Scheme & Object (Legislative intent) Abide Laws Deterrent Effect 2

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1 Penalty u/s.271(1)(c) WIRC-15/01/2011 CA. Reepal G. Tralshawala 1

2 Scheme & Object (Legislative intent) Abide Laws Deterrent Effect 2

3 Concealment of particulars of income; OR Furnishing inaccurate particulars of income Concealment of particulars of income - meaning hiding the particulars i.e. non-furnishing of particulars in respect of claim made Furnishing inaccurate particulars meaning fabricated / false particulars furnished i.e. claim made on basis of wrong / incorrect particulars 3

4 Analysis of provision- AO/CIT(A)/CIT - satisfied in course of any proceedings that any person - has concealed the particulars of his income; or has furnished inaccurate particulars of such income; - may direct.. by reason of concealment of particulars of his income or furnishing inaccurate particulars of such income 4

5 Emphasis on the word Particulars Disclosure of particulars of income- What particulars are required to be disclosed How the same are to be disclosed When the same are required to be disclosed To what extent are they required to be disclosed 5

6 Penalties Nature of Proceedings & Burden of Proof Law before 1964 Quasi-judicial proceedings - language used word deliberately Gokuldas Hari Vallabhdas (1958) 34 ITR 98 (Bom) CIT v Anwar Ali (1970) 76 ITR 696 (SC) Hindustan Steel Ltd. v. State of Orissa (1972) 83 ITR 26 (SC) Principles laid down as under- Deliberate act / mens rea - for levy of penalty Revenue to prove that disputed amount constitutes income even though explanation proved to be false in assessment proceedings - CIT v. Khoday Eswarsa & Sons (1972) 83 ITR 369 (SC) Finding in assessment not conclusive - burden on department to prove concealment - Anantharam Veerasinghaiah & Co. v. CIT (1980) 123 ITR 457 (SC) Penalty not for technical or venial breach of provisions 6

7 Penalties Nature of Proceedings & Burden of Proof Law from 1964 to 1976 Word deliberately deleted and Explanation added Explanation before deletion in 1976 contained wording failure to return the correct income did not arise from any fraud or any gross or willful neglect on his part Amendment of 1964 provision to overcome decision of Anwar Ali (SC) - even if explanation found to be false still no penalty CIT v Mussadilal Ram Bharose (1987) 165 ITR 14 (SC) - laid down certain principle considering law existing between 1964 to 1976 read with Explanation - Rebuttal to be based on material - Explanation to be supported with evidence - Explanation not to be fantastic or fanciful Proceedings remained to be Quasi-judicial 7

8 Nature of Proceedings & Burden of Proof Law from 1976 onwards Explanation of 1964 amended 5 new Explanations added Clause (B) added in 1986 in Explanation 1 Explanation 1 specifically overruled Anwar Ali decision in respect to falsity of explanation Principles laid down in detail in T. Ashok Pai v. CIT (2007) 292 ITR 11 (SC) 8

9 Decision of Supreme Court in UOI v. M/s. Dharamendra Textile Processors (2008) 306 ITR 277 (SC) - larger Bench decision Explanations indicate element of strict liability Object of legislature is to provide a remedy for loss of revenue Penalty is civil liability Wilful concealment not essential ingredient for attracting civil liability Effect & relevance of prosecution provision in sec.276c not considered in Dilip N. Shroff case 291 ITR 519 (SC) 9

10 Issues that arise after decision of SC in Dharamendra Textile Processor - Whether quasi-criminal or civil in nature Whether mens rea still applicable Whether levy of penalty is automatic 10

11 Whether levy of penalty is automatic UOI v. Rajasthan Spinning & Weaving Mills (SC) 317 ITR 1 (SC) Not automatic - explained the decision rendered in Dharamendra Textile Processor Conditions expressly mentioned in particular provision needs to applied 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) 11

12 Explanation 1 Penalties Initial burden of proof on assessee Analysis reveals- In respect of material facts to computation of total income, the assessee- (A) (B) (i) (i) fails to offer an explanation; or (ii) explanation offered is found to be false by the AO or CIT(A) or Commissioner; or offered explanation but not substantiated and also fails to prove that the explanation is bona fide; and (ii) fails to show that all the facts relating to and material for computation of total income have been disclosed the addition or disallowance made in computing the total income shall be deemed to represent income in respect of which particulars have been concealed. Reliance Petroproducts 322 ITR 158 (SC) 12

13 Explanation 1 If explanation of assessee is not found to be false - levy of penalty not justified invoking Explanation 1 National Textiles v. CIT [2001] 249 ITR 125 (Guj) CIT v. Jalaram Oil Mills [2002] 253 ITR 192 (Guj) CIT v. M.P. Narayanan [2000] 244 ITR 528 (Mad) 13

