CIT - jb nagar cpe study circle of wirc of icai

J. B. Nagar CPE Study CircleWIRC of 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 of Interest,(b) Imposition of penalty –Chapter XXI Penalties imposable(c)Launching of 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 of any proceedings under this Act, issatisfied that any person—(b) has failed to comply with a notice under sub-section (2) ofsection 115WD or under sub-section (2) of section 115WE or undersub-section (1) of section 142 or sub-section (2) of section 143 orfails to comply with a direction issued under sub-section (2A) ofsection 142,he may direct that such person shall pay by way of penalty,—[(ii) in the cases referred to in clause (b), in addition to tax, ifany, payable by him, a sum of ten thousand rupees for each suchfailure ;3

Defective noticeCIT 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 –CIT v. Smt. P.K. Noorjahan [1999] 237 ITR 570 (SC)CIT v. P. Natarajan [2004] 266 ITR 219 (Mad)Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 (SC)5

Reasonable Cause – Section 273BCIT 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 of any proceedings under this Act, issatisfied that any person—(c)has concealed the particulars of his income orfurnished inaccurate particulars of such income, or(d) has concealed the particulars of the fringe benefits orfurnished inaccurate particulars of such fringe benefits,he may direct that such person shall pay by way of penalty,—7

Finding on charge for penalty Penalty proceeding can be initiated on two charges i.e.(1) concealment of particulars of income and(2) furnishing of inaccurate particulars of income. There must be a clear finding about the charge of penalty In the absence of 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 of satisfaction cannot be altered subsequentlyCIT-v-Kejriwal Iron Stores 168 ITR 715 (Raj). Even penalty cannot be levied for different item.CIT-V- C.K.Nehra & Bros 117 ITR 19 Cal. If proceedings are initiated on charge of concealment then penaltycannot be levied on the charge of furnishing of inaccurateparticulars of income and vice versa.CIT-v- Lakhdhir lalji 85 ITR 77(Guj)9

"Concealment of particulars of income" and "furnishing of inaccurateparticulars of income“Dilip Shroff [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 of; to withhold knowledge of. The offence ofconcealment is, thus, a direct attempt to hide an item of income or a portionthereof from the knowledge of 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 of penalty10

The stress is on “the particulars of income” which are eitherconcealed or furnished inaccurately by the assessee. Kanbay Software India (P) Ltd. 122 TTJ 721(Pune).The Tribunal considered the meaning of the expression"furnishing of inaccurate particulars of income" appearing in section271(1)(c). This view is now fortified by the recent Supreme Court Judgment inthe case of Reliance Petroproducts 322 ITR 158 SC.11

Both the words concealment and inaccurate particulars indicateprima facie the intention of an assessee to hide his income orparticulars thereof 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 of proof from A.O. to theassessee. Instead of the A.O. being under an obligation to establishthe malafides of the assessee, the burden is on the assessee toestablish his bonafides and innocence. This explanation provides a rule of evidence for raising a rebuttablepresumption in favour of the revenue.12

Explanation 1.—Where in respect of any facts material to thecomputation of the total income of any person under this Act,—(A) such person fails to offer an explanation or offers anexplanation which is found by the Assessing Officer or theCommissioner (Appeals) or the Commissioner to be false, or(B) such person offers 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 of his total income have been disclosed by him,then, the amount added or disallowed in computing the total incomeof such person as a result thereof shall, for the purposes of clause (c)of this sub-section, be deemed to represent the income in respect ofwhich particulars have been concealed.13

After Explanation 1 Every difference between reported and assessed income needs anexplanation. If no explanation is offered, penalty may justify penalty. If explanation is offered, but is found to be false, penalty will beexigible. If explanation is offered 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 of income.14

Explanation 1 to section 271(1)(c) cannot be applied where chargeagainst the an assessee is furnishing of inaccurate particulars ofincome since it provides a deeming fiction qua concealment ofparticulars of income only and consequently cannot be extended to acase where charge against furnishing of inaccurate particulars ofincome. Dilip Shroff [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 of India vs. Dharmendra Textiles Processors [306 ITR 277]has held that wilful concealment is not an essential ingredient forlevy of penalty u/s 271(1)(c).15

