Vide Finance Act, 2016, Sections 270A and 270AA have been inserted in the Income-tax Act w.e.f. 1-4-2017 i.e., A.Y. 2017-18 to provide for levy of penalty in the cases of under-reporting of income and misreporting of income and for grant of immunity in certain cases. Prior to insertion of aforesaid new sections penalty for concealment of income or for furnishing inaccurate particulars was leviable in accordance with provisions of section 271(1)(c) of Income-tax Act. Provisions of Sections 270A and 270AA have been inserted in the Act with a view to simplify the procedure and bring certainty in levy of penalty as there have been lot of litigation under old provisions. In this regard in the Memorandum it has been stated that:

“Under the existing provisions, penalty on account of concealment of particulars of income or furnishing inaccurate particulars of income is leviable under section 271(1)(c) of the Income-tax Act. In order to rationalise and bring objectivity, certainty and clarity in the penalty provisions, it is proposed that section 271 shall not apply to and in relation to any assessment for the assessment year commencing on or after the 1st day of April, 2017 and subsequent assessment years and penalty be levied under the newly inserted Section 270A with effect from 1st April, 2017.”

Though the provisions have been inserted with a view to bring certainty but on going through the provisions it is observed that drafting has not been made with a view to bring clarity and certainty. There lot of confusion in the language and litigation is also likely to continue in regard to levy of penalty. In this regard following points can be made:

1. Sub-section (1) provides for initiation of penalty proceedings by the Assessing Officer or the Commissioner (Appeals) or the Pr. Commissioner or the Commissioner during the course of any proceedings under this Act. Similar provision was there in section 271(1) of the Income-tax Act. Sub-section (12) also provides that penalty shall be imposed, by an order in writing, by the Assessing Officer, the Commissioner (Appeals), the Commissioner or the Pr. Commissioner, as the case may be. On going through the provisions of the section 270A of the Act it is evident that penalty is leviable with reference to under-reported income, which is to be determined with reference to income assessed or re-assessed. Further, reference has also been made to the order of assessment or reassessment under sub-section (3) of Section 143 or 147 of the Act. As per the scheme of the Act, order determining the income assessed or reassessed under Section 143(3) or Section 147 has to be passed only by the Assessing Officer and not by the Commissioner (Appeals), the Commissioner or the Pr. Commissioner. Therefore, it appears that reference to initiation of proceedings or imposition of penalty by the Commissioner (Appeals), the Commissioner or the Pr. Commissioner is redundant. Under the existing law penalty proceedings can be initiated by the Commissioner (Appeals) during the course of appeal proceedings before him and similarly proceedings can be initiated by the Commissioner or the Pr. Commissioner during the course of proceedings u/s. 263 of the Act. There would be no case under the Income-tax Act when the Commissioner (Appeals), the Commissioner or the Pr. Commissioner will pass the order determining the assessed income. Even the order pursuant to order of CIT(A) or CIT has to be passed by the Assessing Officer determining the income of the assessee as per the directions contained in the order of CIT(A) or CIT.

2. Apart from the fact that assessed income is to be determined only by the Assessing Officer, as mentioned hereinabove, provisions of section 270AA of the Act also provides for making an application to the Assessing Officer. Further, the order granting the immunity from imposition of penalty is to be passed by the Assessing Officer only after the expiry of limitation period of filing appeal before Commissioner (Appeals) u/s. 249(2)(b) of the Act. Appeal before CIT(A) can be filed only against the order passed by the Assessing Officer. Therefore, as per the legal position there would be no case when the Commissioner (Appeals), the Commissioner or the Pr. Commissioner will initiate proceedings or will levy the penalty or would entertain application for granting the immunity.

