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CAPITAL CORP. SYDNEY

73 Ocean Street, New South Wales 2000, SYDNEY

Contact Person: Callum S Ansell
E: callum.aus@capital.com
P: (02) 8252 5319

WILD KEY CAPITAL

22 Guild Street, NW8 2UP,
LONDON

Contact Person: Matilda O Dunn
E: matilda.uk@capital.com
P: 070 8652 7276

LECHMERE CAPITAL

Genslerstraße 9, Berlin Schöneberg 10829, BERLIN

Contact Person: Thorsten S Kohl
E: thorsten.bl@capital.com
P: 030 62 91 92

Penalties Under the Income Tax Act

Economy, GST

Under the Income-tax Act, penalties are levied for various defaults committed by the taxpayer. Some of the penalties are mandatory and a few are at the discretion of the tax authorities. In this part, you can gain knowledge about the provisions relating to various penalties leviable under the Income-tax Act.

A penalty for default in making payment of Self Assessment Tax

As per section 140A(1) any tax due (after allowing credit for TDS, advance tax, etc.) along with interest and fee* should be paid before filing the return of income. Tax paid as per section 140A(1) is called ‘self-assessment tax.

As per section 140A(3), if a person fails to pay either wholly or partly self-assessment tax or, interest, or fee* then he will be treated as assessee in default in respect of unpaid amount. As per section 221(1), if a taxpayer is treated as an assessee in default, then he shall be held liable to pay penalty of such amount as the Assessing Officer may impose and in the case of a continuing default, such further amount or amounts as the assessing officer may, from time to time, direct. However, the total amount of penalty cannot exceed the amount of tax in arrears. Before charging penalty under section 221(1), the tax authority shall give the taxpayer a reasonable opportunity of being heard. No penalty is levied if the taxpayer proves to the satisfaction of the tax authorities that the default was for good and sufficient reason.

Note: An assessee shall not cease to be liable to any penalty under section 221(1) merely by reason of the fact that he paid the tax before the levy of such penalty.

*W.e.f. the assessment year 2018-19, if assessee failed to furnish a return of income within due date as prescribed under section 139(1) then as per section 234F, he will be required to pay the fee of:

– a) Rs. 5000 if the return is furnished on or before 31 December of the assessment year.

b) Rs. 10,000 in any other case.

However, if the total income of the person does not exceeds Rs. 5 lakh then fee payable shall be Rs. 1000.

A penalty for default in making payment of Tax

As per section 220(1), when a demand notice under section 156 has been issued to the taxpayer for payment of tax (other than notice for payment of advance tax), then such amount shall be paid within a period of 30 days of the service of the notice at the place and to the person mentioned in the notice. In certain cases, the above period of 30 days can be reduced by the tax authorities with the previous approval of designated authorities. If the taxpayer makes default in the payment of any tax due from him, then apart from other penal provisions, he is treated as an assessee in default. As per section 221(1), if a taxpayer is treated as an assessee in default, then he shall be liable to pay the penalty of such an amount as the Assessing Officer may impose. However, the penalty cannot exceed the amount of tax in arrears. Thus, a penalty under section 221(1) is a general penalty and can be levied in all the cases in which the taxpayer is treated as an assessee in default. Before charging penalty as discussed above, the tax authorities shall give the taxpayer a reasonable opportunity of being heard. No penalty is levied if the taxpayer proves to the satisfaction of the tax authorities that the default was for good and sufficient reason.

Note: An assessee shall not cease to be liable to any penalty under section 221(1) merely by reason of the fact that he paid the tax before the levy of such penalty.

Late filing fees for the delay in filing the TDS/TCS statement

As per section 200(3), every person liable to deduct tax at source is liable to file the statement in respect of tax deducted by him i.e. TDS return. Further, as per proviso to section 206C(3), every person liable to collect tax at source has to furnish a statement in respect of tax collected by him i.e. TCS return. Section 234E provides for levy of late filing fees for the delay in filing TDS/TCS return.

