[Opinion] Emerging Issues in Respect of Penalties for Under-Reporting and Misreporting of Incomes

CA V K Subramani – [2024] 159 taxmann.com 177 (Article)

Provisions relating to levy of penalty are basically inserted in the statute book to act as a deterrent measure. However, the ascending number of litigations relating to levy of penalty could be attributed to the attitude of the taxpayers, interpretation of the legal provision by the tax administration and the rationale of the court decisions one after another which go to nurture the thought process of the stakeholders. When it comes to the attitude of the taxpayers, it is because of their mindset. When it is identified with tax administration, one probable the reason is to pass on the decision-making as regards penalty with the appellate authorities by mechanically levying penalty at the initial stages.

For long tax counsels were habituated to hear the expression ‘concealment penalty’. However, the Finance Act, 2016 wanted to address the issue with different expressions such as ‘under-reporting’ and ‘misreporting’ though the substance of the issue remained the same viz. the taxpayer in the opinion of the Assessing Officer has not reported / admitted correct income for the purpose of income-tax. The penal provisions contained in section 270A is immediately followed by section 270AA meant to provide immunity from penalty. This is a classic case of providing a legal provision for imposing penalty and immediately thereafter inserting yet another legal provision to provide relief from such penalty. It would have been better if the section meant for providing relief from penalty was inserted adjacent to section 273A or section 273B instead of placing it immediately after the penal provision.

This refresher takes note of the emerging court decision on penalty under section 270A by making reference to recent High Court decisions.

1. Legal provision

Section 270A empowers the Assessing Officer or Joint Commissioner (Appeals) or Commissioner (Appeals) or the PCIT or CIT during the course of any proceeding under the Act to direct an assessee who has under-reported his income to pay penalty in addition to tax in respect of the under-reported income.

The abovesaid provision would show that the said income-tax authorities during the course of any proceedings can impose penalty. Therefore, it could be levied by CIT as well when the proceedings for revision under section 263 is invoked by him. Yet another expression used in the section is ‘direct that any person who has under-reported his income shall be liable to pay a penalty’. Which means only the income of the person to whom it belongs is liable for penalty. Reference to definition of the term ‘assessee’ contained in section 2(7) covers not only the taxpayer but also a person deemed to be an assessee i.e. in representative capacity. Thus, when a person files an ITR in representative capacity it is possible to argue (though a weak one) that the under-reporting of income could not be subjected to penalty where the income reported is not his income but filed in representative capacity.

Section 270A(2) says, what is under-reported income and section 270A(7) says that such income is liable for penalty equal to 50% of the amount of tax payable on under-reported income. Similarly, section 270A(8) says misreporting of income is liable for penalty equal to 200% of the amount of tax payable on such misreported income while section 270A(9) says what all are to be treated as misreporting of income.

Section 270A(9) has six instances where the income added to the returned income would be treated as misreporting of income viz. “(a) misrepresentation or suppression of facts; (b) failure to record investments in the books of account; (c) claim of expenditure not substantiated by any evidence; (d) recording of any false entry in the books of account; (e) failure to record any receipt in books of account having a bearing on total income; and (f) failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply”. (emphasis supplied)

Section 270AA(3) says that “The Assessing Officer shall subject to the fulfilment of the conditions specified in sub-section (1) and after the expiry of the period of filing the appeal as specified in clause (b) of sub-section (2) of section 249, grant immunity from imposition of penalty under section 270A and initiation of proceedings under section 276C or section 276CC, where the proceedings for penalty under section 270A has not been initiated under the circumstances referred to in sub-section (9) of the said section 270A”. This would mean that the immunity from penalty is available only for under-reporting of income and not for misreporting of income since there is a specific reference to section 270A(9) being excluded in section 270AA(3).

Section 270AA(4) says “The Assessing Officer shall within a period of one month from the end of the month in which the application under sub-section (1) is received, pass an order accepting or rejecting such application:

Provided that no order rejecting the application shall be passed unless the assessee has been given an opportunity of being heard”. The key aspect that to reject the application for immunity from penalty is that the assessee is given an opportunity of being heard.

2. Chambal Fertilizers case – 158 taxmann.com 184 (Raj)

In this case, the assessee filed return of income for the assessment year 2018-19 on 30th November, 2018 and filed a revised return of income on 29th March, 2019. The case was selected for scrutiny and an exhaustive list of issues seeking reply was issued on 22nd September, 2019. The assessee gave reply to all the issues raised in the notices of Assessing Officer. The assessee during the course of scrutiny proceedings admitted that provision for doubtful GST input tax credit of Rs.1630.91 lakhs was inadvertently merged with another expense and was claimed as deduction while computing the income. The assessee surrendered the income by filing revised return which was communicated to the assessing authority.

The assessment was completed with only addition of suo moto surrendered amount of Rs.1630.91 lakhs. There was no other addition. However, the addition so made was subjected to penalty under section 270A for misreporting of income. The assessee wanted immunity from penalty by taking shelter under section 270AA which was rejected by the Assessing Officer. The matter was subjected to revision under section 264 and the assessee prayed for immunity from penalty which was also rejected by PCIT vide order dated 13th March, 2023. The assessee preferred writ against the order under section 264 before the High Court.

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