3. Provisions of section 270A of the Act has repeatedly made reference to “income assessed” for the purpose of determination of under-reported income. As mentioned hereinabove reference has also been made to order passed u/s. 143(3) of the Act or Section 147 of the Act. Section provides for levy of penalty with reference to under-reported income. It is intended that determination of under-reported income will be a simple process and the Assessing Officer will be able to determine the amount of under-reported income by comparing the income assessed or re-assessed with the income determined earlier on processing the return u/s. 143(1)(a) or in the preceding order. Therefore, it is likely that the Assessing Officer will immediately after passing the order of assessment determine the amount of under-reported income and would levy the penalty u/s. 270A of the Act. The amount of assessed income would go under change as a result of appeal / revision / rectification proceedings. There is no apparent indication in the provisions that penalty will be levied by the Assessing Officer only after the income has been determined pursuant to appeal or other proceedings. It has also not been provided that if penalty has been levied by the Assessing Officer immediately after passing the order u/s. 143(3) or 147 and subsequently in appeal proceedings if the addition or disallowances made in those orders are deleted then the quantum of under-reported income will consequently be amended by the Assessing Officer and revised penalty order will be passed deleting or reducing the quantum of penalty earlier levied. In case the intention was to simplify the process, it ought to have been provided in the section that either the penalty will be levied only after the final determination of amount of under-reported income, may be after adjudication of appeal by the tribunal or it ought to have been provided that the Assessing Officer at every stage will re-compute the amount of under-reported income and a revised order of penalty will be passed. In the light of provisions, as such, the assessee will have no option but to file appeal against the penalty order also in case he is pursuing the appeal against the assessment order.

4. Under the provisions of section 271(1)(c) of the Act, the Assessing Officer was required to record satisfaction in the assessment order to the effect that the assessee has concealed the income or has furnished inaccurate particulars. There is no such requirement in provisions of section 270A of the Act. The amount of under-reported income is required to be determined straightaway on the basis of difference between the income determined on processing of return u/s. 143(1)(a) of the Act and income assessed or reassessed by the Assessing Officer, without going into the reasons for which additions have been made by the Assessing Officer. There are, however, further provisions in section 270A of the Act which would make the determination of amount of under-reported income cumbersome since in certain circumstances the difference in income may not be considered as under-reported income or in certain circumstances amount of under-reported income may be construed to be misreporting of income. The law ought to have provided that before initiating penalty proceedings the Assessing Officer shall apply his mind to hold that there is under-reported income and necessary satisfaction should have been recorded.

5. Sub-section (3) of Section 270A of the Act provides for determination of under-reported income. Clause (b) provides that in a case where no return has been furnished, amount of under-reported income in case of a company, firm or local authority will be the amount of income assessed by the Assessing Officer. In case of other assessees, amount of under-reported income will be the difference between the income assessed and the maximum amount not chargeable to tax in the case. There can be a case where assessee has paid tax either by way of advance tax, tax deducted at source or tax on self assessment but for some reason return could not be filed by the assessee. It may be the position that on passing the order of assessment by the Assessing Officer, there may be no further tax liability found to be payable by the assessee since tax has already been paid. As per the language of clause (b) of sub-section (3) of Section 270A of the Act even in such a case the amount of income assessed or the difference between the income assessed and the maximum amount not chargeable to be tax will be considered to be under-reported income and penalty will be payable with reference to the same. The provision in this regard is illogical and exclusion ought to have been provided in such cases to the extent of income covered by the amount of tax already paid by the assessee.

6. There is, virtually, duplication in the provisions of sub-section (2) and sub-section (3) of Section 270A of the Act. Sub-section (2) defines the circumstances in which an assessee will be considered to have under-reported his income. Sub-section (3) provides the basis for determination of under-reported income. Same basis and circumstances have been repeated in above sub-sections. It is stated that sub-section (2) could simply provide that an assessee will be deemed to have under-reported his income, if there is under-reported income in terms of sub-section (3) of Section 270A of the Act. Repeating of same thing in two sub-sections will only add to confusion and litigation.

