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Under the Income -tax Act, 1961 (the “Act”) defaults in compliance, whether substantive or procedural, could result in any one or more of the following consequences:-
(a) levy of interest
(b) imposition of penalty
(c) Launch of prosecution
While charging of interest is normally considered to be compensatory in nature, levy of penalty and, for certain more critical defaults, launch of prosecution are meant to act as strong deterrents against non-compliance and infraction of law.
Chapter XXI of the “Act” lists down the various kinds of penalties imposable, their quantum, the underlying procedure, the manner in which and limitation by which they are to be imposed.
Up to and including A/y 2016-17,s. 271(1)(c) provided for the levy of penalty where in the course of any proceedings under the Act if an Assessing Officer is satisfied that any person has “concealed the particulars of his income” or “furnished inaccurate particulars of such income”. The said Section also laid down the procedure and manner for the conduct of penalty proceedings and the quantum of penalty that can be levied. Given the sensitivities attached to the issue of levy of penalty, the wider ramifications involved, and the elasticity attached to the phrase “concealment” and “furnishing inaccurate particular of income”, the section has expectedly been the subject of large-scale debate and discussion calling for judicial intervention on numerous occasions.
With effect from A/Y 2017-18, with the introduction of s 270A penalty is leviable for “under reporting of income” (@ 50% of tax payable on the under reported income) and “under reported income in consequence of any misreporting thereof” (@ 200% of tax payable on the under-reported income). In particular the section also goes on to specify cases where an assessee will be deemed to have “under-reported his income” or where the “under-reported income is in consequence of any misreporting thereof.
The essential distinguishing factor between sec 271(1)(c) is that while there is a shift from “concealment’ or “furnishing inaccurate particulars of income” to “under reporting” or mis- reporting” of income. Moreover while sec 270A seeks to clearly define “under reporting” and “mis-reporting”, the phrases “furnishing inaccurate particulars of income” and “concealment” were not defined in sec 271(1)(c) thereby lending them with some kind of elasticity and consequential interpretational disputes.
Initiation of penal proceedings and the subsequent, if the circumstances so call for, levy of penalty has the potential not only to cast additional financial burden on Assessees but also to taint his conduct as being contumacious( thereby opening up the possibilities for launch of prosecution) and thereby it becomes critical that not only should the circumstances be so compelling as to comprehensively justify such an action, the procedure followed should also be free from any irregularities and blemishes.
Before proceeding ahead a discussion on the provisions of the Act regarding the procedure to be followed for initiation and levy of penalty would be in order. While penalty u/s 271(1) (c)/270A is initiated as a part of the assessment order, sec 274 requires that no order imposing a penalty shall be made unless “the Assessee has been heard or been given an opportunity of being heard”. Accordingly, where penalty proceedings are initiated, a notice u/s 274 is issued, which is a mandatory statutory notice without which the penalty proceedings would be nugatory and non-est in the eye of law. The issue of notice is followed by the levy of penalty, duly taking into account the submissions and arguments, if any, made by the Assessee, followed by the passing of the order levying penalty. In practice, in a case where the Assessee files an appeal against the additions made in the order, penalty proceedings are, normally, kept in abeyance till such time they do not get time barred as per sec 275 of the Act.
To summarise there are normally three stages preceding the levy of penalty: –
(i) Initiation of penalty proceedings in the assessment order;
(ii) Providing the assessee an opportunity of being heard as per sec 274;
(iii) Recording of reasons as to why it is a fit case for the levy of penalty and passing of the
order levying penalty.
Initially there was a controversy and fair amount of litigation as to the need for recording a specific satisfaction in the assessment order for initiation of penalty proceedings u/s 271(1)(c) with there being conflicting judicial opinion on the issue. However, with a view to put an end to the controversy, sub-section (IB) was inserted to sec 271 by the Finance Act, 2008 w.r.e.f 01.04.1989 to provide that an order of assessment/reassessment shall be deemed to constitute satisfaction of the Assessing Officer for initiation of penalty proceedings u/s 271(1)(c). Even the Supreme Court in the case of MAK Data (P) Ltd v. CIT-II [[2013] 38 taxmann.com 448 / 358 ITR 593 (SC)] had held that in terms of s. 271(1)(c), the Assessing Officer has to satisfy whether penalty proceedings be initiated or not during course of assessment proceedings and he is not required, to record his satisfaction in a particular manner or reduce it to writing. The legislative amendment (retrospective) and the judgement of the Supreme Court effectively laid this controversy to rest.
