An overview of Penal & Prosecution provisions in the Income Tax Act-1961

“The law helps those who watch, not those who sleep”- Proverb.

Why does government impose penalties on those who commit certain minor error in complying with the law, more particularly in a country where majority of the population is illiterate, ignorant and without required infrastructure? Taxation no matter how much legitimate it may be, it still constitutes a forced extraction of wealth from the pocket of the citizens

Obvious answer is that a penalty promotes compliance. Fear is one of the key factors in the compliance of law. Chances of getting caught or getting penalized is what makes compliance compulsory.  Penal provisions are an integral part of every law. Income Tax Act-1961 too have number of penal provisions to ensure authentic & time bound compliances from the taxpayers.

Often, penalty is as second tax and prosecution is equated with the death penalty for the taxpayer. Whether the power to prosecute is justifiable or is proper, at least in India, is question of debate and arguments. I

The penal provisions are normally in the form of (a) Levy of Interest & late fees (b) imposition of penalty (c) Launching of prosecution proceeding against tax defaulters. Levy of interest is purely compensatory in nature whereas imposition of penalty & initiation of prosecution proceedings act as strong deterrents against tax evaders.

Penalty is there not only if there is non-filing of income tax return or if there is mis-reporting or under reporting of income. But the penalty is there for various non compliances. Some of the common instances which often attract penal consequences are as under:

1.      In case of the following defaults, Penalty of Rs. 10,000 can be imposed: i. Failure to comply with any notice issued by the department. ii. Refusal to sign statements recorded in any income tax proceedings. iii. Non compliance with summons issued for producing books of accounts or other evidences. iv Refusal to answer questions raised by the Income Tax Authorities

2. Failure to apply, quote, intimate PAN or quoting of false PAN attracts penalty of Rs. 10,000/-. Similarly, failure to apply, quote TAN or wrong quoting thereof attracts a penalty of ₹10,000

 

3. Where a person is liable to deduct or collect tax at source (TDS) and fails to do so, penalty equal to the amount of tax can be levied. Further, failure to furnish TDS/TCS statement or furnishing incorrect statements can attract penalty from Rs. 10,000/- to Rs. 1,00,000/-. 

4.      Failure to maintain books of accounts and other documents attracts penalty of Rs. 25,000/-. In case the taxpayer is a person who has entered into international transaction, penalty will be 2% of the value of such international transaction or specified domestic transactions.

 

5. If the taxpayer fails to get accounts audited or furnish audit report, penalty can be levied which could be Rs. 1,50,000 or ½% of the total sale, Turnover or gross receipts, whichever is lesser. If such failure to get accounts audited pertains to taxpayer with foreign transaction, penalty of Rs. 1,00,000/- can be imposed.

 

6. Failure to furnish statement of financial transaction (SFT) or reportable account shall attract a penalty of Rs. 500/- for each day of failure. If default continues even after issue of notice then penalty shall be Rs. 1,000/- per day. Inaccurate furnishing attracts penalty of Rs. 50,000/-. 

        7.If any person accepts or repays any loan or deposit of an amount of             Rs. 20,000/- or more in cash then penalty of an amount equal to                     such  loan or deposit can be imposed.

8.      If any person receives an amount of Rs. 2,00,000/- or more (a) in aggregate from a person in a day; or (b) in respect of a single transaction; or (c) in respect of transactions relating to one event or occasion from a person, otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account then penalty equivalent to such amount can also be imposed as penalty.

 

9. If a report or certificate is required to be furnished by an Accountant, Merchant Banker, Registered Valuer and such information is found to be incorrect then penalty of Rs. 10,000 for each such report can be imposed. 
   
   

Let us have a look at the detailed list of various other penalties are as under:

(i) Concealment of particulars of income or furnishing of inaccurate particulars of income. [Section 271(1)(c)]

 (ii) Failure to pay the advance tax as directed by the Assessing Officer or as estimated by the assessee. [Section 273(1)]

(iii) Failure to comply with a notice issued under section 142(1) or 143(2) or failure to comply with the direction issued under section 142(2A) to get the accounts audited. [Section 271(1)(b)]

 

(iv)When the assessee is in default or is deemed to be in default in making payment of tax, including the tax deducted at source, advance tax and the self assessment tax. [Section 221 read with Sec.201(1)]

 

