports Co. Pvt. Ltd. 255 ITR 72(Cal.) ; A<strong>CIT</strong> vs. Vaish Bros. & Co. Ltd. (2005) 93 TTJ 476 (Lucknow)56
PENALTY FOR VIOLATION OF TDS Failure to Deduct Tax at source – 271C TDS Dividend distribution tax – 115-O Whole or part penalty, a sum equal to the amount <strong>of</strong> tax which such person failed todeduct or pay as aforesaid. Any penalty imposable shall be imposed by the Joint Commissioner. Levy <strong>of</strong> penalty is attracted only if there is no reasonable cause – Woodward Governor India (P) Ltd. v. <strong>CIT</strong> [2002] 253 ITR 745 (Delhi).57
Levy <strong>of</strong> Penalty section 272A(2)(c), (f) to (i): Failure such to furnish returns, statements, issue certificate, declaration,etc., Assessee shall pay, by way <strong>of</strong> penalty, a sum [<strong>of</strong> one hundred rupees] forevery day during which the failure continues. Provided that the amount <strong>of</strong> penalty for failures in relation to [adeclaration mentioned in section 197A, a certificate as required bysection 203 and] returns under sections 206 and 206C [and statementsunder sub-section (3) <strong>of</strong> section 200 or the proviso to sub-section (3)<strong>of</strong> section 206C] shall not exceed the amount <strong>of</strong> tax deductible orcollectible, as the case may be.]58
<strong>CIT</strong> vs. Superintending Engineer, Udaipur (2002) 177 CTR (Raj) 586 <strong>CIT</strong> vs. Accounts Officer, Telecom (2006) 281 ITR 302 (All) [Also see<strong>CIT</strong> vs. Dy. Hsg Commissioner, Raj Hsg Board, Jodhpur (2002) 177 CTR591(Raj.)] Rajasthan High Court in State <strong>of</strong> Rajasthan vs. ITAT & Anr. (2003) 259ITR 686 (Raj) Against Executive Engineer, PH Division, Berhampur vs. A<strong>CIT</strong> (2004) 91TTJ 58659
271C vs. 272A [<strong>CIT</strong> vs. Sri Ram Memorial Education Promotion Society (2006) 287 ITR155 (All); <strong>CIT</strong> vs. Sahara India Financial Corpn. Ltd. (2007) 158Taxman 435 (All) ITO vs. Gajanan Auto Engg. (P) Ltd. (2002) 75 TTJ 75 (Pune) - theory<strong>of</strong> double jeopardy cannot be pressed into service, relying on the decision<strong>of</strong> the Gujarat High Court in <strong>CIT</strong> vs. J. L. Trivedi & Sons (1993) 115 CTR535.60
Section 271D provides for levy <strong>of</strong> penalty for contravention <strong>of</strong> theprovisions <strong>of</strong> section 269SS <strong>of</strong> the Act. As per Section 269SS, any personwas takes or accept from any other person, any loan or deposit otherwisethan by an account payee cheque or account payee bank draft <strong>of</strong> Rs.20,000/-or more may attract penalty. The amount <strong>of</strong> penalty is a fixed sum equal tothe amount <strong>of</strong> loan or deposit taken. Penalty can be levied under this section only by the Joint Commissioner. Similarly, section 271E provides for levy <strong>of</strong> penalty for the contravention <strong>of</strong>the provisions <strong>of</strong> section 269T <strong>of</strong> the Act. As per section 269T, penalty willbe imposed on a person repaying any deposit or loan, otherwise than byaccount payee cheque or account payee bank draft. Penalty is imposable bythe Joint Commissioner <strong>of</strong> Income Tax.61
Reasonable cause Finding that transaction entered into books <strong>of</strong> accounts and amountinvolved is not very high, penalty cannot be imposed. <strong>CIT</strong> vs. RatnaAgencies, 284 ITR 609 (Mad) Firm accepting cash from partners in excess <strong>of</strong> prescribed limit on thebonafide belief that partners are not different from the firm, then nopenalty could be imposed. <strong>CIT</strong> vs. Lokpath Film Exchange (Cinema) 304ITR 172 (Raj). The contractor accepting cash loans from sister concern for payment tothe labourers at site is reasonable cause and no penalty is justified. <strong>CIT</strong>vs. Maheshwari Nirman Udyog, 302 ITR 201 (Raj).62
