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Penalties

20.1 The Income-tax Act, 1961 contains provisions relating to imposition of penalties for various defaults. However, these provisions do not adequately support a strong deterrence programme in a moderate tax regime. Hence, provisions have been included in the Code that will ensure certainty of punishment upon non-compliance with the tax laws. The salient features of the proposed Scheme are as follows :

(a) Every person who wilfully under-reports his tax base shall be liable to a penalty not less than, and up to twice, the amount of tax payable in respect of the amount of tax base so under-reported.

(b) A person shall be deemed to have wilfully under-reported his tax base if,—

(i) no return of tax base has been filed by the due date ;

(ii) the tax base disclosed in the return filed is less than the assessed tax base ; or

(iii) the tax base reassessed is greater than the tax base assessed immediately before the reassessment.

(c) The amount of tax base under-reported shall be the aggregate of the addition, or disallowance, made by the Assessing Officer, Commissioner or Commissioner (Appeals).

(d) However, the aggregate amount of addition, or disallowance, referred to above shall not include the following :

(i) amount relating to addition, or disallowance, in respect of which the assessee offers an explanation and the Assessing Officer is satisfied that :

(A) the explanation is bona fide ;

(B) he has disclosed all the facts material to the addition or disallowance ; and

(C) he has disclosed all the facts relating to the explanation ;

(ii) amount relating to addition, or disallowance, determined on the basis of an estimate by the Assessing Officer, if the accounts are correct and complete to the satisfaction of the Assessing Officer but the method employed is such that, in the opinion of the Assessing Officer, the income cannot properly be deduced therefrom ;

(iii) the amount relating to addition, or disallowance, pertaining to any issue, determined on the basis of an estimate by the Assessing Officer, if the assessee—

(A) has, on his own, estimated a lower amount of addition or disallowance on the same issue ;

(B) has included such amount in the computation of his tax base ; and

(C) has disclosed all the facts material to the addition or disallowance ;

(iv) the amount of undisclosed tax base found as a result of search, which is subjected to a penalty at the rate of 10 per cent.

(v) the amount of tax base in respect of which the liability to tax has been discharged by way of pre-paid taxes ; and

(vi) the amount relating to prima facie adjustment carried out while processing the return of tax base.

(e) The amount of tax payable in respect of the amount of tax base so under-reported shall be calculated at the maximum marginal rate in order to arrive at the quantum of penalty.

(f) In the case of search, the undisclosed tax base shall be subjected to a penalty at the rate of ten per cent. if—

(i) the undisclosed tax base relates to—

(A) the financial year which has ended before the date of search but the due date of filing of return of such financial year has not expired before the date of the search and the return of tax base for such financial year has not been furnished before the date of search ; or

(B) the financial year in which the search is conducted ; and

(ii) the assessee does not—

(A) admit the undisclosed tax base in the course of search ; or

(B) substantiate the manner in which the undisclosed tax base is derived ; or

(C) pay tax and interest on such undisclosed tax base ;

(g) The penalty for under-reporting of tax base shall be imposed by an order in writing by the Assessing Officer, Commissioner or Commissioner (Appeals), as the case may be, in respect of an assessment order passed by the Assessing Officer, order in revision passed by the Commissioner or order in appeal passed by the Commissioner (Appeals).

(h) Penalties for other defaults have also been rationalized.

(i) No income-tax authority shall have the power to waive the penalty imposed.

(j) In a case where the amount of penalty is one lakh rupees or more, an order of penalty shall be made by an Income-tax Officer after obtaining the approval of the Joint Commissioner or the Additional Commissioner. In a case where the amount of penalty is five lakh rupees or more and it is levied by an Assistant/Deputy Commissioner, the order of penalty shall be made by the Assessing Officer after obtaining the approval of the Joint Commissioner or the Additional Commissioner.

(k) An order of penalty shall be passed within one year from the end of the financial year in which the notice for imposition of penalty is issued.

(l) If the tax base determined by the Assessing Officer is revised or modified by the Commissioner, Commissioner (Appeals), the Appellate Tribunal, the National Tax Tribunal or the Supreme Court, the Assessing Officer shall, according to the revised tax base, review the order which imposed the penalty or revive the order which did not impose any penalty. Such review or revival shall be done and a fresh order passed within a period of six months from the end of the month in which the order revising or modifying the tax base was received.

20.2 With a view to providing deterrence against non-compliance, the Code provides for prosecution of offences of a serious nature. The salient features of the scheme for prosecution of offences are as under :

(a) Every offence under the Code shall be punishable with both imprisonment and fine.

(b) There will be no mandatory minimum term of imprisonment.

(c) The maximum term of imprisonment for certain offences will be two years or less and such offences will be prosecuted adopting the procedure of summons trial. In the case of offences where the maximum term of imprisonment is more than two years, the offence will be prosecuted adopting the procedure of warrant trial.

(d) The minimum and maximum amount of fine for various offences have been stipulated in the Code.

(e) The prosecution of an offence under the Code will be in addition to, and not in derogation of, the provisions of any other law providing for prosecution of offences under that law.

(f) It has been clarified that levy of penalty and prosecution are independent of each other and it shall be no defense to a prosecution that an order of assessment or an order of penalty has not been made, or has been barred by limitation, or has been set aside by a higher authority or a court, or for any other reason.

(g) One or more inspectors of income-tax will be notified by the Board and authorised to file complaints before a court. Such Inspector of Income-tax may file the complaint regardless of the fact that he was not the Assessing Officer in respect of the proceedings or transactions that gave rise to the offence. The Inspector of Income-tax shall file the complaint on a reference made to him by the income-tax authority concerned and after such Authority has obtained the previous sanction of the Commissioner or Director or Commissioner (Appeals). The Inspector of Income-tax filing the complaint shall not be called upon to appear as a witness in the proceedings solely on the ground that the complaint was filed by him.

(h) All complaints under the Code shall be filed in a court which is not inferior to that of presidency magistrate or a magistrate of the first class.

Provision has been made for compounding of an offence by the Chief Commissioner or Director General at the prescribed rates. The compounding of an offence will be permissible at any time before conviction by the trial court.