After decision of SC in Dharamendra Textile Processor - Whether levy of 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 Software India P. Ltd. v. DCIT - Pune ITAT ACIT 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. CIT [249 ITR 125 (Guj)] Shiv Lal Tak vs. CIT [251 ITR 373 (Raj)] CIT vs. Mussaddilal Ram Bharose [165 ITR 14 ](SC) - theburden placed upon the assessee is not discharged by anyfantastic explanation. Whether express invocation of explanation 1 necessary CIT vs. P. M. Shah [203 ITR 792] and CIT vs. DharamchandShah [204 ITR 462] K.P.Madhusudan-v-CIT 251 ITR 99 (SC).17

SATISFACTION - SECTION 271(1B) CIT 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 of penaltyproceedings under section 271(1)(c), it would be deemed to constitutesatisfaction of the Assessing Officer. Ms. Madhushree Gupta vs. Union of India (2009) 317 ITR 143 (Del).18

DEEMED CONCEALMENT – EXPLANATION 3, 5, & 5A. Explanation 3 Effect- This explanation provides for the case of a new assessee who hasnot been previously assessed to income tax.- Deemed concealment of income for non-filing of return of incomebefore time limit prescribed u/s.153(1) i.e. completion of assessment. Reasonable Cause specifically provided20

S.P. Hinduja (Bigger HUF) vs. ITO (2005) 279 ITR (AT) 178 (Mum) Salvi Divakar Shankar vs. ACIT (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. DCIT,ITA No. 779/Mum/2003, Bench ‘A’ dated 27-3-07. Advance tax paid, return not filled – to the extent of advance tax cannot betreated as undisclosed income. - P. R. Patel vs. Dy. CIT (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 of search action Prior to deletion, the provision contained for levy of penalty in searchcases where assets are found and which are acquired out ofundisclosed income Immunity is provided from levy of penalty upon fulfillment of certainconditions22

Explanation 5 – Immunity if- income or transaction resulting in income is recorded in the books ofaccount before the date of search action; or such income is disclosed to the Chief Commissioner or Commissionerbefore the date of search action; or in the search action, disclosure is made in statement recorded u/s.132(4)and specifying therein the manner of earning the income disclosed andalso pays tax together with interest in respect of such income.23

Third condition consists of 3 parts- Disclosure made in statement recorded u/s.132(4); Recording of statement only by authorised officer as per132(4) Disclosure thus only in statement u/s.132(4) & nototherwise Disclosure by way of letter or statement u/s.131 -immunity may not be available24

Manner of 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 stillavailableCIT v. Mahendra C. Shah [2008] 299 ITR 305 (Guj);CIT v. E.V. Balashanmugham [2006] 286 ITR 626 (Mad);CIT v. Nem Kumar Jain [2006] 151 Taxman 187 (All);CIT v. Radha Kishan Goel [2005] 278 ITR 454 (All);Gulabrai V. Gandhi v. ACIT [2003] 84 ITD 370 (Mum)Also refer – Indus Engg. Co. v. ACIT (Inv) 184 Taxman 269 (Bom)25

Payment of tax with interest in respect of income disclosed. When to be paid Payment of interest suggests can be paid laterCIT v. Mahendra C. Shah [2008] 299 ITR 305 (Guj) Immunity available for which income ? Undisclosed income earned in year of search or Earlier year if due date for filing return has not expired ondate of search action26

Issue is whether immunity still available for earlier years also CIT v. Kanhaiyalal Saruparia [2008] 299 ITR 19 (Raj) CIT v. S.D.V. Chandru [2004] 266 ITR 175 (Mad) CIT v. Chhabra Emporium [2003] 264 ITR 249 (Del) ACIT v. Rupesh Bholidas Patel (2008) 16 DTR 369 (Ahd) –Not available followed in ACIT159 (Ahd)(TM)v. Kirit D. Patel 121 ITD27