14 Explanation 2 This explanation is for benefit of department Provides for levy of penalty in retrospect Intangible / ad hoc addition made in year 1 Penalty not levied due to case of ad hoc addition In year 2 or subsequent years - if benefit of this intangible addition taken against other unaccounted investments or cash credits, etc., the intangible addition becomes real income Penalty would then be levied in year 1 Time limit taken care of by sec.271(1a) 14

15 Explanation 3 Penalties Prior to amendment by Finance Act, 2002, w.e.f , applicable only in case of new assessee if return of income not filed before completion of assessment Explanation not attracted in case of assessee previously assessed to tax prior to amendment amendment not retrospective CIT v. Smt. Lata Shantilal Shah (2009) 18 DTR 246 (Bom) From AY 03-04, 04, Explanation covers all assessees Deemed concealment of income for non-filing of return of income before time limit prescribed u/s.153(1) i.e. completion of assessment Effect - converts concealment penalty into penalty for delay in filing return of income Upto AY , 89, delay in filing return covered by s.271(1)(a) and thereafter by levy of interest u/s.234a Provision is over and above levy of interest u/s.234a 15

16 Explanation 4 Covers loss to loss cases Penalties Provision amended by Finance Act 2002, w.e.f. 1/4/ clause (a) substituted Prior to amendment - conflicting view of Courts more particularly after decision in CIT v. Prithipal Singh 249 ITR 670 (SC) Law was then settled in Virtual Soft Systems Ltd. v. CIT [2007] 289 ITR 83 (SC) (no penalty in loss to loss case) However, this was then reversed by larger bench of SC in CIT v. Gold Coin Health Food P. Ltd., 304 ITR 308 (SC) (penalty justified even in loss to loss cases) 16

17 Explanation 5 Inserted w.e.f. 1/10/1984 and discontinued w.e.f. 1/6/2007 and substituted by Explanation 5A and 271AAA w.e.f. 1/6/2007 Applicable only in case of search action Prior to deletion, the provision contained for levy of penalty in search cases where assets are found and which are acquired out of undisclosed income Immunity is provided from levy of penalty upon fulfillment of certain conditions 17

18 Penalties Explanation 5 Immunity if- income or transaction resulting in income is recorded in the books of account before the date of search action; or such income is disclosed to the Chief Commissioner or Commissioner before 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 and also pays tax together with interest in respect of such income. Above 3 conditions are not cumulative but separate from each other 18

19 Explanation 5 issues mostly relating to third condition Third condition consists of 3 parts- Disclosure made in statement recorded u/s.132(4); Manner of earning the income to be disclosed; Payment of tax with interest in respect of income disclosed. Once all the 3 conditions satisfied - immunity available Gebilal Kanhaialal (HUF) v. ACIT (2004) 270 ITR 523 (Raj) 19

20 Disclosure made in statement recorded u/s.132(4); Recording of statement only by authorised officer as per 132(4) Disclosure thus only in statement u/s.132(4) & not otherwise Disclosure by way of letter or statement u/s immunity may not be available Finance Minister Speech & instruction of CBDT dated 10/3/ no disclosure - rely of evidence How disclosure to be made 20

21 Manner of earning income to be disclosed Manner of deriving income to be specified in the statement recorded & not later Even if manner not specified or where no such question asked by authorised officer - immunity still available CIT 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) passing reference made non disclosure of manner of earning concealed income penalty justified 21

22 Payment of tax with interest in respect of income disclosed Whether to be paid immediately upon making disclosure Time limit by which payment required to be made if not immediately Wordings used pays tax with interest Payment of interest suggests can be paid later CIT v. Mahendra C. Shah [2008] 299 ITR 305 (Guj) Outer-limit before completion of assessment by which time AO needs to reach satisfaction whether to levy penalty 22

23 Whether immunity available for earlier years Explanation 5 sub-clause (2) immunity available only if- Undisclosed income earned in year of search or Earlier year if due date for filing return has not expired on date of search action Issue is whether immunity still available for earlier years also CIT v. 1) Kanhaiyalal 2) 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 ACIT v. Kirit D. Patel 121 ITD 159 (Ahd)(TM) 23

24 Explanation 5A- Inserted w.e.f , thus applicable to search action conducted on or after Found to be owner of assets or Income included in books of account Return filed before date of search but income (whether recorded in books or not) not disclosed therein OR No return of income filed before date of search action & due date expired Deemed to be concealed income even if entries recorded in books of account No reasonable cause provided for delay in filing return of income for non-levy of penalty Analogy of Explanation 4(b) could be made for credit of payment of advance tax / TDS etc. however no such specific relief provided 24

