FAQs on Penalties under the Income Tax Act 1961

FAQs on Penalties under the Income Tax Act 1961

 

There are penalties defined for maximum kind of defaults in laws of Income Tax Act,1961, so it is required to be aware penal actions provided for each such defaults.

  1. What are major procedures of penalty proceedings?
  • Opportunity of being heard shall be necessary before any order of penalty.
  • Now e.f.  12-01-2021, all  penalty proceedings has been made faceless, i.e. without any physical interface between assesse and officers.
  • Prior approval of Joint commissioner is necessary if penalty order to be passed by ITO and penalty amount exceeds Rs.10,000/-
  • Prior approval of Joint commissioner is necessary if penalty order to be passed by Assistant Commissioner or Deputy Commissioner if penalty amount exceeds Rs.20,000/-

Some of the recent case law on Penalty proceedings

  1. Proper record of satisfaction by the Assessing Officer that there was any concealment of income or that any inaccurate particulars were furnished by the assesse is important. If there is no such record of satisfaction by AO, the penalty proceedings to be dropped, as held by Supreme Court in the case of PCIT vs. Golden Peace Hotels and Resorts (P.) Ltd., [2021] 124 taxmann.com 249 (SC)

  2. Penalty on acceptance of cash deposit in violation of section 269SS deleted on proving reasonable ground that the depositors belonged to rural areas where adequate banking facilities were not available. Refer case PCIT vs. Sahara India Financial Corpn. Ltd, [2020] 119 taxmann.com 285 (SC).

  3. For purposes of calculating time bar limitation of passing penalty order under section 271(1)(c) r.w. section 275(1)(a) of the Act limitation begins to run from date of order of appellate tribunal was served upon Commissioner (Judicial). Refer case PCIT vs. Indian Sugar Exim Corporation Ltd., [2020] 115 taxmann.com 267 (SC).

  4. Merely because director deposited cash obtained from JD in current account of assesse company on very same day and assessee utilized it to pay salaries, rent and EMI commitments, same could not be a ground to be taken as a mitigating factor to escape from rigour of levy of penalty u/s 271D, as held by High Court of Madras and also SLP on this is dismissed by supreme Court. Refer case Vasan Healthcare (P.) Ltd. vs. ACIT, [2021] 125 taxmann.com 266 (SC).

  5. Until and unless it is determined that unaccounted transactions unearthed during search were liable for payment of tax, penalty or interest, no prosecution could be launched on ground of attempt to evade such tax, penalty or interest. Refer case ITD vs. D.K. Shivakumar, [2021] 434 ITR 367 (Karnataka High Court)

  6. During assessment proceedings assessee had made full representation why according to his belief, receipt was not chargeable to tax and, in such a case, merely because Assessing Officer did not accept such a stand of assessee, would not automatically permit revenue to levy penalty. Refer Case PCIT vs. Ashok Kumar Maneklal Parikh, [2020] 120 taxmann.com 269 (SC).
  1. For what defaults, the Assessing Officer can waive off the imposition of penalties, if reasonable cause for failure of default is proved by the assesse?
  • If reasonable cause for failure or making defaults listed in section 273B is proved by the assesse, the penalty proceedings may be waived off by the AO.
  • Some of the examples of defaults listed are:
  1. Failure to keep, maintain or retain books of account, documents, etc. as per section 44AA, deduct TDS/TCS, TDS/TCS Return
  2. False estimate of, or failure to pay, advance tax.
  1. Is there any time bar limitation for imposition of penalty?

Yes. Time Bar limitation is given is section 275 as follows:

Sl. No

Situation

Time Limit

1.

Penalty order initiated in assessment order

 Appeal was made to CIT(A) or ITAT for Assessment Order

End of F.Y in which appeal order completed, Or

One year from the end of F.Y. when the appeal order is received by Commissioner (judicial),

whichever is  later

2.

Penalty order initiated in assessment order

Assessment Order went for revision u/s 263/265

Six months form end of months when revision order passed

3.

other case i.e. no appeal or revision is made for Assessment Order

Expiry of F.Y when the penalty proceedings initiated/completed, Or,

six months from the end of the month in which action for imposition of penalty is initiated,

whichever is later.