Explanation 5A Found to be owner of assets or Income included in books of account Return filed before date of search but income (whether recorded in booksor not) not disclosed therein OR No return of income filed before date ofsearch action & due date expired Deemed to be concealed income even if entries recorded in books ofaccount The term reasonable cause is not provided. Hence even delay in filingreturn of income may attract penalty. Analogy of Explanation 4(b) could be made for credit of payment ofadvance 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% of undisclosed income of specified previousyear/s – i.e. year of search or immediate prior year if duedate of filing return u/s.139(1) not expired & no return filed(word used AO ‘may’ direct … assessee ‘shall’ pay)29

Immunity given from levy of penalty @10% if- Disclosure is made in statement recorded u/s.132(4) & specifies mannerof earning such income Substantiates the manner of earning such income Pays tax with interest on such undisclosed income Provision of section 271(1)(c) not to apply in respect of 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 of undisclosed income, may not have anyevidence to substantiate Substantiation may be required only in the course of 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 Soft Systems Ltd. v. CIT [2007] 289 ITR83 (SC) (no penalty in loss to loss case) However, this was then reversed by larger bench of SC in CIT v. GoldCoin Health Food P. Ltd., 304 ITR 308 (SC) (penalty justified even inloss to loss cases) Explanation 6Clarifies that No penalty in case of adjustments made u/s 143(1)(a).32

Explanation 7Where any amount is added or disallowed in computing the total incomeunder sub-section (4) of section 92C, then, the amount so added ordisallowed shall, for the purposes of clause (c) of this sub-section, bedeemed to represent the income in respect of which particulars have beenconcealed or inaccurate particulars have been furnished, unless theassessee proves to the satisfaction of 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. CIT (1961) 42 ITR 129 (Pat). (135) CIT vs. Shankar D. Dhanwatey (1995) 212 ITR 150 (Bom) (153) Unsigned notice Umashankar Mishra vs. CIT (1982) 136 ITR 330 (MP) No Penalty on protective basis CIT vs. Behari lal (1983), 141 ITR 32 (Punj.)34

Quantum two views / Debatable point Durga Kamal Rice Mills vs. CIT (2004) 265 ITR 25 (Bom) Nuchem Ltd. v. DCIT [1994] 49 ITD 441 (Del) CIT v. Harshvardhan Chemicals & Minerals Ltd. [2003] 259 ITR 212(Raj.) CIT v. Ram Singhani Dall Mills [2002] 254 ITR 264 (MP) Chandrapal Bagga v. ITAT [2003] 261 ITR 67 (Raj.) CIT v. Calcutta Credit Corporation (1987) 166 ITR 29 (Bom) ACIT v. Porrittis & Spencer (A) Ltd. (2008) 22 SOT 281 (Del)35

Agreed assessment and penalty. Sir Shadilal Sugar and General Mills Ltd vs. CIT (1987) 168 ITR 705(SC) & K. P. Madhusudan, [251 ITR 99] ITO vs. Smt. Devibai Parmani [84 ITD 342] Dy. Director of Income Tax vs. Chirag Metal Rolling Mills Ltd. [305 ITR29 (MP)] CIT vs. P. Govindswamy [263 ITR 509] Smt. Brij Bala Choudhary vs. ITO [82 TTJ 355] CIT vs. S. V. Electricals [274 ITR 334] CIT vs. M. M. Gujamgadi [290 ITR 168]36

Revised return offering income / conditional offer – to buy peace& avoid litigation CIT v. Suresh Chandra Mittal [2001] 251 ITR 9 (SC) CIT v. Amalendu Paul (1984) 145 ITR 439 (Cal) CIT vs. Chota Nagpur Glass Works [145 ITR 225 (P & H)] CIT vs. Bhimji Bhamji & Co. [146 ITR 145 (Bom)]Celebrity Stores vs. ITO 33 ITD 41(TM) (Delhi)] Parasmal Parekh vs. ACIT [58 ITD 34(JP)]37

Survey / Search cases ITO vs. Babitaben Rameshbhai Patel [116 TTJ 421 ((Ahd)] Santosh Narain Kapoor Dy. CIT [115 TTJ 402 (Luck)] CIT vs. Sureshchandra Mittal [251 ITR 9 (SC)] CIT vs. Hukam Chand Hari Prakash [119 Taxman 822 (P & H)] Sangam Enterprises vs. CIT [288 ITR 396 (All)] Biland Ram Hargun Dave vs. ITO [81 ITD 772 (All)] Jyoti Laxman Konkar v. CIT [2007] 292 ITR 163 (Bom) Shree Nirmal Commercial Ltd. v. CIT [2008] 218 CTR 581 (Bom) CIT v. Ashok Taker [2008] 170 Taxman 471 (Del)38