However, another controversy arose regarding the recording of satisfaction as to which particular limb of sec 271(1)(c) would be applicable in a particular case. In this article it is proposed to discuss the issue from the viewpoint of the need of a specific recording of satisfaction and arriving at a conclusion by an Assessing Officer as to which particular limb i.e. “concealment” or “furnishing inaccurate particulars of income” would be applicable in a particular scenario in the light of the prevailing opinion and judicial guidance on the subject and the need to ensure harmony at each stage of the penalty proceedings i.e. initiation, conduct and levy.
Considering the additional financial burden imposed by the levy of penalty and the prospect of launch of prosecution proceedings, the dominant professional opinion was that it is necessary that the satisfaction regarding which particularly limb of sec 271(1)(c) i.e., concealment or furnishing accurate particulars of income is applicable should be specified at each stage of the penalty proceedings with all the stages being identical and free from ambiguity. .
The expressions “concealed the particulars of income” or “furnished inaccurate particulars of income” used in Section 271(1)(c) of the Act have not been defined anywhere in the Act. While any of the said expressions have the ultimate effect of saddling on Assessee with the additional burden and stigma of penalty (which could also be a precursor to the launch of prosecution) the underlying meaning and scenarios are as different as chalk and cheese with almost no possibility of their converging in any circumstances and are radically different in details.
Broadly speaking the expression “concealment of income” has its origins in the Latin expression “suppresioveri” or “suppression of truth” and is more direct in its approach and the expression “furnishing of inaccurate particulars” manifests itself from “suggestio falci” i.e., “suggesting or stating a falsehood”. While act of “concealment” is representative of an active, direct attempt to hide any particular income from being assessed to tax, the act of “furnishing inaccurate particulars of income” is a perhaps more passive attempt, albeit with the same consequence and end-result.
Even in the context of sec 270A even though the expressions “under reporting of income” and “misreporting of income” are defined in sub-section (2) and (9) respectively, since two different scenarios with drastically differing consequences are laid out, it is necessary that, as far as possible the Assessing Officer should identify which clause /sub-clause of sec 270A(2)/270A(9) is applicable and rely upon the same in the penalty order also.
It appears that in a case where the Legislature, in its infinite wisdom has laid out two scenarios for the levy of penalty it does not seem to eb the Legislative intention or even plausible, for a resort to an “omnibus” reference to the said section while initiating penalty proceedings. In matters as grave and far-reaching as the initiation of penalty proceedings which is a penal action for a default, it appears to be necessary that an Assessing Officer has to be clear as to the nature of default and specific provisions under which penalty is proposed to be levied. Merely reproducing the provisions, in their entirety, it appears, defeats the underlying purpose and exhibits a lack of application of mind and a mechanical approach to a matter which further negatively taints the conduct of an Assessee apart from saddling him with additional financial liability.
In the context of sec 271(1)(c), it was widely observed that the assessment order, penalty notice, and the penalty order are issued on both the limbs mentioned in section 271(1)(c) of the Act generally and that they often vary at the various stages. The issue whether, the explicit ground/ limb of section 271(1)(c) of the Act (i.e., whether penalty has to be levied for concealment of particulars of income of furnishing inaccurate particulars of income) is to be specified at all stages of the assessment proceedings and the need for a commonality between them has been the subject of intense judicial activity.
On behalf of Assessees, it has been argued that a precondition for the valid conduct of penalty proceedings is that the explicit ground/ limb of section 271(1)(c) of the Act i.e., whether for concealment of particulars of income or for furnishing inaccurate particulars of Income on the basis of which penalty was proposed to be levied is to be specified by an Assessing Officer as being against the principles of natural justice.