As per section 234E, where a person fails to file the TDS/TCS return on or before the due date prescribed in this regard, then he shall be liable to pay, by way of fee, a sum of Rs. 200 for every day during which the failure continues. The amount of late fees, however, shall not exceed the amount of TDS/TCS.

TDS/TCS return cannot be filed (after prescribed due date) without payment of late filing fees as discussed above.

Fee for default in furnishing return of income

W.e.f. the assessment year 2018-19, if assessee failed to furnish the return of income within due date as prescribed under section 139(1) then as per section 234F, he will be required to pay the fee of:-

  1. a) Rs. 5000 if a return is furnished on or before 31 December of the assessment year.
  2. b) Rs. 10,000 in any other case.

However, if the total income of the person does not exceeds Rs. 5 lakh then fee payable shall be Rs. 1000.

The penalty for failure to comply with the notice issued under section 142(1) or 143(2) or

direction for audit under section 142(2A)

A penalty under section 272A is levied if a taxpayer fails to comply with the notice issued to him under section 142(1) or section 143(2) or fails to comply with a direction issued under section 142(2A). Before understanding the penalty provisions of section 272A we shall take a brief overview of provisions of section 142(1), 142(2A) and section 143(2).

Under section 142(1), the Assessing Officer can issue a notice asking the taxpayer

  1. To file the return of income if he has not filed the return of income or to produce or cause to be produced such accounts or documents as he may require or
  2. To furnish in writing and verified in the prescribed manner, information in such form and on such points or matters (including a statement of all assets and liabilities of the taxpayer, whether included in the accounts or not) as he may require.

Section 142(2A) deals with a special audit. As per section 142(2A), if the conditions justifying special audit as given in section 142(2A) are satisfied, then the Assessing Officer can direct the taxpayer to get his accounts audited or re-audited from a chartered accountant nominated by the Principal Chief Commissioner or Chief Commissioner or PrincipalCommissioner or Commissioner. Section 143(2) deals with the provisions relating to the issuance of notice before conducting a scrutiny assessment under section 143(3). If the taxpayer fails to comply with the notice issued to him under section 142(1) or section 143(2) or fails to comply with direction issued under section 142(2A), then as per section 272A he shall be liable for a penalty of Rs. 10,000 for each failure.

A penalty for underreporting and misreporting of income

Many times a taxpayer may try to reduce his tax liability by underreporting of income. In such a case, by virtue of Section 270A, the taxpayer will be held liable for a penalty. The rate of a penalty shall be fifty percent of the tax payable on under-reported income. However, in a case where under-reporting of income results from misreporting of income, the taxpayer shall be liable for the penalty at the rate of two hundred percent of the tax payable on such misreported income.

A penalty for failure to keep, maintain, or retain books of account, documents, etc., as required under section 44AA

For the purpose of the Income-tax Act, a taxpayer is required to maintain the books of account as provided in section 44AA. If the taxpayer fails to maintain books of account as per the provisions of section 44AA, then he shall be liable to pay penalty under section 271A. A penalty under section 271A is Rs. 25,000.

A penalty in case of search

To unearth the undisclosed income, tax authorities generally conduct the search at the premises of the taxpayer. Section 132 provides the circumstances in which the tax authorities can initiate a search. If a search has been initiated and any undisclosed income is unearthed in the search, then penalty can be levied under section 271AAB.

The quantum of penalty under section 271AAB shall be as follows:

1) Where search has been initiated on or after 1-7-2012 but before the date on which the Taxation Laws (Second Amendment) Bill, 2016 receives the assent of the president (i.e., 16-12-2016) –

  1. a) 10% of the undisclosed income of the specified previous year if an 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
  2. b) 20% of the undisclosed income of the specified previous year if the 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;
  3. c) 60%of undisclosed income of the specified previous year if it is not covered by (a) or (b) above

2) Where search has been initiated on or after the date on which the Taxation Laws (Second Amendment) Bill, 2016 receives the assent of the president (i.e., 16-12-2016)-

  1. a) 30% of the undisclosed income of the specified previous year if an 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
  2. b) 60% of the undisclosed income of the specified previous year if it is not covered by the above provisions.