Surrender of giftsSmt. Sandhya Verma vs. ITO [114 TTJ 933 (Del)]ITO vs. Dr. Sameer Kant Agarwal [113 TTJ 252 (Luck)]ACIT vs. Vishan Narayan Khanna [171 Taxman 136 (Delhi) (Mag)]CIT vs. Balbhir Singh [164 Taxman 65 (P & H)]Penalty levied. Giri Raj Gupta vs. ITO [162 Tamman 81 (Del)(Mag)] CIT vs. Master Sunil R. Kalro [292 ITR 86 (Kar)]39

Surrender of Cash Credits CIT vs. Jalaram Oil Mills [253 ITR 192 (Guj.)] CIT vs. Aggarwal Pipe Co. [240 ITR 880] CIT vs. Agro Chemicals (India) [288 ITR 149 (P & H)] V. Rajasekharan Nair vs. ITO [40 ITD 125 (Coch)] Loknath Chowdhury [155 ITR 291 (Cal.)] CIT vs. Chandulal [152 ITR 238 (AP)] CIT vs. Down Town Hospital Ltd. [171 ITR 683 (Gua)]40

Penalty Qua estimated / Adhoc addition / Disallowance Estimated income Harigopal Singh v. CIT (2002) 258 ITR 85 (P &h) CIT v. Rahamat Khan Birbal Khan Badruddin & Party (1999) 240 ITR778 (Raj.) CIT v. M.M. Rice Mills (2002) 253 ITR 17 (P & H)41

Addition made due to rejection of accounts because of nonmaintenance of stock / production register, would not justify levyof penalty. CIT v. B.D. Ramchandra 150 ITR 242 (Bom) CIT vs. Dhillon Rice Mills [256 ITR 447 (P & H)] CIT vs. Valmikbhai H. Patel [280 ITR 487] (Guj)). CIT v. Sangur Vanaspati Mills Ltd. [2008] 303 ITR 53 (P & H) – SLPrejected [2009] 308 ITR (St.) 18 Harigopal Singh v. CIT (2002) 258 ITR 85 (P&H) CIT v. Kailash Crockery House (1999) 235 ITR 544 (Pat) Rajan H. Shinde v. DCIT (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. CIT [290 ITR 172]. CIT vs. Ram Singhani Dall Mills [254 ITR 264] CIT vs. Shivananda Steels Ltd. [256 ITR 683] CIT vs. Hariyana Education Society [251 ITR 846] CIT vs. Smt. Padmadevi Jain [245 ITR 818] CIT v. International Audio Visual Co. 288 ITR 570 (Del) CIT v. Nath Bros. Exim International Ltd. 288 ITR 670 (Del) CIT v. Caplin Point Laboratories Ltd. 293 ITR 524 (Mad)43

Inaccurate particulars vis-à-vis loss CIT vs. S.P.K. Steels (P) Ltd. (2004) 270 ITR 156 (MP) Inaccurate particulars vis-à-vis expenditure CIT vs. Textiles & General Tdg. Co. (2000) 109 Taxman 104 / 244 ITR876 (Del.), CIT v. Ajaib Singh & Co. [2002] 253 ITR 630 (Punj. & Har.) CIT v. Goyal Gases (P.) Ltd. [2000] 241 ITR 451 (Delhi) J.K. Jajoo v. CIT [1990] 181 ITR 410, 412 (MP) CIT 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. CIT vs. Premier protein Ltd (2005) 278 ITR 252 (MP) Tata Tele Services (Mah.) Ltd. [2 DTR 122]. Difference in stock CIT vs. Abdul Majeed [232 ITR 50 (Ker)], CIT vs. Nellai Trading Automobile Agency [288 ITR 557 (Mad)] CIT vs. ASK Enterprises [230 ITR 48 (Bom)] Addition due to change of head of income CIT vs. Ganeshan Builders [299 ITR 403 (Mad)] CIT vs. Vamchampigons & Agri Produce [284 ITR 408 (Del)] Alpha Associates vs. Dy. CIT, [ITAT Mumbai 66 TTJ 758]45