The transactions <strong>of</strong> kaccha adhatiya <strong>of</strong> purchase <strong>of</strong> agricultural crops,retention <strong>of</strong> sale proceeds and subsequent payment in cash. Theprovisions <strong>of</strong> section 269SS not applicable and no penalty can beimposed. <strong>CIT</strong> vs. Hissaria Brothers, 291 ITR 244 (Raj). Revenue treating the cash receipt as undisclosed income in the hands <strong>of</strong>the assessee and thereafter initiating penalty proceedings u/s 269SS r.w.s.271D is not proper and no penalty can be levied. <strong>CIT</strong> vs. StandardBrands Ltd., 285 ITR 295 (Del). Where receipt <strong>of</strong> cash in excess <strong>of</strong> prescribed limit was explained statingthat the depositors do not have bank account and transactions weregenuine and such explanation was accepted, penalty cancellation isjustified. <strong>CIT</strong> vs. Kundrathur Finance and Chit Co., 283 ITR 329 (Mad),<strong>CIT</strong> vs. Saini Medical Stores, 278 ITR 79 (P&H).63
Society taking money from private parties for its day to day expenses,and cash transactions are not on account <strong>of</strong> any malafides on the part <strong>of</strong>the society which depends on grants from the government, levy <strong>of</strong>penalty is not justified. DIT (Exemp) vs. All India Deaf & Dumb Society,283 ITR 113 (Del). Loan given by the relatives on Sunday, no penalty could be levied. <strong>CIT</strong>vs. Rangarajan (TR), 279 ITR 587 (Mad). Advance for a transaction is not a loan or deposit hence no penalty can belevied. <strong>CIT</strong> vs Khoraitilal & Co., 270 ITR 445 (P&H) The financial assistance was granted from out <strong>of</strong> agriculture income <strong>of</strong>the lender and the borrower having no income prior to setting up <strong>of</strong> thebusiness. Section 269SS is not applicable. Ashwin Kumar vs. ITO 309ITR 69 (Delhi)64
Mere technical breach will not attract penalty if the transaction isgenuine. Amount received from director by the company is not a depositor loan. Dillu Cine Enterprises (P) Ltd. vs Addl. <strong>CIT</strong>, 80 ITD 484 (Hyd) Cash amounting to Rs.5 Lakhs were urgently required for honouringcheques issued by one <strong>of</strong> the directors, there being a reasonable cause foraccepting cash. Maruthi Nandem finance corp (P) Ltd vs. A<strong>CIT</strong> 114 TTJ142 (Ahd) (2008).65
No reasonable cause An advocate specialized in land acquisition matters had cash transactionswith the client exceeding specified limit without satisfactory explanation,penalty is valid. Dhanji R. Zalte vs. A<strong>CIT</strong>, 265 ITR 204 (Bom) Share application money amount to deposit within the meaning <strong>of</strong> section269SS, therefore share application money in excess <strong>of</strong> prescribed limitreceived in cash, penalty can be imposed. Bhalotia Engineering WorksPvt. Ltd. vs. <strong>CIT</strong>, 275 ITR 399 (Jhar.) When the loans are added is 68 as income the there is no contraventions<strong>of</strong> 269SS and hence penalty u/s 271D cannot be applied66
Limitation for passing penalty order – sec.275 Prior to proviso inserted by Finance Act 2003, w.e.f. 1/6/2003 - AO couldhave waited until disposal <strong>of</strong> appeal by ITAT. The outer limit was sixmonths from the end <strong>of</strong> the month in which order <strong>of</strong> <strong>CIT</strong>(A) or Tribunalis received by CC / <strong>CIT</strong> After insertion <strong>of</strong> proviso- the Outer limit <strong>of</strong> passing penalty order –Before expiry <strong>of</strong> FY in which proceedings initiated; orIf appeal preferred – within one year from the end <strong>of</strong> FY in which the CC / <strong>CIT</strong> receivesorder passed by <strong>CIT</strong>(A) (on or after 1-6-2003) Applicable to date <strong>of</strong> passing order and not with respect to particularassessment year No more to wait till outcome <strong>of</strong> Tribunal appeal Tarlochan Singh & Sons (HUF) v. ITO (2008) 114 TTJ 82 (Asr) Naresh Kumar Gupta v. ITO (2009) 20 DTR 565 (Del)–67