(v) Failure to maintain books of accounts and documents by persons carrying on profession or business as prescribed under section 44AA. [Section 271A]

(vi) Failure to get the accounts audited in prescribed circumstances or failure to obtain the prescribed audit report within prescribed time period of failure to furnish the audit report along with the return, as required under section 44AB. [Section 271B]

(vii) Failure to subscribe to the eligible issue of capital [Section 271BB]

(viia) Penalty for failure to deduct tax at source. [Section 271C]

(viii) Accepting of any loan or deposit or repayment of deposit of Rs.20,000 or more otherwise than by account payee cheque or account payee draft, in contravention of the provisions of Section 269SS. [Section 271D]

(viiia) Repayment of loan in contravention of the conditions imposed in section 269T. [Section 271E]

(viiib) A. Failure of file the return of income as required under Section 239 (1), shall entail imposition of penalty. [Section 271F]

1. Failure to file the return as required under the proviso to Section 139(1), in the event of assessee fulfilling the prescribed conditions, i.e., certain persons in occupation of immovable property or owner of motor vehicle or subscriber to telephone, one who incurred expenditure on foreign travel, the holder of the credit card or a member of a club, subject to specific conditions, are required to file the return as per proviso to Section 139(1), failing which penalty may be imposed. (Proviso to Section 271F)

(ix) Refusal to answer in contravention of legal obligation. [Section 272A(1)(a)]

(x) Refusal to sign any statement made in the course of income-tax proceedings. [Section 272A(1)(b)]

(xi) Failure to attend or give evidence or produce books of accounts and documents in compliance with the requirements of summons under section 131(1). [Section 272A(1)(c)]

(xii) Failure to comply with the provisions of section 139A dealing with the application for and allotment of Permanent Account Number or General Index Register Number. [Section 272A(1)(d)]

(xiii) Failure to furnish information regarding securities. [Section 272A(2)(a)]

(xiv) Failure to give notice of discontinuance of business or profession. [Section 272A(2)(b)]

(xv) Failure to furnish in due time information sought under section 133 of Income-tax Act. [Section 272A(2)(c)]

(xvi) Failure to furnish in due time prescribed returns/statements. [Section 272A(2)(c)]

(xvii) Failure to allow inspection or take copies of registers of registers of companies. [Section 272A(2)(d)]

(xviii) Failure to furnish in due time the return of income by charitable or religious institutions. [Section 272A(2)(e)]

(xix) Failure to deliver in due time a copy of declaration of non-deduction of tax at source u/s.197A. [Section 272A(2)(f)]

(xx) Failure to furnish a certificate of tax deducted at source to the person on whose behalf tax has been deducted or collected as required by Section 203 or Section 206C. [Section 272A(2)(g)]

(xxi) Failure to deduct and pay tax from salary payable to an employee as directed by the Assessing Officer or the Tax Recovery Officer as required by Section 226(2). [Section 272A(2)(h)]

(xxii) Failure to allow an Income-tax Authority to collect any information useful or relevant to the purposes of Income-tax Act u/s.133B. [Section 272AA)]

(xxiii) Failure to comply with the provisions of section 203a dealing with tax Deduction Account Number [Section 272BB]

Other provision with regard to penalty:

       No penalty under the Income-tax Act is imposed unless the person concerned has been given reasonable opportunity of being heard.

         The quantum of penalty leviable depends upon the nature of default. The relevant sections of Income-tax Act prescribe the minimum as well as maximum penalties which can be levied.

         Subject to certain terms and conditions, some of the penalty can be reduced or waived by the higher income tax authorities subject to the condition that assessee should voluntarily and in good faith make full and true disclosure of income prior to the detection of concealment by the Assessing Officer. In certain cases of genuine hardship, the penalty levied can be reduced/ waived if the assessee has co-operated in any enquiry relating to the assessment and recovery of taxes. The waiver/reduction of penalties is discretionary and dependent upon satisfaction or prescribed conditions. No assessee can claim waiver or reduction of penalty imposed or imposable as a matter of right [Section 273A].

However, the new penal provisions and amendments are reducing the discretionary power of the authorities in reducing or waiving off the penalty.