Income not declared but a note is given to the return CIT vs. P. H. I. Seeds Ltd. [301 ITR 13 (Del)CIT vs. Mrs. Roshan D. Nariman [295 ITR 280 (Bom)] CIT vs. International Audio Visual [288 ITR 570 (Del)]. Bombay H.C. in CIT vs. Lullabhai Hirabhai [190 ITR 437(Bom)]. Dispute about year of assessmentCIT vs. Manilal Tarachand [254 ITR 630 (Guj)]CIT vs. Kusum Products Ltd. [203 ITR 672 (Cal)]Niranjanlal vs. ITO [14 ITD 439 (TM)]CIT vs. Kusum Products Ltd. 203 [ITR 672 (Cal)]Jainarayan Babulal vs. CIT [170 ITR 399 (Bom)]46

Mistakes in computation of income Udayan Mukherjee [291 ITR 318 (Cal)], CIT vs. Milex Cable Industries [261 ITR 675] CIT vs. Pitambardas Dhulichand [273 ITR 271]. CIT vs. M. M. Rice Mills [253 ITR 17 (P & H)] CIT vs. Sudhitkumal Chottubhai 250 ITR 528 (Bom.) Revised returns CIT vs. Karuppasamy & Sons [254 ITR 59] G.C. Agarwal vs. CIT [186 ITR 571] CIT vs. A. Shriniwas Pai [242 ITR 29] CIT vs. Sudarshan Silks and Sarees [253 ITR 145] CIT vs. Dr. A. Mohammad Abdul Khadir [260 ITR 650]47

Addition on account of difference in cost of construction based onDVO’s Report T. P. K. Ramlingam vs. CIT [211 ITR 520 (Mad)] CIT vs. Apsara Talkies [155 ITR 303 (Mad)] Dilip Shroff [291 ITR 519 (SC)] Cases involving deeming provisions of section 44AD, 44AE, etc. Darshan Enterprises vs. ITO [113 TTJ 857 (Pune)] –48

Addition attributable to the mistake of the tax consultant or aclaim made on the basis of advice of the consultant – gift section56 T. Ashok Pai vs. CIT [292 ITR 11 (SC)]Concord of India Insurance Co. Ltd. vs. Smt. Nirmala Devi & Others[118ITR 507 (SC)] Shyam Gopal Charitable Trust vs. Director of Income Tax [290 ITR 99(Del)]Chanabhai Virabhai vs. ITO [42 ITD 182 (Ahd)]Laxmi Cutpiece Bhandar [31 ITD 421 (Del)] Dilip N. Shroff v. JCIT [2007 291 ITR 519 (SC) CIT vs. Rice Mills (S.D.) (2005) 275 ITR 206 (P & H) Omission v. Concealment D. M. Dahanukar vs.CIT [65 ITR 280].49

Circumstances to be considered – impossibility of performance –investment in 54EC CIT vs. Laxmi Stores [261 ITR 621 (Raj.)], Enhancement by CIT(A) The authority imposing penalty has no jurisdiction to impose penalty inrelation to an item of enhancement made by the first appellate authority CIT 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 of levy of penalty and only for deletion ofpenalty & not for quashing assessment itself ACIT v. Smt. Surinder Kaur (2009) 18 DTR 38 (Luck) – case of blockassessment Tide Water Marine International Inc. v. DCIT (2005) 96 ITD 406 (Del) –case of reassessment Union of India v. Rai Singh Dal Singh 88 ITR 200 (SC) CIT v. Dumravan Cold Storage & Refrigerators Services 97 ITR 137 (Pat) CIT 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. CIT (Gau) (1996) 220 ITR 32551

PENALTY U/S 271A When is Penalty u/s 271A leviable? Penalty for failure to keep and maintain books of account, etc, and fornot retaining them for the prescribed period. The penalty leviable isRs.25,000/- The Amritsar Tribunal in case of Sujan Singh Vs. Assessing Officer(2007) 110 TTJ (Asr) 818 held that penalty under s. 271A is not leviableupon the assessee for non-maintenance of stock register52