Penalty in case of income from undisclosed sources

The Assessing Officer may make the addition to the income of an assessee under section 68, section 69, section 69A, section 69B, section 69C or section 69D if assessee fails to explain the nature and source of his income. Section 271AAC of the Income-tax Act (inserted with effect from Assessment Year 2017-18 vide Taxation Laws (Second Amendment) Act, 2016) empowers AO to levy penalty at the rate of 10% of the tax payable under section 115BBE if any addition is made under section 68, section 69, section 69A, section 69B, section 69C, section 69D. However, no penalty shall be levied if such income is disclosed in the return of income and tax on such income is paid under Section 115BBE on or before the end of the relevant previous year.

Failure to get accounts audited or furnish a report of audit as required under section 44AB

Section 44AB prescribes when the accounts of the taxpayer are to be audited. If a taxpayer, in spite of the requirement of section 44AB, fails to get his accounts audited, then he can be held liable for penalty under section 271B. A penalty under section 271B will be levied for failure to get the accounts audited or failure to furnish a report of audit as required under section 44AB. A penalty shall be one-half percent of total sales, turnover or gross receipts, etc., or Rs. 1,50,000, whichever is less.

The penalty for failure to pay tax in respect of winning from lottery or crossword puzzle

The section 194B provides that the person responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle or card game and other game of any sort in an amount exceeding [ten thousand rupees], shall, at the time of payment thereof, deduct income-tax thereon at the rates in force. Second proviso to section 194B provides that in a case where the winnings are wholly in kind or partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of the winnings, the person responsible for paying shall, before releasing the winnings, ensure that tax has been paid in respect of the winnings. If any person fails to pay whole or part of the tax as required under the second proviso to section 194B than, such person shall be liable to pay the penalty of an amount equal to tax not paid.as per section 271C.

Penalty for failure to collect tax at source

Similar to the provisions of tax deducted at source, section 206C provides certain items in respect of which tax is to be collected at source by the person receiving payment in respect of certain specified items. If the person required to collect tax at source fails to collect the tax, then he shall be liable to pay penalty under section 271CA. The penalty shall be levied of an amount equal to tax not collected.

Taking or accepting certain loans or deposits or specified sum in contravention of provisions of section 269SS

Section 269SS provides that no person shall take or accept loan or depositor-specified sum exceeding Rs. 20,000 by any mode other than account payee cheque or account payee demand draft or use of electricity clearing system through a bank account. Specified sum” means any sum of money receivable, whether as advance or otherwise, in relation to the transfer of an immovable property, whether or not the transfer takes place. Contravention of the provisions of section 269SS will attract penalty under section 271D. Penalty under section 271D shall be levied of an amount equal to loan or deposit taken or accepted.

Penalty on receipt of an amount of Rs. 2 lakh or more in cash

Section 269ST (as inserted by the Finance Act, 2017 with effect from 1/4/2017) provides that no person shall receive an amount of Rs. 2,00,000 or more,—

(a) in aggregate 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, otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account. However, the said restriction shall not apply to Government, any banking company, post office savings bank, co-operative bank or a person notified by the Central Government. Section 271DA provides for levy of penalty on a person who receives a sum in contravention of the provisions of section 269ST. The penalty shall be equal to the amount of such receipt. However, the penalty shall not be levied if the person proves that there were good and sufficient reasons for such contravention.

Repaying loans or deposits or specified advance in contravention of provisions of section 269T

Section 269T provides that no person shall repay any loan or depositor-specified Advance exceeding Rs. 20,000 by any mode other than account payee cheque or account payee demand draft in the name of the person who has made the loan or deposit or paid the specified advance or by use of electricity clearing system through a bank account. “Specified advance” means any sum of money in the nature of advance, by whatever name called, in relation to the transfer of an immovable property, whether or not transfer takes place. Contravention of the provisions of section 269T will attract penalty under section 271E. Penalty under section 271E shall be a sum equal to loan or deposit or specified advance so repaid.

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