CONCEALMENT PENALTIESPROCEEDINGS AND ISSUES RELATING TO REPRESENTATION IN PENALTY PROCEEDINGS

- CA BHAVIN SHAH18 April 2015

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CONCEALMENT PENALTY – SECTION 271(1)(C)

• Proceedings for concealment can be initiated by AO, CIT, CIT(A) on two charges

1. Concealment of particulars of income or2. Furnishing of inaccurate particulars of income

• Explanation 4 defines the term ‘amount sought to be evaded’’

• Section 273B – Penalty not to be imposed where the assessee proves that there was a reasonable cause for such failure

Minimum penalty – 100% of tax sought to be evadedMaximum penalty – 300% of tax sought to be evaded

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EXPLANATIONS TO SECTION 271(1)(C)

Explanation 1 - • Any fact which is material to the computation of total income, the assessee • Does not offer an explanation or offers an explanation which is found to be false

by the AO or Commissioner or;• Offers an explanation which he is not able to substantiate and fails to prove that

such explanation is bonafide and all material facts have been disclosed• The amount added or disallowed shall be deemed to represent the income in

respect of which particulars have been concealed

Explanation 7 –• Transfer Pricing adjustment would trigger penalty unless the assessee proves his

bonafide that the price charged or paid in such transaction was computed as per section 92C, in good faith or due diligence

Approach of the Income tax department in cases of adjustment under the normal provision of the Act and transfer pricing adjustment

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LIMITATION FOR IMPOSING PENALTIES

• Section 275 – Order imposing penalty shall be passed

(a) within the FY in which the original proceeding was completed, or

(b) Within 6 months from the end of the month of the receipt or passing of appellate or revision order by the CCIT/CIT, or

(c) Within 6 months from the end of the month or initiation of penalty proceedings – whichever expires later

In case of appellate order passed by the CIT(A) on or after 1 June 2003 penalty order shall be passed within one year from the end of the financial year in which the appellate order was received by the CIT/CCIT

• Time – limit for consequential penalty order under section 275(1A) inapplicable when quantum proceedings are in assessee’s favour

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ISSUES IN PENALTY PROCEEDINGS

• Time at which the claim surrendered – Revising the claim by filing revised return or surrendering during the course of assessment

• Difference between the term ‘concealment of particulars of income’ and ‘furnishing of inaccurate particulars of income’ – conscious concealment

• Whether every addition justifies penalty

• Doctrine of res judicata

• Finding of concealment must be recorded

• Finding of concealment must be recorded

• Charge for levy of penalty must be specific

• Penalty proceedings are distinct from assessment proceedings

• Initiation of penalty proceedings and imposition of penalty must not be for different offences

• Imposition of penalty where assessed income is taxable as per MAT – proposed amendment by Finance Bill, 2015

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RECENT JUDICIAL TREND ON LEVY OF PENALTY

Facts –

• The assessee entered into a Development Agreement with the owners of land at Pune by paying a consideration of Rs. 54 Lakhs.

• During AY 2005-06 the agreement was cancelled. The owners of the land paid the petitioners a sum of Rs. 1.65 Crores (including the amount of Rs. 54 Lakhs originally paid by the assessee). The assessee was of the view that the amount of Rs. 1.11 Crores (Rs. 1.65 Crores less R. 54 Lakhs) was not income but capital receipt which is not chargeable to tax as capital gains. The aforesaid view was reflected in the notes forming part of the Accounts as well as in the covering letter dated 29 October 2005 accompanying its Return of Income.

• The AO initiated penalty proceedings u/s 271(1)(c) of the Act. The AO did not accept the assessee's contention that as complete disclosure of facts had been made and the claim made is bona fide no penalty is imposable in view of the decision of the Apex Court in CIT vs. Reliance Petroproducts Pvt. Ltd. (322 ITR 158)

CIT VS. S. M. CONSTRUCTION (BOM HC) –

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RECENT JUDICIAL TREND ON LEVY OF PENALTY

Held -

• There was a complete disclosure of all facts. Besides, the claim made by the assessee of not being taxable was not found to be not bonafide.

• As held by the Supreme Court in Reliance Petroproducts Pvt. Ltd. (supra) making of an incorrect claim would not tantamount to furnishing inaccurate particulars of income.

CIT VS. S. M. CONSTRUCTION (BOM HC) –

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RECENT JUDICIAL TREND ON LEVY OF PENALTY

Facts –

• The assessee Company is manufacturer of automobile parts.

• It filed return of income declaring total income of Rs. 59,75,720/-. It claimed deduction of Rs. 1,11,66,935/- on account of waiver of sales tax deferral loan from Government of Maharashtra being capital receipt. In the earlier assessment proceedings, the AO noticed that the assessee has collected sales tax from customers and claimed deduction in the said amount for profit and loss. The amount of sales tax collected was retained by the assessee under the deferral scheme.

• The assessee claimed deduction under Section 43B of the Act considering sales tax collected as deemed payment for the purpose of Section 43B.

CIT VS. RUCHA ENGINEERS PVT. LTD. (BOM HC) -

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RECENT JUDICIAL TREND ON LEVY OF PENALTY

Held -

• The act of the assessee was bona fide even though the assessee may have failed to substantiate its claim that the amount was capital receipt.

• The assessee had not concealed and had disclosed necessary particulars in the form of notes to income. It could not be said that, the assessee made wrong claims which could be branded as inaccurate particulars.

CIT VS. RUCHA ENGINEERS PVT. LTD. (BOM HC) -

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RECENT JUDICIAL TREND ON LEVY OF PENALTY

Facts –

• The assessee had filed e-return for AY 2006-07 declaring loss of Rs. 1,89,44,380/-.

• In the return, under head profit and loss, the assessee had claimed business loss amounting to Rs. 2,33,07,349/- on account of sale of fixed assets.

• During the course of assessment proceedings, the assessee filed a revised return on 8 March, 2008 declaring total income of Rs. 33,62,974/-. In the revised return, the loss of Rs. 2,33,07,349 on account of sale of fixed assets was not treated as "business loss", rather shown as capital loss. The AO made some additions on above account.

CIT VS. NG TECHNOLOGIES LTS. (DEL HC) -

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RECENT JUDICIAL TREND ON LEVY OF PENALTY

Held –

• All claims or deductions wrongly made cannot be treated as bona fide and protected by Explanation 1 to section 271(1)(c) of the Act.

• In cases where interpretive skills and divergent views are plausible, penalty for concealment should not be imposed.

• At the same time, the interpretation put forward or the claim made should not be banal or a ruse, per se or ex facie incorrect or wrong.

• Platitudinous conduct or claim is not a bona fide conduct.

CIT VS. NG TECHNOLOGIES LTS. (DEL HC) -

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UNEARTHING OF BLACK MONEY

• In furtherance to the Budget announcement, the Undisclosed Foreign Income and Assets (Imposition of Tax), 2015 proposes to tax the undisclosed foreign income or assets at the flat rate of 30 per cent while levying a penalty at the rate of 90 per cent of the undisclosed income or asset.

• The Bill has also proposed a one-time compliance opportunity for all those who have stashed black money abroad. It also proposes stringent action against offenders, including rigorous imprisonment of 3 to 10 years. No imprisonment in smaller cases

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