The Nagpur Tribunal in case of ITO vs. Dinesh Paper Mart 70 ITD 274(Nag.) held that No penalty u/s 271A is leviable for not retaining booksof account in case of assessees carrying on business other than specifiedprofessions. Unless rules prescribed for the retention of the books ofaccount, there cannot be failure of 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 of 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 of accountshave been maintained. Surajmal Parsuram Todi vs. CIT 222 ITR 691(Gau.); Ram Prakash C Puri vs. ACIT – 77 ITD 210 (Pune) and CITvs. Bisauli Tractors (2008) 299 ITR 219 (All) The Hyderabad Tribunal in case of DCIT vs. Mangal Dayak Chit FundPvt. Ltd. 92 ITD 258 (Hyd.) observed that in case of chit fundcompanies, chit subscriptions are not to be treated as income or turnover.54

Hitest D. Gajaria vs. ACIT ITA No. 992/Mum/2007(BCAJ – April2008) Dr. Sunderlal Surana vs. ITO 105 TTJ 907 Publicity agents CIT vs. Heros Publicity Services 248 ITR 256 (Bom). Share broker CIT 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 of the assessment proceedings, the limitation of time as laiddown in section 275(1)(c) would apply for imposing penalty. Reference can be made to Subodh Kumar Bhargava vs. CIT (2009) 309ITR 31 (Del) ; ACIT vs. Birkmyre Exports Co. Pvt. Ltd. 255 ITR 72(Cal.) ; ACIT 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 of tax which such person failed todeduct or pay as aforesaid. Any penalty imposable shall be imposed by the Joint Commissioner. Levy of penalty is attracted only if there is no reasonable cause – Woodward Governor India (P) Ltd. v. CIT [2002] 253 ITR 745 (Delhi).57

Levy of Penalty section 272A(2)(c), (f) to (i): Failure such to furnish returns, statements, issue certificate, declaration,etc., Assessee shall pay, by way of penalty, a sum [of one hundred rupees] forevery day during which the failure continues. Provided that the amount of 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) of section 200 or the proviso to sub-section (3)of section 206C] shall not exceed the amount of tax deductible orcollectible, as the case may be.]58

CIT vs. Superintending Engineer, Udaipur (2002) 177 CTR (Raj) 586 CIT vs. Accounts Officer, Telecom (2006) 281 ITR 302 (All) [Also seeCIT vs. Dy. Hsg Commissioner, Raj Hsg Board, Jodhpur (2002) 177 CTR591(Raj.)] Rajasthan High Court in State of Rajasthan vs. ITAT & Anr. (2003) 259ITR 686 (Raj) Against Executive Engineer, PH Division, Berhampur vs. ACIT (2004) 91TTJ 58659

271C vs. 272A [CIT vs. Sri Ram Memorial Education Promotion Society (2006) 287 ITR155 (All); CIT vs. Sahara India Financial Corpn. Ltd. (2007) 158Taxman 435 (All) ITO vs. Gajanan Auto Engg. (P) Ltd. (2002) 75 TTJ 75 (Pune) - theoryof double jeopardy cannot be pressed into service, relying on the decisionof the Gujarat High Court in CIT vs. J. L. Trivedi & Sons (1993) 115 CTR535.60

Section 271D provides for levy of penalty for contravention of theprovisions of section 269SS of 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 of Rs.20,000/-or more may attract penalty. The amount of penalty is a fixed sum equal tothe amount of loan or deposit taken. Penalty can be levied under this section only by the Joint Commissioner. Similarly, section 271E provides for levy of penalty for the contravention ofthe provisions of section 269T of 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 of Income Tax.61

Reasonable cause Finding that transaction entered into books of accounts and amountinvolved is not very high, penalty cannot be imposed. CIT vs. RatnaAgencies, 284 ITR 609 (Mad) Firm accepting cash from partners in excess of prescribed limit on thebonafide belief that partners are not different from the firm, then nopenalty could be imposed. CIT 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. CITvs. Maheshwari Nirman Udyog, 302 ITR 201 (Raj).62