Prosecution:

 Not only monetary, authorities are aptly empowered to launch the prosecution as well in an attempt to fight tax evasion. Even in certain cases, launching of prosecution is prescribed without prescribing monetary penalties. One of the common instance is not depositing the amount of TDS to the Government treasury after collecting it from the Deductee. The Income-tax Act contains a separate chapter XXII wherein offences for prosecution has been dealt.

Some of the provisions are as under:

 (i) Removal, parting with or otherwise dealing with books of accounts, documents, money, bullion, jewellery or other valuable article or thing put under restraint during the search. [Section 275A]

(ii) Fraudulent removal, concealment, transfer or delivery of any property or any interest in the property with the intention to thwart recovery of tax. [Section 276]

(iii) Failure on the part of a liquidator or receiver of a company to give notice of his appointment to the Assessing Officer or failure to set apart amount notified by the Assessing Officer, or parting away of company’s properties in contravention of income-tax provision. [Section 276A]

(iv) Failure to enter into written agreement or failure to furnish the statement of immovable property intended to be transferred u/s.269UC, or failure to surrender or deliver the property u/s.269UE, purchased by the Appropriate Authority or doing or omitting to do anything u/s.269UL, which will have the effect of transfer of property without the permission of the Appropriate Authority (under the provisions of Chapter XX-C) [Section 276AB]

(v) Failure to pay to the credit of the Central Government the tax deducted at source. [Section 276B]

(va) Failure to pay the tax collected at source. [Section 276BB]

(vi) Willful attempt to evade any tax, penalty or interest [Section 276C(1)]

(vii) Willful attempt to evade the payment of any tax, penalty or interest levied under Income Tax Act. [Section 276C(2)]

(viii) Willful failure to furnish in due time return of income. [Section 276CC)]

(viiia) Failure to furnish return of income in Search Cases as required under section 158BC [Section 276CCC]

(ix) Willful failure to produce accounts and documents as directed by issue of notice under section 142(1) [Section 276D]

(x) Willful failure to get the accounts audited as directed by the Assessing Officer under section 142(2A). [Section 276D]

(xi) Making of a statement in verification or delivery of an account or statement which is false and which the concerned person knows or believes to be false or does not believe to be true. [Section 277]

(xii) Abetting or inducing another person to make and deliver an account or statement or declaration relating to any taxable income which is false and which he either knows or believes to be false. [Section 278]

(xiii) Punishment for 2^nd & subsequent offences in cases of certain defaults. [Section 278A]

(xiv) No person shall be punished for any failure if he proves that there is reasonable cause failure. [Section 278AA].

Certain key issues concerning prosecution are as under:

 

       Mens-Rea: 
In case of willful act of omission or commission, the court shall presume the existence of culpable mental state. However, the accused can rebut this presumption by producing necessary evidence before the court. (Section 278E).

    Any person, committing above offences is liable to be prosecuted whether the concerned person is a taxpayer or not. Even offence committed by a Company, Firm, Association of Persons or Body of Individuals, prosecution can be launched on every person who is in charge of or responsible for the conduct of the business of the concern. For offence by a Hindu Undivided Family (HUF), the karta thereof is deemed to be guilty of the offence.

 

        Section 279(2) of Income-tax Act empowers a Chief Commissioner of Director General of Income-tax to compound an offence either before or after the institution of prosecution proceeding.

         Public servant furnishes any information in contravention of the provisions of Section 138(2), prosecution may be instituted against him with the previous sanction of the Central Government. (Section 280).

 Here is chart showing the compilation of the penal provision for AY 2019-20 under the Income Tax Act-1961

 