25 Section 271AAA- Inserted w.e.f , thus applicable to search action conducted on or after Penalty at 10% of undisclosed income of specified previous year/s i.e. year of search or immediate prior year if due date of filing return u/s.139(1) not expired & no return filed (word used AO may direct assessee shall pay) Immunity given from levy of if- Disclosure is made in statement recorded u/s.132(4) & specifies manner of 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 years covered u/s.271aaa Undisclosed income defined similar to one provided in s.158b(b) & also includes expenses found to be false 25

26 Section 271AAA- Immunity provision similar to provision in Explanation 5, however with one exception Manner of earning income to be also substantiated Issue is how to substantiate and till what stage Since case of undisclosed income, may not have any evidence to substantiate Substantiation may be required only in the course of search action Substantiation only if asked / required by search party while recording statement u/s.132(4) 26

27 - General Return of income not filed Penalty only if concealment of particulars or furnishing inaccurate particulars Act of concealment committed with filing of return In survey, additional income offered return not due admitted income disclosed in return filed no penalty Dilip M. Shah Mum-ITAT (Unreported) Amirchand v. ITO 49 ITD 171 (Del) Vinod Goyal v. ACIT (2008) 115 TTJ 559 (Nag) DCIT v. Dr. Satish B. Gupta (2010) 42 SOT 48 (Ahd) 27

28 General Revised return offering income / conditional offer to buy peace & avoid litigation CIT v. Suresh Chandra Mittal [2001] 251 ITR 9 (SC) Ramnath Jagannath v. State of Maharashtra [1984] 57 STC 46, 51 (Bom) CIT v. Amalendu Paul (1984) 145 ITR 439 (Cal) Income surrendered after detection by department, then levy of penalty justified- CRN Investments (P.) Ltd. v. CIT [2008] 300 ITR 342 (Mad) CIT v. Mahabit Prasad Bajaj [2008] 298 ITR 109 (Jharkhand) Jyoti Laxman Konkar v. CIT [2007] 292 ITR 163 (Bom) case of survey where revised return of income was filed after detection by survey party Income surrendered without detection by dept.- no penalty Shree Nirmal Commercial Ltd. v. CIT [2008] 218 CTR 581 (Bom) CIT v. Ashok Taker [2008] 170 Taxman 471 (Del) 28

29 General 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) Act on the basis of Legal advice / opinion whether liable for penal provision - T. Ashok Pai v. CIT [2007] 292 ITR 11 (SC) Dilip N. Shroff v. JCIT [ ITR 519 (SC) Disallowance of expenses whether penalty justified 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) 29

30 General Debatable issue not a ground for levy of penalty - 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) Disallowance of deductions partly or wholly 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) 30

31 General Estimation of GP / income CIT v. Sangur Vanaspati Mills Ltd. [2008] 303 ITR 53 (P & H) SLP rejected [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) case of search however material found not specifically showing discrepancy in GP 31

32 General 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 can be challenged for ground of levy of penalty and only for deletion of penalty & not for quashing assessment itself ACIT v. Smt. Surinder Kaur (2009) 18 DTR 38 (Luck) case of block assessment 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) 32

33 General Limitation for passing penalty order sec.275 Prior to proviso inserted by Finance Act 2003, w.e.f. 1/6/2003 AO could have waited until disposal of appeal by ITAT Outer limit was six months from the end of the month in which order of CIT(A) or Tribunal is received by CC / CIT After insertion of proviso- Outer limit of passing penalty order Before expiry of FY in which proceedings initiated; or If appeal preferred within one year from the end of FY in which the CC / CIT receives order passed by CIT(A) (on or after ) Applicable to date of passing order and not with respect to particular assessment year No more to wait till outcome of Tribunal appeal CIT(A) order passed after served on CC on , penalty order passed on 31/3/05 time-barred Tarlochan Singh & Sons (HUF) v. ITO (2008) 114 TTJ 82 (Asr) Similar view - Naresh Kumar Gupta v. ITO (2009) 20 DTR 565 (Del) CIT(A) dismissed quantum appeal as time-barred (delay not condoned) held assessment order not subject matter of appeal 33

34 Thank You 34

Mihir Naniwadekar Advocate. Penalties: S. 271(1)(c), S. 271AAA, s. 271AAB

Mihir Naniwadekar Advocate. Penalties: S. 271(1)(c), S. 271AAA, s. 271AAB Mihir Naniwadekar Advocate Penalties: S. 271(1)(c), S. 271AAA, s. 271AAB Nature of Penalty Proceedings Relationship with Assessment Proceedings: Not a continuation of assessment proceedings Jain Bros v.