4.

Order of penalty passed before the order in appeal before CIT(A), ITAT, High Court, Supreme Court or revision order u/s 263/264

Old Penalty order shall be revised to give effect to these appeal or revision order,

Time limit- Within six months when the appeal order is received by the Commissioner (judicial) or when revision order was passed.

 

  1. What is the penal consequence of not paying self-assessment tax u/s 140A of the Act?
  • Under section 140(1) of the Act, the assesse is required to pay self-assessment tax before filing the income tax return. It is paid along with interest and fees after adjusting credit for TDS, TCS, advance tax, etc.
  • If any assesse do not pay wholly or partly the self-assessment tax, he is considered as assesse in default in terms of section 140A(3).
  • Penal Section- Section 221(1)
  • Amount of penalty- as imposed by the Assessing Officer, upto the amount of tax not paid.
  • Waive Off- May be waived off if sufficient reason is proved for non-compliance.
  1. Whether penalty may be waived off if self-assessment tax is paid before levy of penalty u/s 221(1)?
  • No. Penalty u/s 221(1) shall not be wiaved off merely by reason that he paid the tax before the levy of such penalty.
  1. What is the penal consequence of not filing return of income within due date u/s139 of the Act?
  • Fees is levied u/s 234F of the Act for default in filing income tax return within the due date of section 139 of the Act
  • Fees Levy section – Section 234F
  • Waive Off- It is mandatory. No waive off.
  • Amount of Fees is as under:

Sl.No.

Category

Amount of total income (Rs.)

Fee (Rs.)

 

Before A.Y. 2021-22

 

 

1

 

If return is filed before 31st Dec. of the relevant A.Y.

Rs. 5 lacs or less

1,000/-

2

If return is filed before 31st Dec. of the relevant A.Y.

Exceeds Rs. 5 lacs

5,000/-

3

If return is filed after 31st Dec. of the relevant A.Y.

Rs. 5 lacs or less

1,000/-

4

If return is filed after 31st Dec. of the relevant A.Y.

Exceeds Rs. 5 lacs

10,000/-

 

From A.Y. 2021-22 and onwards

 

 

1

If return is filed after due date u/s 139

Rs. 5 lacs or less

1,000/-

2

If return is filed after due date u/s 139

Exceeds Rs. 5 lacs

5,000/-

 

  1. What is the penal consequence for failure to pay tax as per demand notice u/s 156 of the Act?
  • The assessee may be demanded to pay tax in the following situations:
  1. In consequence of any assessment order
  2. In pursuance of intimation of filing of income tax return u/s 143(1), processing of TDS or TCS Return u/s 200A and u/s 206CB of the Act
  • Such demand of payment of tax is considered as demand notice u/s 156 of the Act for which the assesse has to pay tax generally within 30 days of the receipt of notice u/s 156.
  • If any assesse fails to comply with the payment of tax demanded within the allowed time for it, he shall be considered as assesse in default.
  • Penal Section- Section 221(1)
  • Amount of penalty- as imposed by the assessing officer, maximum penalty amount of tax demanded not paid.
  • Waive Off- May be waived off if sufficient reason is proved for non-compliance.
  1. What penal consequence is there due to misreporting or under reporting of income?
  • This is very important area of penal actions provided in Section 270A of the Act. This was made effective from 01-04-2017. Earlier it was penalized u/s 271(1)© for concealment of income.
  • Two important terms, i.e. ‘Misreporting of Income’ and ‘Underreporting of Income’ plays a vital role in levy of penalty here.
  • In a simple language underreporting of income means income assessed is greater than the income as per processing of return, or where no return is filed by the assesse and the income assessed comes to be greater than basic exempted amount of income.
  • However, misreporting of income of income means there is under reporting of income due to false entry or suppression of facts, omission to record nay investments in books. Means there is false representaion or non-representation in the books by the assesse.
  • For underreporting of income- penalty is 50% of tax on underreported income
  • For misreporting of income- penalty is 200% of tax on underreported income
  • Both the terms have been dealt below separately.
  1. What shall be considered as underreporting of income and how to calculate it?