Section	Nature of default	Penalty leviable
(1)	(2)	(3)
140A(3)	Failure to pay wholly or partly—	Such amount as Assessing Officer may impose but not exceeding tax in arrears
	(a) self-assessment tax, or
	(b) interest and fee, or
	(c) both
	under section 140A(1)
158BFA(2)	Determination of undisclosed income of block period	Minimum : 100 per cent of tax leviable in respect of undisclosed income
		Maximum : 300 per cent of tax leviable in respect of undisclosed income.
221(1)	Default in making payment of tax	Such amount as Assessing Officer may impose but not exceeding amount of tax in arrears
234E	Failure to file statement within time prescribed in section 200(3) or in proviso tosection 206C(3)	Rs. 200 for every day during which failure continues but not exceeding tax deductible/collectible
234F	Default in furnishing return of income within time prescribed in section 139(1)	a) Rs. 5000 if return is furnished on or before 31 December of assessment year. b) Rs. 10,000 in any other case Note: if total income of the person does not exceeds Rs. 5 lakh then fee payable shall be Rs. 1000
270A(1)	Under-reporting and misreporting of income	A sum equal to 50% of the amount of tax payable on under-reported income. However, if under-reported income is in consequence of any misreporting thereof by any person, the penalty shall be equal to 200% of the amount of tax payable on under-reported income
271(1)(b)	Failure to comply with a notice under section 115WD(2)/115WE(2)/142(1) or section 143(2) or failure to comply with a direction under section 142(2A)	Fixed at Rs. 10,000 for each failure. Note:- However, the above penalty shall not be levied to and in relation to any assessment for the A.Y commencing on or after the 1st day of April, 2017.
271(1)(c)	Concealment of particulars of income or fringe benefits or furnishing of inaccurate particulars of income or fringe benefits	Minimum : 100 per cent
		Maximum : 300 per cent of tax sought to be evaded in addition to tax payable
		Note:
		‘Amount of tax sought to be evaded’ shall be aggregate of tax sought to be evaded under the general provisions and the tax sought to be evaded under the provisions of MAT or AMT. However, if an amount of concealed income is considered both under the general provisions and provisions of MAT or AMT, such amount shall not be considered in computing tax sought to be evaded under provisions of MAT or AMT. Further, where provisions of MAT or AMT are not applicable, the computation of tax sought to be evaded under the provisions of MAT or AMT shall be ignored.
		Note:- However, the above penalty shall not be levied to and in relation to any assessment for the A.Y commencing on or after the 1st day of April, 2017.
271(4)	Distribution of profits by registered firm otherwise than in accordance with partnership deed and as a result of which partner has returned income below the real income	Not exceeding 150 per cent of difference between tax on partner’s income assessed and tax on income returned, in addition to tax payable
		Note:- However, the above penalty shall not be levied to and in relation to any assessment for the A.Y commencing on or after the 1st day of April, 2017.
271A	Failure to keep, maintain, or retain books of account, documents, etc., as required under section 44AA	Rs. 25,000
271AA(1)	(1) Failure to keep and maintain information and documents required by section 92D(1) or 92D(2)	2% of value of each international transaction/or specified domestic transaction entered into
	(2) Failure to report such transaction
	(3) Maintaining or furnishing incorrect information or document
271AA(2)	Failure to furnish information and document as required under Section 92D(4)	Rs. 5,00,000/-
271AAA	Where search has been initiated before 1-7-2012 and undisclosed income found	10% of undisclosed income
271AAB(1)	Where search has been initiated on or after 1-7-2012 but before 15-12-2016 and undisclosed income found	(a) 10% of undisclosed income of the specified previous year if assessee admits the undisclosed income; substantiates the manner in which it was derived; and on or before the specified date pays the tax, together with interest thereon and furnishes the return of income for the specified previous year declaring such undisclosed income
		(b) 20% of undisclosed income of the specified previous year if assessee does not admit the undisclosed income, and on or before the specified date declare such income in the return of income furnished for the specified previous year and pays the tax, together with interest thereon;
		(c) 60% of undisclosed income of the specified previous year if it is not covered by (a) or (b) above
271AAB(1A)	Where search has been initiated on or after 15-12-2016 and undisclosed income found	(a) 30% of undisclosed income of the specified previous year if assessee admits the undisclosed income; substantiates the manner in which it was derived; and on or before the specified date pays the tax, together with interest thereon and furnishes the return of income for the specified previous year declaring such undisclosed income (b) 60% of undisclosed income of the specified previous year in any other case.
271AAC	Income determined by Assessing Officer includes any income referred to in section 68,section 69, section 69A, section 69B, section 69C or section 69D for any previous year. [if such income is not included by assessee in his return or tax in accordance with section 115BBE has not been paid]	10% of tax payable under section 115BBE.
271B	Failure to get accounts audited or furnish a report of audit as required under section 44AB	One-half per cent of total sales, turnover or gross receipts, etc., or Rs. 1,50,000, which-ever is less
271BA	Failure to furnish a report from an accountant as required by section 92E	Rs. 1,00,000
271BB	Failure to subscribe any amount to units issued under scheme referred to in section 88A(1)	20 per cent of such amount