273A. (1) Notwithstanding anything contained in this Act, the Commissionermay, in his discretion, whether on his own motion or otherwise,—(ii) reduce or waive the amount <strong>of</strong> penalty imposed or imposable on aperson under clause (iii) <strong>of</strong> sub-section (1) <strong>of</strong> section 271;if he is satisfied that such person—(b)in the case referred to in clause (ii), has, prior to the detection by theAssessing Officer, <strong>of</strong> the concealment <strong>of</strong> particulars <strong>of</strong> income or <strong>of</strong> theinaccuracy <strong>of</strong> particulars furnished in respect <strong>of</strong> such income, voluntarilyand in good faith, made full and true disclosure <strong>of</strong> such particulars,and also has co-operated in any enquiry relating to the assessment <strong>of</strong>his income and has either paid or made satisfactory arrangements for thepayment <strong>of</strong> any tax or interest payable in consequence <strong>of</strong> an order passedunder this Act in respect <strong>of</strong> the relevant assessment year.68
Detected Bhairav Lal Verma, 230 ITR 855 (All)(FB) Voluntary The expression ‘voluntary’ means ‘without compulsion’ - Laxman v. <strong>CIT</strong>[1988] 174 ITR 465 (Bom.). Hakam Singh v. <strong>CIT</strong> [1980] 124 ITR 228 (All.). Return filed under the advice, suggestion or even at the behest <strong>of</strong> the<strong>of</strong>ficer [113 ITR 318 (Guj), 124 ITR 228 (All); 127 ITR 579 (AP), 138ITR 77 (P&H); 194 ITR 355 (AP) and 252 ITR 269 (AP)]. Commissioner must give reasons – Purshottam Thackersey v. K.N. Anantarama Ayyar, <strong>CIT</strong> [1985] 154 ITR438 (Bom.). Assurance given to assessee [Sangram Singh Mehta vs. ITO (2008) 296ITR 483 (Raj)].69
Section 273A (3) Where an order has been made under sub-section (1) in favour <strong>of</strong> anyperson, whether such order relates to one or more assessment years, heshall not be entitled to any relief under this section in relation to anyother assessment year at any time after the making <strong>of</strong> such order When the applications for waiver are made on different dates with regardto different assessment years, Commissioner is bound to consider all theapplications. He cannot grant waiver for one assessment year and rejectthe application for succeeding assessment years [202 ITR 346 (Karn)].70
Who is liable to be prosecuted? Any person, committing the <strong>of</strong>fence is liable to be prosecuted. In thisconnection it is not necessary that the person should be an assessee underthe Income-tax Act. In the case <strong>of</strong> an <strong>of</strong>fence committed by a Company,Firm, Association <strong>of</strong> Persons or Body <strong>of</strong> Individuals, every person incharge <strong>of</strong> or responsible for the conduct <strong>of</strong> the business <strong>of</strong> the concern aswell as the concern are deemed to be guilty. Similarly, in the case <strong>of</strong> an<strong>of</strong>fence by a Hindu Undivided Family, the karta there<strong>of</strong>, is deemed to beguilty <strong>of</strong> the <strong>of</strong>fence. Is mens rea or culpable mental state or guilty intention necessary? In case <strong>of</strong> wilful act <strong>of</strong> omission or commission, the court shall presumethe existence <strong>of</strong> culpable mental state. However, the accused can rebutthis presumption by producing necessary evidence before thecourt. (Section 278E).71
Can the <strong>of</strong>fence be compounded? Section 279(2) <strong>of</strong> Income-tax Act empowers a Chief Commissioner <strong>of</strong>Director General <strong>of</strong> Income-tax to compound an <strong>of</strong>fence either before orafter the institution <strong>of</strong> prosecution proceeding. When public servant liable to be prosecuted? If a public servant furnishes any information in contravention <strong>of</strong> theprovisions <strong>of</strong> Section 138(2), prosecution may be instituted against himwith the previous sanction <strong>of</strong> the Central Government. (Section 280)72
J. B. NAGAR CPE STUDY CIRCLE WIRC OF ICAITHANK YOUParas S. Savla & Ajay R. Singh, Advocates73