Sl. No.

Scenarios

Tax Assessed u/s 143(3)/148

Amount of Under Reported Income

1.

Return has been filed u/s 139,

Amount of income processed u/s 143(1)(a)- Rs.10 lacs,

Assessment is made for first time

 

Rs. 12 lacs

 

Rs. 2 lacs (12 lacs- 10 lacs)

2.

Where no return is furnished by assesse,

It means there is no declaration of income by assesse,

Assessment is made for time

   Rs. 7 lacs

For company/firm- Rs 7 lacs

 

For others- Rs 4.5 lacs  (7lacs-2.5 lacs)

3.

If earlier also assessment was made and it is not the  first time assessment

 

 

Amount of income assessed this time- Rs 50 lacs

 

Amount of income assessed under previous assessment was Rs. 40 lacs

Rs. 10 lacs (Rs.50 lacs- Rs.40 lacs)

 

  1. If any source of receipt, deposit or investment is claimed by the assesse to be of any preceding years, however no penalty was levied in those prior years, whether those amounts will also amount to under reporting of income?
  • Yes, if no penalty was levied in the respective preceding year, it shall be considered as underreporting of income for that preceding year for levy of penalty u/s 270A.
  1. When it can be said that it is misreporting of income and higher penalty @ 200% can be levied for misreporting of income?
  • When the above said underreporting of income in FAQ No. 9 is due to reason of misrepresentation or suppression of facts, failure to record investments/receipt, false entry, failure to report any international transaction or any transaction, it shall be considered as misreporting of income.
  • The above is an exhaustive list, if there is underreporting of income only due to above stated reason, then only it is misreporting of income.
  • In no other cases, penalty at higher rate of 200% can be levied.
  1. Whether penalty for underreporting of misreporting of income u/s 270A can be imposed only on the basis of addition of disallowance of certain amount?
  • No, penalty u/s 270A cannot be imposed on the basis of addition/disallowance of any amount.
  1. Is there any way out so the penalty for misreporting or underreporting of income be waived off?
  • Yes, there is one option available with the assesse u/s 270AA to get immunity from penalty u/s 270A after fulfilling the following conditions:
  1. Tax and interest in the assessment order is paid within the time allowed in the demand notice
  2. No appeal is made for the assessment order
  • Proper application for such waive off has to be made within 1 month from the end of the month of the order receiving date.
  1. What is the penal consequence for or delay in filing the TDS/TCS Return?
  • Person liable to deduct tax and collect tax has to furnish TDS and TCS Return u/s 200(3) and u/s 206C(3) of the Act respectively within the time allowed for it.
  • Delay in filing TDS/ TCS will attract late filing fees chargeability on the assesse
  • Fees Levy section- Section 234E
  • Amount- Rs.200 per day after due date till actual filing. Maximum amount of fees is the amount of TDS/TCS.
  • Waive Off- It is mandatory. No waive off.
  1. What is the penal consequence of non-complying notice for seeking certain information or filing return?
  • Assessing Officer may seek certain information or ask assesse to file income tax return by issuing notice u/s 142(1)
  • Failure to comply with notice u/s 142(1) attracts penalty
  • Penalty section-Section 272A
  • Amount- Rs.10,000 for each failure
  1. What is the penal consequence of non-complying with the notice issued for scrutiny assessment selection?