However, on behalf of the revenue, the argument furnished is that for sustaining a complaint of violation of the principles of natural justice on the ground of absence of opportunity it has to be established that prejudice is caused to the concerned person. Mere mistake of the language used or mere non-striking of the inaccurate portion cannot by itself invalidate the proceedings and that principles of natural justice cannot be imprisoned in any straight -jackal formula. It has further been contended that opportunity of hearing( as provided in s. 274) is always larger than the issuance of notice and that the issuance of notice(for which in any case no statutory form is prescribed) is an administrative device for informing the assessee about the proposal of levy of penalty in order to enable him to explain why it should not be levied against him
In favour of assessee, various courts of law have, in the following cases affirmed, the view that levy of penalty has to be clear as to the limb for which it is to be levied, and when the position is unclear, levy of penalty is not sustainable: –
- Relying on decision of Division Bench of Karnataka High Court rendered in case of CIT Manjunatha Cotton & Ginning Factory [2013] 359 ITR 565/218 Taxman 423/35 taxmann.com 250, held that notice issued by Assessing Officer under section 274 read with section 271(1)(c) was bad in law, as it did not specify under which limb of section 271(1)(c) penalty proceedings had been initiated, i.e., whether for concealment of particulars of income or furnishing of inaccurate particulars of income, and, therefore, there was no substantial question of law arising for determination. CIT, Bangalore v. SSA’s Emerald Meadows [(2016) 73 taxman.com 241 (Karnataka)] The Supreme Court held that there was no merit in SLP filed by revenue, same was liable to be dismissed.Commissioner of Income-Tax v. SSA’s Emerald Meadows [[2016] 73 taxmann.com 248 (SC)]
- The Assessing Officer is empowered under the Act to initiate penalty proceedings once he is satisfied in the course of any proceedings that there is concealment of income or furnishing of inaccurate particulars of total income under clause (c). Concealment and furnishing inaccurate particulars of income are different. Thus, the Assessing Officer while issuing notice has to come to the conclusion that weather is it a case of concealment of income or is it a case of furnishing of inaccurate particulars. The Apex Court in the case of Ashok Pai v. CIT [2007] 292 ITR 11 (SC) / [2007] 161 Taxman 340 (SC) has held that concealment of income and furnishing inaccurate particulars of income carry different connotations. The Gujarat High Court in the case of CIT v. Manu Engg. [(1980) 122 ITR 306] and the Delhi High Court in the case of CIT v. Virgo Marketing (P.) Ltd. [(2008) 171 Taxman 156], has held that levy of penalty has to be clear as to the limb for which it is levied and the position being unclear penalty is not sustainable. Therefore, when the Assessing Officer proposes to invoke the first limb being concealment, then the notice has to be appropriately marked. Similar is the case for furnishing inaccurate particulars of income. The standard proforma without striking of the relevant clauses will lead to an inference as to non-application of mind.Commissioner of Income-Tax v. Manjunatha Cotton & Ginning Factory [[2013] 35 taxmann.com 250 / 218 Taxman 423 / 359 ITR 565 (Karnataka)]
- “In absence of clear finding of Assessing Officer whether assessee is guilty of concealment of income or furnishing incorrect particulars of income, penalty levied under section 271(1)(c) cannot be sustained”.Commissioner of Income-Tax, Ahmedabad-IV v. Whiteford India Ltd. [(2013) 38 taxmann.com 302 / 219 Taxman 98 (Gujarat) (MAG.)]
