Common Penalties for defaults in the Income Tax Law: An Overview
No law can exist without the penal provision. To ensure that the taxpayer does not default in paying taxes or disclosing the information, there are several penalties prescribed under the Income Tax Law. Some of the penalties are mandatory whereas few are at the discretion of the tax authorities. With each passing year, penal provisions are getting stricter & discretionary powers of authorities are shrinking. Let us know some of the most common penal provisions in the Income Tax Act-1961.
- Penaltyfor underreporting and misreporting of income:
Many times a taxpayer may try to reduce his tax liability by underreporting or misreporting of income. In such a case, penalty may be levied U/s 270A. Penalty amount in such a case shall be 50% of the tax payable on under-reported income. However, in a case where under-reporting of income results from the misreporting of income then the taxpayer shall be liable for penalty @ 200% of the tax payable on such misreported income. In short, the cost of penalty would be double the amount of legitimate tax.
For levy of penalty, the following cases will be considered as misreporting of income:
- Misrepresentationor suppression of facts.
- Failureto record investments in the books of account.
- Claimof expenditure not substantiated by any evidence.
- Recordingof any false entry in the books of account.
- Failureto record any receipt in books of account having a bearing on total income.
- Failure to report any international transaction or any transaction deemed to be aninternational transaction or any specified domestic transaction, to which the provisions of Chapter X apply.
- Penaltyin case of Income Tax Raids [Search Case]:
If the undisclosed income is found in the income tax raids conducted by income tax department after 16.12.2016 then the penalty is leviable U/s 271AAB as under:
a) 30% of undisclosed income if taxpayer admits the undisclosed income; substantiates the manner in which it was derived and pays the tax along with interest while filing income tax return of the year to which such undisclosed income pertains.
b) 60% of undisclosed income if it is not covered by above case.
- Penalty incase of income from undisclosed sources:
If during the course of the assessment, income tax officer make any addition U/s 68, 69, 69A, 69B, 69C or 69D (all this sections pertains to undisclosed income, investment, expenditure, money etc) then the penalty is applicable U/s 271AAC @ 10% of the tax payable under section 115BBE.
- Penalty to reply or make submission:
If the taxpayer fails to comply with notices issued under various sections of the Income Tax Act then penalty is applicable U/s 272A@ Rs. 10,000 for each failure.
- Feefor default in furnishing return of income:
Taxpayers who are required to file the income tax return fail to file it are liable for the late fee of Rs. 5,000 if return has been furnished after the due date prescribed U/s 139(1). However, it shall be Rs. 1,000 only if the total income of does not exceed Rs. 5 lakh. The late fee is not at the discretion of the tax authorities and is mandatory in nature.
- Penalty for failure to keep, maintain, or retain books of account, documents, etc., asrequired under section 44AA:
Wherever the taxpayer is required to maintain the books of accounts fails to maintain it then such taxpayer shall be liable to pay penalty u/s 271A of Rs. 25,000.
- Penaltyfor ‘False Entry’ in the Books of Account:
The Finance Act 2020 has introduced a new section 271AAD to provide for a levy of penalty if during any income tax proceedings it is found in the books of accounts maintained by the taxpayers that there is:
a) A false entry; or
b) Any entry relevant for computation of total income of such a person has been omitted to evade tax liability.
The penalty amount shall be equal to the aggregate amount of false entries or omitted entry.
Further, the person (may be an accountant, tax consultants, business facilitator, broker, etc) who guides or abets such false entries may also be liable for a penalty of an equivalent amount.
For the purpose of section 271AAD, the false entry includes use or intention to use:
a) Forged or falsified documents such as a false invoice or, in general, a false piece of documentary evidence.
b) Invoice in respect of supply or receipt of goods or services or both issued by the person or any other person without actual supply or receipt of such goods or services or both or
c) Invoice in respect of supply or receipt of goods or services or both to or from a person who do not exist.
- Failure to file Statement of Donation or issue donation certificate:
Now, every trust who are registered U/s 80G are required to file the Statement of Donation received. Failure to file such a statement within the due date attracts a fee @ Rs. 200 per day. However, the fee cannot exceed the amount in respect of which the failure hasoccurred. Section 271K further empowers the Assessing Officer to levy a penalty of Rs. 10,000 to Rs. 1 lakh if such trusts fail to furnish the statement or fails to furnish a certificate.
- Failure to getaccounts audited or furnish a report of audit as required under section 44AB:
If taxpayers who are required to get their books of accounts audited U/s 44AB fails to do so then they are liable for penalty U/s 271B which can be ½% of the total turnover or Rs. 1,50,000, whichever is less.
