Penalty u/s. 271(1)(C)

Hiral Raja 
on 24 March 2009

If the Assessing officer or Commissioner (Appeals) in the course of any proceedings under the Act is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income, then he can direct that such person shall pay by way of penalty u/s. 271(1) (c), a sum not less than 100% but not exceeding 300% of the amount tax sought to be evaded by reason of concealment of his income or furnishing inaccurate particulars of his income. This section is used as a sword by the assessing officers. In fact in the orders passed u/s. 143(3) of the Income Tax Act, they have been mentioning “Initiate Penalty proceedings u/s. 271(1) (C) of the I T Act” by default on additions/disallowances done without providing any reasons irrespective of whether the assessee really tried to conceal his income or furnished inaccurate particulars of his income or even if additions/disallowances are on account of legally debatable issues.

There were various judicial pronouncements viz., CIT Vs. Ram Commercial Enterprises Ltd. [2000] 246 ITR 568 (Delhi), Sri. T Ashok Pai Vs. CIT [2007] 292 ITR 011 SC, Shri. Bhagwant Finance Co. Ltd. V. CIT & Anr. (2005) 196 0462 DEL, etc. wherein it had been  held that satisfaction of AO u/s 271(1)(c) is a condition precedent to initiation of penalty proceedings. Penalty proceeding cannot be exercised unless requisite satisfaction is recorded in the proceedings under the act. Non-recording of satisfaction is a jurisdictional defect which cannot be cured. Hence in such cases, penalty proceeding are bad and also subsequent proceedings must fail. However Finance Act 2008 has introduced new sub section (1B) with retrospective effect from 1st April 1989 to nullify the effect of the abovementioned judgements.  It provided that where any amount is added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment and if such order contains a direction for initiation of penalty proceedings, then such an order of assessment or reassessment shall be deemed to constitute satisfaction of the Assessing Officer for initiation of the penalty proceedings under section 271(1) (c).  Unfortunately this proviso has come as another weapon in the hands of the assessing officers. They do have not have to record any satisfaction for initiating the penalty proceedings.
Further Larger Bench of Supreme Court in case of Union of India and Ors., vs. M/s. Dharmendra textile processors and Ors. 306 ITR 227 while reversing the supreme court judgement of Dilip N Shroff Vs. Joint CIT, SpecialRange, Mumbai 291 ITR 519 has held that “It is a well-settled principle in law that the court cannot read anything into a statutory provision or a stipulated condition which is plain and unambiguous. A statute is an edict of the legislature. The language employed in a statute is the determinative factor of legislative intent”. Also it has further held that “The Explanations appended to Section 271(1)(c) of the IT Act entirely indicates the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing return. The judgment in Dilip N. Shroff's case (supra) has not considered the effect and relevance of Section 276C of the I.T. Act. Object behind enactment of Section 271(1)(c) read with Explantations indicate that the said section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Wilful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under Section 276C of the I.T. Act”. Hence the supreme court in this judgement has concluded that ‘’ Mens Rea’’ or ‘’Wilful concealment’’ is not a criteria for determining leviability of penalty. However with due respect of the judgement of the Hon’ble Supreme Court, I feel that Supreme Court ought to have appreciated the adhoc manner in which penalty proceedings are by default initiated by the assessing officers on the additions/disallowances done in the assessment orders. The assessees genuinely had a strong and quite logical ground to argue and prove that there was no intention to conceal/furnish inaccurate particulars and additions are merely differences of opinion between the assessing officer and the assessee.
Further today in the online E – filing of returns, there is no place to include any notes to Income tax return or to include any explanations in respect of any legal position taken by the assessee on a specific claim while filing the return of income. Under Income Tax Act, there are many issues which are debatable and hence assessee takes a legal position based on judicial pronouncements existing at the time of filing returns. An assessee would prefer making a claim in a transparent manner by providing on record all relevant facts, reasonings and judicial pronouncments considered while deciding on the making a claim. However in absence of an opportunity to submit such a explanation (thru online e filing of returns), assessee is clearly losing the opportunity to provide proper explanations and is exposed to the vagaries of penalties levied by the assessing officers whimsically even on the genuine claims made by the assessee.
Based on the above, in today’s scenario, it appears that once additions/disallowances are made in the assessment orders, there is no onus on the department to prove that assessee has concealed his income or furnished inaccurate particulars. The onus is entirely on the assessee to prove his bonafides. The assessing officers merrily just have to mention “ Initiate Penalty proceedings u/s 271(1)(c) of the I T Act”.
I feel in today’s world where transparency and governance are provided highest ratings, to make the law fair and just for the assessees:
o        Assessing Officers should mandatorily provide reasons for initiation of penalty proceedings. This will also bring discipline with the assessing officers to genuinely initiate penalty proceedings where assessee has really concealed his income or has furnished inaccurate particulars and avoid to some extent ill – motivated initiating of penalty proceedings. Penalty proceedings should not be just be initiated on each and every additions/disallowances made in the assessment order.
o        Penalty provision requires strict adherence and hence the onus to prove that there was concealment of income with a view to avoid tax, should be on the department. Penalty should only be levied in cases where mens rea exists.
o        Opportunity should be provided at the time of filing return of income to the assesseee to provide full explanations and reasonings in respect of the claims made in the Income Tax Return.
This would certainly help the genuine and honest tax payers in the long way and at the same time provide department with a level playing opportunity to prove in case assessee has really concealed the income or has furnished inaccurate particulars.



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