  • U/s 143(2) of the Act, the assesse is intimated for scrutiny assessment selection
  • Failure to comply with notice u/s 143(2) attracts penalty
  • Penalty section-Section 272A
  • Amount- Rs.10,000 for each failure
  1. What is the penal consequence not conducting audit on direction of special audit by the assessing officer?
  • U/s 142(2A) of the Act the assessing officer may direct assesse to conduct re-audit by a chartered accountant
  • Failure to comply with notice u/s 143(2) attracts penalty
  • Penalty section-Section 272A
  • Amount- Rs.10,000 for each failure
  1. What is penal consequence for failure to keep, maintain, or retain books of account, documents, etc., as required u/s 44AA of the Act?
  • Section 44AA requires in following cases to keep and maintain books of accounts and documents so that the AO can compute his income as per the Act:
  1. Business from profession
  2. if total income exceeds Rs.1,20,000/- or total sales/turnover/gross receipts exceeds Rs.10,00,000/- in any last three years
  3. For new business, if estimated total income exceeds Rs.1,20,000/- or estimated total sales/turnover/gross receipts exceeds Rs.10,00,000/- in any last three years
  4. If income claimed is lower than the deemed income under presumptive taxation scheme
  5. In case of section 44AD, where the income exceeds the maximum amount not chargeable to tax
  • If any failure is there by any person referred above in keeping and maintaining such books of books and documents, penalty shall be attracted
  • Penal Section-section 271A
  • Amount- Rs.25.000/-
  1. What is the penal consequence for not maintaining information or documents as per section 92D of the Act for transfer pricing cases?
  • As per section 92D of the Act, the assessee who has entered into international transaction or specified domestic transaction as to keep and maintain the information and documents as per Rule 10D of the Income Tax Rules, 1962. Documentation pertains to the information of assesse enterprise and other enterprise such as:
  1. Ownership structure
  2. Profile of multinational group including  name, address, legal status and country of tax residence
  3. Description of business
  4. as mentioned therein
  • The Income-tax Authority may require the taxpayer to produce these documents (to be maintained for 8 years after the relevant A.Y. which has to be produced before him within 30 days or extended time, if any.
  • Also, reporting of such international transaction and specified domestic transaction is required before transfer pricing officer in Form 3CEB.
  • Any such failure in maintaining and keeping the said documents, reporting to transfer pricing officer or false maintaining or furnishing of information shall attract penalty.
  • Penal Section- Section 271AA
  • Amount- 2% of the value of each international transaction or specified domestic transaction entered into by the taxpayer. Penalty for constituent entity of international group may amount to Rs.5,00,000/-
  1. What is the penal consequence for not furnishing the information or documents for international transaction when asked by the authority?
  • Penal Section-Section 271G
  • Amount-2% of international transaction/specified domestic transaction amount
  1. What is penalty consequence for undisclosed income in course of search?
  • In terms of section 132 of the Act, income tax authority has the power to conduct search in the situation provided therein.
  • Penal Section-271AAB
  • Amount- Amount of penalty shall be as follows:

Sl. No.

Category

Amount of Penalty

 

Search initiated in the period 01-07-2012 to 15-12-2016

 

1

If assessee admit the undisclosed income, explains the source, pays the tax with interest on it declaring it in the return for the relevant period within the specified time.

10% of undisclosed income

2

If assessee  does not admit the undisclosed income, but pays the tax with interest on it declaring it in the return for the relevant period within the specified time.

20% of undisclosed income

3

If assesse neither admits the undisclosed nor pays the tax with interest on it on declaring it in the return for the relevant period within the specified time.

60% of undisclosed income

 

Search initiated on or after 16-12-2016

 

1

If assessee admits the undisclosed income, explains the source, pays the tax with interest on it declaring it in the return for the relevant period within the specified time.

30% of undisclosed income

2`

If assesse neither admits the undisclosed nor pays the tax with interest on it on declaring it in the return for the relevant period within the specified time.

60% of undisclosed income

 

  1. Is there any penal consequence for making false entry in books of accounts or omitting any entry on which income tax is leviable?
  • This penalty has newly introduced by Finance Act, 2020 for making any false entry or omitting any entry in the books of accounts on which income tax is leviable.
  • This penalty is also for any other person who is responsible for making such false entry or omitting any entry to record
  • Penal section- Section 271AAD
  • Amount- Total amount of false or omitted entry
  1. What penal consequence is for use of false invoice or documents?
  • The use or intention to use is covered under the penal provisions of false or omitted entry in the books only under section 271AAD of the Act to include the use or intention to use the following:
  1. false documents like false invoice or evidence etc.
  2. false invoice without actual supply or receipts of goods or services
  3. false invoice in the name non existing person
  • Penal section- Section 271AAD
  • Amount- Total amount of false documents or invoice
  1. What is this new requirement of furnishing statement for donation received by organization u/s 35 and section 80G of the Act and issuing certificate to the donors? What penal consequence is there for failure in this?
  • The requirement to furnish statement for receiving donation by research association, university, college or other institution or the company u/s 35 and also the person referred to in section 80G of the Act has newly been introduced by Finance Act, 2020.
  • Such donation receiving organisation has to furnish a certificate to the donee who shall be claiming deduction for such donation u/s 35 and u/s 80G of the Act.
  • Earlier there were no such requirements under the law to furnish such statement and issue of certificate by the donation receiving organisation to the donee.
  • This has been introduced to keep an accountability of the amount represented by the donation receiving person and the amount to be claimed as deduction by the donee.
  • It is made effective w.e.f 01-04-2021
  • Statement of details of donation received has to be furnished in Form 10DB as introduced by new Rule 18AB under the Income Tax Rules, 1962.
  • Certificate to the doneee has to be issued by donor prescribing the amount of donation received during any F.Y in Form 10BE as introduced by new Rule 18AB under the Income Tax Rules, 1962.
  • Therefore, to ensure the compliance of the same, Fee and Penalty action has also been made for failure or delay in furnishing such statement and issuing certificate to donee.
  • Fee and Penal Section- Section 234 for Fee and Section 271K for Penalty
  • Amount- Fee- Rs.200/day (upto the amount of donation)
  • Penalty- Rs.10,000/- to Rs. 1,00,000/-
  1. What is the penal consequence if the source of income is not explained by the assesse?
  • Section 115BBE of the Act provides for levy of income tax @60% in following cases if the source of income is not explained by the assesse:
  1. Unexplained Cash Credit (Section 68)-Any sum amount is found credited in the books
  2. Unexplained Investments (Section 69)-Investment made by the assesse which is not recorded in the books
  3. Unexplained money, bullion, jewellery or other valuable article (Section 69A)- when assesse is found to be owner of these assets
  4. Lesser amount is recorded in books than actual investments or acquisition of money, bullion, jewellery or other valuable article (Section 69B)
  5. Borrow or Repayment of hundi loan otherwise than through an account payee cheque (Section 69D)
  • Apart from the levy of higher rate of tax in the above cases, there is penalty also u/s 271AAC.
  • However, no penalty shall be levied if such unexplained income is taken into return u/s 139 and tax is paid before the end of the previous year.
  • Also, For the matter listed above, no penalty shall be levied u/s 270A of the Act for underreporting or misreporting of income
  • Penal Section- Section 271AAC
  • Amount-10% of amount involved
  1. What is penalty for not complying with the requirement of getting accounts audited?