- “…………………………., it is seen that in the assessment order, the Assessing Officer has not recorded any satisfaction whether the initiation of penalty proceedings under Section 271(1)(c) of the Act is for furnishing of inaccurate particulars of income or for concealing the particulars of income or both. Even, in the notice issued under section
- 274 r/w 271(1)(c) of the Act dated 2nd May 2008, which is in standard printed format, the Assessing Officer has not specified which limb of the provision contained under section 271(1)(c) of the Act he intends to invoke for imposing penalty on the assessee. The Assessing Officer has not struck off inappropriate words in the said notice. Thus, cumulative effect of the aforesaid facts if examined in the touchstone of the ratio laid down in the decisions referred to above, it becomes absolutely clear that the assessing officer has not recorded any satisfaction regarding exact nature of offence committed by the assessee for initiating the proceedings for impositions of penalty under section 271(1)(c) of the Act. Therefore, the basic condition for the said penalty provision has not been complied with. Thus, on overall consideration of the facts and material on record and keeping in view the ratio laid down in the judicial precedents cited before us, we are of the considered opinion that the impugned penalty order passed in case of the assessee is invalid due to lack of recording of satisfaction by the assessing officer with regard to the nature of offence committed by the assessee. Hence, we have no hesitation in deleting the penalty imposed. Since we have deleted the penalty on the legal ground raised by the assessee it is needless to go into the merits of the issue. In the result, the assessee’s appeal is allowed.”Vidyavardhini The Assistant Commissioner of Income-Tax, Circle-2, Mumbai [(2012) 20 taxmann.com 81 (Mum)]
- Concealment of income and furnishing of inaccurate particulars of income in section 271(1)(c) carry different meanings/connotations and, therefore, the satisfaction of the Assessing Officer with regard to only one of the two breaches mentioned under section 271(1)(c) for initiation of penalty proceedings will not warrant/permit penalty being imposed for the other. The order imposing penalty has to be made only on the ground of which the penalty proceedings has been initiated, and it cannot be on a fresh ground of which the assessee has no notice. Therefore, where the Assessing Officer initiated penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income, the order imposing penalty for concealment of income was not valid. Commissioner of Income-tax Samson Perinchery [(2017) 88 taxmann.com 413/392 ITR 4 (Bom)]
- Following the decisions of the Karnataka High Court in the case CIT v. Manjunatha Cotton & Ginning Factory [[2013] 35 taxmann.com 250 / 218 Taxman 423 / 359 ITR 565 (Karnataka)] and Commissioner of Income Tax v SSA’s Emerald Meadows [(2016) 73 Taxman.com 241(Kar)] held that the notice issued by the Assessing Officer would be bad in law if it did not specify which limb of Section 271(1)(c) the penalty proceedings had been initiated under. Pr Commissioner of Income Tax v M/s Sahara India Life Insurance Company Limited [order dated 02.08.2019 in ITA Nos 475/2019, 426/2019, 427/2019 and 429/2019 passed by the Delhi High Court]
- The decision of the lower authorities wherein penalty proceeding was dropped on the round that there is no record of satisfaction by Assessing Officer that there was any concealment of income or that any inaccurate particulars were furnished by the Assessee is to be upheld. Pr CIT (Central), Bengaluru Golden Peace Hotels and Resorts (P) Ltd [(2021) 124 taxman.com (248) (Bom)]. An SLP filed on behalf of the Department was dismissed by the Supreme Court vide order dated November 20, 2020 [(2021) 124 taxmann.com 249 (SC)]
On behalf of the Revenue reliance is generally placed on the following case laws: –
The revenue had correctly contended that even if the notice under section 274 read with section 273(b), was a bad one, wrong labelling of the section or some mistake in the charge framed against the assessee did not prejudice the assessee, since the ITO had not only given the assessee an opportunity of being heard but the assessee had, in fact, given a written reply and was quite aware of the charges which he was required to meet. Under section 274, all that was required was that the assessee should be given an opportunity to show cause. No statutory notice was prescribed in this behalf. In view of these facts, the impugned notices could not be said to be ab initio void. [CIT v. Mithila Motors (P.) Ltd. (1984) 16 Taxman 224 (Pat.)].