The transactions of kaccha adhatiya of purchase of agricultural crops,retention of sale proceeds and subsequent payment in cash. Theprovisions of section 269SS not applicable and no penalty can beimposed. CIT vs. Hissaria Brothers, 291 ITR 244 (Raj). Revenue treating the cash receipt as undisclosed income in the hands ofthe assessee and thereafter initiating penalty proceedings u/s 269SS r.w.s.271D is not proper and no penalty can be levied. CIT vs. StandardBrands Ltd., 285 ITR 295 (Del). Where receipt of cash in excess of prescribed limit was explained statingthat the depositors do not have bank account and transactions weregenuine and such explanation was accepted, penalty cancellation isjustified. CIT vs. Kundrathur Finance and Chit Co., 283 ITR 329 (Mad),CIT 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 of any malafides on the part ofthe society which depends on grants from the government, levy ofpenalty 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. CITvs. Rangarajan (TR), 279 ITR 587 (Mad). Advance for a transaction is not a loan or deposit hence no penalty can belevied. CIT vs Khoraitilal & Co., 270 ITR 445 (P&H) The financial assistance was granted from out of agriculture income ofthe lender and the borrower having no income prior to setting up of 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. CIT, 80 ITD 484 (Hyd) Cash amounting to Rs.5 Lakhs were urgently required for honouringcheques issued by one of the directors, there being a reasonable cause foraccepting cash. Maruthi Nandem finance corp (P) Ltd vs. ACIT 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. ACIT, 265 ITR 204 (Bom) Share application money amount to deposit within the meaning of section269SS, therefore share application money in excess of prescribed limitreceived in cash, penalty can be imposed. Bhalotia Engineering WorksPvt. Ltd. vs. CIT, 275 ITR 399 (Jhar.) When the loans are added is 68 as income the there is no contraventionsof 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 of appeal by ITAT. The outer limit was sixmonths from the end of the month in which order of CIT(A) or Tribunalis received by CC / CIT After insertion of proviso- the Outer limit of passing penalty order –Before expiry of FY in which proceedings initiated; orIf appeal preferred – within one year from the end of FY in which the CC / CIT receivesorder passed by CIT(A) (on or after 1-6-2003) Applicable to date of passing order and not with respect to particularassessment year No more to wait till outcome of 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 of penalty imposed or imposable on aperson under clause (iii) of sub-section (1) of 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, of the concealment of particulars of income or of theinaccuracy of particulars furnished in respect of such income, voluntarilyand in good faith, made full and true disclosure of such particulars,and also has co-operated in any enquiry relating to the assessment ofhis income and has either paid or made satisfactory arrangements for thepayment of any tax or interest payable in consequence of an order passedunder this Act in respect of the relevant assessment year.68

Detected Bhairav Lal Verma, 230 ITR 855 (All)(FB) Voluntary The expression ‘voluntary’ means ‘without compulsion’ - Laxman v. CIT[1988] 174 ITR 465 (Bom.). Hakam Singh v. CIT [1980] 124 ITR 228 (All.). Return filed under the advice, suggestion or even at the behest of theofficer [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, CIT [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 of 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 of 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 offence 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 of an offence committed by a Company,Firm, Association of Persons or Body of Individuals, every person incharge of or responsible for the conduct of the business of the concern aswell as the concern are deemed to be guilty. Similarly, in the case of anoffence by a Hindu Undivided Family, the karta thereof, is deemed to beguilty of the offence. Is mens rea or culpable mental state or guilty intention necessary? In case of wilful act of omission or commission, the court shall presumethe existence of culpable mental state. However, the accused can rebutthis presumption by producing necessary evidence before thecourt. (Section 278E).71

Can the offence be compounded? Section 279(2) of Income-tax Act empowers a Chief Commissioner ofDirector General of Income-tax to compound an offence either before orafter the institution of prosecution proceeding. When public servant liable to be prosecuted? If a public servant furnishes any information in contravention of theprovisions of Section 138(2), prosecution may be instituted against himwith the previous sanction of the Central Government. (Section 280)72

J. B. NAGAR CPE STUDY CIRCLE WIRC OF ICAITHANK YOUParas S. Savla & Ajay R. Singh, Advocates73