  • Section 44AB requires the accounts to be audited by a chartered accountant, if the turnover/sales/gross receipts from business, exceeds Rs. 1 cr. and from profession it exceeds Rs. 50 lacs.
  • Any failure in getting the accounts audited shall attract penalty.
  • Penal section- Section 271B
  • Amount- 0.5% of total sales/turnover/gross receipts or Rs,1,50,000/- whichever is less.
  1. What is the penalty for default in getting Report u/s 92E of the Act for transfer pricing?
  • Section 92E requires that a report from accountant has to be taken for international transaction and specified domestic transaction.
  • Report as to be furnished in Form 3CEB in terms of Rule 10E
  • Failure in furnishing Form 3CEB shall attract penalty
  • Penal section- Section 271BA
  • Amount-Rs.1,00,000/-
  1. Penalty for failure in deducting TDS or collecting TCS?
  • If any person fails to deduct TDS prescribed under chapter XVII-B of the Act or collect TCS as per section 206C, penalty shall be levied on such failure.
  • Penalty Section- Section 271C for TDS and 271CA of TCS
  • Amount-Amount of TDS/TCS
  1. What is the consequence of not filing or late filing TDS/TCS Return?
  • Every person deducting TDS or collecting TCS has to file TDS/TCS return quarterly as per the due date prescribed u/s 200(3) and u/s 206C(3)
  • Not filing or late filing shall attract both penalty as well as late fee
  • Fee/Penal section- Fee u/s 234E and penalty u/s 271H
  • Amount- Fee- Rs.200/day (maximum fee-amount of TDS/TCS)
  • Penalty- Rs.10,000/- to Rs. 1,00,000/-
  • Waive Off- Penalty u/s 271H may be waived off of TDS/TCS Return made within one year from the actual due date after payment of TDS/TCS with interest.
  1. Penalty of non-payment of tax in case of rewarding in Kind the winning from lottery or crossword puzzles?
  • In case the reward is given in kind, the person giving such reward has to ensure that tax is paid on such winning before release of reward.
  • Failure shall attract penalty
  • Penalty Section- Section 271C
  • Amount-Amount of TDS
  1. Whether accepting consideration in cash for sale of immovable property in cash will attract penalty?
  • Section 269SS provides that the consideration for sale of immovable property shall be accepted in cash only upto Rs.20,000/-.
  • If it is accepted in cash for amount exceeding Rs.20,000/-, it shall attract penalty
  • Penalty section-Section 271D
  • Amount-Amount of cash consideration accepted
  1. What is person consequence for payment in cash for purchase of immovable property?
  • For purchase of immovable property restriction is there for payment in cash of more than R.20,000/- only if it is paid as advance.
  • Penal Section-271E
  • Amount-Amount of advance paid
  1. Whether loan or deposit can be accepted/repaid in cash?
  • As per Section 269SS, loan or deposit cannot be accepted in cash for amount of Rs. 20,000/- or more, otherwise it shall attract penalty
  • Also, as per section 269T repayment of loan or deposit in cash is restricted below Rs.20,000/-
  • Penalty section-Section 271D/271E
  • Amount-Amount of loan or deposit accepted/repaid.
  1. What is the maximum cap of receiving amount in cash for any transaction? What penalty consequence is there for failure?
  • As per section 269ST cash shall not be received of Rs.2,00,000/- from a single person in a day or in respect of a single transaction or single event from a single person
  • Any violation in this shall attract penalty.
  • Penalty Section- Section 271DA
  • Amount-Amount of receipt
  1. Is it mandatory to facilitate for electronic payment?
  • Yes as per Section 269SU, whose gross receipt from business in preceding F.Y exceeds Rs.50 cr., they have to mandatorily facilitate for electronic payment, otherwise penal action is there.
  • Penal section- Section 271DB
  • Amount- Rs.5,000/- per day of default
  1. Why furnishing of SFTR (Statement of Financial Transaction or Reportable Account) is necessary?
  • SFTR is required to be filed by persons listed in section 285BA. Like Banks has to file SFTR in respect of any person making FD of more than Rs. 10 lacs during the year, etc.
  • SFTR is used for the purpose of pre-fill of data of any assessee and is also used to collect information of an assessee via third party.
  • Failure or delay in filing SFTR shall attract penalty
  • Penalty section-Section 271FA
  • Amount-Rs.500/- per day. Also, a notice may be issued ITO to file SFTR and if it is not filed within the time period provided in the notice, penalty is Rs.1,000/- per day.
  1. Whether there is penalty even for inaccurate filing of SFTR?
  • Yes, if it is due to failure in conduct of due diligence, or even after knowing of inaccuracy does not inform the inaccuracy to the ITO.
  • Penalty Section-Section 271FAA
  • Amount- Rs.50,000/-
  1. What formalities are required before remittance of fund to a non-resident?
  • As per section 195(6) of the Act, before remitting any fund to a non-resident, the particulars have to be furnished in Form 15CA and Form 15CB.
  • The shall be penal action for failure
  • Section-Section 271-I
  • Amount-Rs.1,00,000/-
  1. Is there any penalty for not responding or complying with any departmental notices or orders?
  • Penalty is Rs.10,000/-for each such failure.

 

 

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