Section 274 or any other provision in the Act or the Rules, does not either mandate the giving of the notice or its issuance in a particular form Penalty proceeding are quasi- criminal in nature. Section 274 contains a principle of natural justice of the assessee being heard before levying penalty. Rules of natural justice cannot be imprisoned in any straight-jacket formula. For sustaining a complaint for failure of principles of natural justice on the ground of absence of opportunity, it has to be established that prejudice was caused to the concerned person by procedure followed. The issuance of notice is an administrative device for informing the assessee about proposal to levy penalty in order to enable him to explain as to why it should not be done. Mere mistake in the language used or mere non-striking off of inaccurate portion could not by itself invalidate the notice. Entire factual background would fall for consideration in the matter and no one aspect would be decisive.[CIT v. Kaushalya (1995) 216 ITR 660/[1994] 75 Taxman 549 (Bom)]
Following the decision rendered by the Jurisdictional Honorable Bombay High court in the case of Kaushalya (referred to above) and not following the decision of Honorable Karnataka High Court in the case of Manjunatha Cotton & Ginning Factory (supra) and relying on the Hon’ble Patna High court in the case of CIT v. Mithila Motor’s (P.) Ltd. [(1984) 16 Taxman 224/149 ITR 751 (Patna)]and the decision of the jurisdictional High Court in the case of CIT v. Kaushalya [1995] 216 ITR 660 (Bombay) / [1994] 75 Taxman 549 (Bombay)] held that under section 274 of the Income-tax Act, 1961, all that is required is that the assessee should be given an opportunity to show cause. No statutory notice has been prescribed in this behalf. Hence, it is sufficient if the assessee was aware of the charges he had to meet and was given an opportunity of being heard. A mistake in the notice would not invalidate penalty proceedings. [Dhanraj Mills Pvt. Ltd. v. ACIT (order dt. 21.3.2017 passed by the Mumbai Bench of the ITAT in ITA Nos. 3830 & 3833/Mum/2009].
The penalty was initiated for furnishing of inaccurate particulars and finally the same was levied on the same ground. The assessee was issued two show-cause notices – one under section 274 and another by way of letter. It is found that in the first notice, the relevant clause has not been ticked off and the second notice is simply a show-cause notice. However, in the quantum order the Assessing Officer, after due deliberations, clearly initiated the penalty proceedings for furnishing of inaccurate particulars which shows due application of mind qua penalty proceedings. The penalty was finally levied on the same ground as well. Therefore, mere marking of relevant clause, on the facts of the case, has not caused any prejudice to the assessee particularly when the assessee voluntarily offered certain additions in the quantum proceedings with a specific request to the Assessing Officer for not initiating the penalty against the same. The assessee very well knew the charges / grounds for which he was being penalized and he actively contested the penalty before the Assessing Officer. At this juncture, the provisions of section 292B comes to the rescue of the revenue which cures minor defect in the various notices issued provided such notice in substance and effect was in conformity with the intent and purpose of the act. On overall facts and circumstances, such condition was fulfilled in the instant case. Therefore, the penalty could not be deleted merely on the basis of defect pointed by the assessee in the notice and therefore, the legal grounds raised are rejected.[Earth moving Equipment Service Corporation v. DCIT 22(2), Mumbai, (2017) 84 taxmann.com 51(Mumbai Tribunal)].
The balance of judicial opinion, with the SLP’s filed by the Department against orders of the High Court having been dismissed, by the Supreme Court on more that one occasion, although in-limine and not through a speaking order, definitely seems to favour the need for recording a specific satisfaction at each stage of penalty proceeding and each stage being in complete harmony with the other on the ground that an assessee has a right to know the specific grounds, which, he has to meet counter specifically, failing which the principles of natural justice stand violated. Of course, a final view will have to await a judgement of the Supreme Court passed through a speaking and definitive order. The said view seems to be applicable both in the context of the erstwhile sec 271(1)(c) [upto and including A/y 2016-17] and sec 270A [A/y 2017-18 onwards] wherein also it would be advisable for the Assessing Officers to specifically record the specific provisions under the penalty proceedings are initiated and levied so as to obviate the chances of any legal challenge to the levy of penalty.
The Authors wish to acknowledge the contribution of their colleagues Manisha Prajapati and Shivani Sharma in this Article