- Accepting or repaying in cash of certain loans, deposits or specified sum of Rs. 20,000/- or more:
Income Tax law prohibits the acceptance as well as repayment in cash of an amount of Rs 20,000 towards loans, deposits or advance against immovable property. If any person violates the law by accepting or repaying all this in cash then penalty is applicable U/s 271D which can be an amount equal to loan or deposit taken oraccepted.
- Acceptance of Rs. 2 Lakh or more in Cash:
Section 269ST prohibits acceptance of Rs. 2 Lakh or more in cash
a) in a day inaggregate from a person in a day;
b) in respect of a single transaction; or
c) in respect of transactions relating to one event or occasion from a person.
If any person violates this law then the penalty is applicable U/s 271DA which shall be an amount equal to the amount of such receipt.
- Failureto furnish SFT by Banks, Companies, Registrar etc:
Income tax department collects information from multiple sources by requiring various entities like banks, registrar, etc to file Statement of financial transaction (SFT) [Earlier it was called as ‘Annual Information Statement (AIS)] U/s 285BA(1). Non-furnishing of statement of financial transaction or reportable account attracts penalty u/s 271FA @ Rs. 500 per day of default. The penalty can be enhanced to Rs. 1000 if the failure is there even after issuance of the notice. There is a further penalty of Rs. 50,000/- for furnishing inaccurate SFT[Section 271FAA].
- Latefiling fees for delay in filing the TDS/TCS statement:
Non filing of the TDS/TCS return on or before the due date attracts penalty @ Rs. 200 per day. The late fee is not at the discretion of the tax authorities and is mandatory in nature [Section 234E]. Further, where a person fails to file the statement of tax deducted/ collected at source i.e. TDS/TCS return on or before the due dates penalty may be levied U/s 271H which may be a minimum of Rs. 10,000 & can go up to Rs. 1,00,000/-. Incorrect filing of TDS/TCS return may also attract penalty U/s 271H.
- Penalty on the professionals for furnishing incorrect certificate or information:
Section271J provides that if CA or Merchant banker or a registered valuer furnishes incorrect information in a report or certificate under the income tax law then income tax authorities may impose a penalty of Rs. 10,000 for each such report or certificate.
- Failureto cooperate with the tax authorities:
Every citizen is expected to cooperate with the tax authorities. Many times the tax authorities require the attendance of the person or require the information from a person or may require the person to sign the statements. Failure to comply with these directions or notices can attract a penalty under section 272A(1) which is Rs. 10,000 for each failure/default.
- Penaltyunder section 272A(2):
Section 272A(2) provides for the penalty @ Rs. 500 per day for every day during which the default continues for various defaults like Failure to give notice of discontinuance of business or profession within 15 days of discontinuance U/s 176(3), Failure to furnish within due date returns, statements or certificates, deliver declaration, allow inspection, etc., u/s 133, 134, 139(4A), 139(4C), 192(2C), 197A, 203, 206, 206C, 206C(1A), 285B etc.
- Penaltyfor failure to cooperate to taxmen while entering in business premises [Section 133B]:
Section 133B empowers the tax authorities to enter the place of business of the taxpayer to collect information required by the authorities which will be useful under the income tax law. If the taxpayer attempts to restrict or submit the requisite information then the penalty shall be applicable U/s 272AA(1) up to Rs. 1,000/-.
- Penaltyfor passing unreasonable benefits to trustee or specified person in case of Trust or Institutions:
FA-2022 has inserted section 271AAE to the Income-tax Act to levy a penalty on trusts or institutions if any unreasonable benefits is passed on to the trustee or specified person. The penalty is to be computed as follows:
a) For the first violation: to the extent of income applied by the trust for the benefit of any interested party referred to in section 13(3);
b) For any violation in subsequent years: twice the amount of such income so applied. This section is applicable with effect from Assessment Year 2023-24.
Not all but there are few penal provision where the penalty proceeding may be dropped, as under:
- Power of Commissioner to waive:
Principal Commissioner or Commissioner of Income-tax has power to waive or reduce any penalty levied under the Income-tax Act. Penalty can be waived or reduced by the Commissioner of Income-tax if the conditions specified in section 273A(4) in this regard are satisfied.
- Reasonable Cause:
Section 273B empowers authorities to give relief from penalty in genuine cases covered by section 271A, 271AA, 271B, 271BA, 271BB, 271C, 271CA,271D, 271E, 271F, 271FA, 271FAB,271FB, 271G, 271GA, 271GB, 271H, 271-I, 271J, 272A(1)(c) or (d), 272A(2), 272AA(1), 272B, 272BB(1), 272BB(1A), 272BBB(1) or 273(2)(b) or (c) if there is a reasonable cause for such failures .