7. Sub-section (4) and sub-section (5) provides that in case there is any receipt, deposit or investment appears in the relevant assessment year and source of such receipt, deposit or investment is claimed to be an amount added to income in any year prior to assessment year under reference, penalty in respect thereof shall be leviable in case it has not been levied in the relevant earlier year. In regard to the provision following points can be made:

   1. Firstly, the meaning of the language that “amount added to income” is not clear. Whether it would include the amount added by the assessee himself in the revised return or offered for addition during the course of assessment proceedings also or it refers to only the addition made by the Assessing Officer in the order of assessment.

   2. In case the amount refers to the addition made by the Assessing Officer in assessment order for any earlier year, including the same in the amount of under-reported income in a subsequent year and levy penalty thereon is unwarranted, unjustified and uncalled for. Penalty is leviable pursuant to proceedings initiated during the course of assessment proceedings and same is to be levied considering the facts and circumstances of the relevant year. Penalty cannot be levied during the course of assessment proceedings for a subsequent year with reference to addition made by the Assessing Officer in an earlier assessment without reference to facts and circumstances of relevant assessment year in which the addition was made. In case the Assessing Officer had neither initiated the penalty proceedings in the relevant year nor had levied the penalty it cannot be levied in respect of the addition in any subsequent year.

8. Provisions of clause (a) of sub-section (6) of section 270A provides that amount of income will not be included in the amount of under-reported income in case the assessee offers an explanation and the Assessing Officer is satisfied that the explanation is bona fide and the assessee has disclosed all material facts to substantiate the explanation offered. The aforesaid provision has shifted onus from the Assessing Officer to the assessee. Under the existing provisions of section 271(1)(c) of the Act, the onus was on the Assessing Officer who records the satisfaction and also substantiate his case that the assessee has concealed the income or has furnished inaccurate particulars. As per provisions of this clause the Assessing Officer at the first instance will determine the amount of under-reported income on the basis of difference between the assessed income and income determined u/s. 143(1)(a) of the Act. Thereafter, it is for the assessee to make submissions before the Assessing Officer and substantiate the contention that the claim was bona fide and he had disclosed all the material facts in respect of the same. Only if the Assessing Officer is satisfied that the explanation offered by the assessee is bona fide and he has disclosed all the material facts to substantiate the explanation offered, he would exclude the amount from the quantum of under-reported income. Accordingly, the provision provides a discretionary power to the Assessing Officer. Discretionary power to the Assessing Officer will defeat the intention of bringing certainty in the provisions and will lead to litigation. In this regard following points can specifically be made:

   1. The satisfaction of the Assessing Officer is a subjective matter. In spite of the explanation given by the assessee and giving all supporting evidence as regards the disclosure made, the Assessing Officer may hold that he is not satisfied and the amount cannot be excluded from the amount of under-reported income.

   2. The condition for satisfaction of the Assessing Officer is that the explanation offered by the assessee is bona fide. Again the issue will be there in what circumstances the explanation will be considered to be bona fide and in what circumstances same will be rejected by the Assessing Officer.

   3. There is further condition for the satisfaction of the Assessing Officer that the assessee has disclosed all the material facts to substantiate the explanation. This terminology again will lead to litigation. What disclosure will be necessary to satisfy the Assessing Officer will be a question of personal view of the Assessing Officer. The assessee may disclose the material facts but still the Assessing Officer may not be satisfied with the disclosure. Further, it is also important to mention in this regard that in the light of the facts that return of income is filed electronically there is a very limited option to make disclosure in respect of material fact for a claim being made by him in the return. Therefore, it will be quite difficult for the assessee to satisfy the Assessing Officer that he has disclosed all material facts in support of his claim or explanation.

   4. There may be many circumstances in which the claim is made by the assessee considering the factual or the legal position in regard to the claim. There is no specific provision made in the section to the effect that in case a claim has been made by the assessee based on some decision of the court, which may subsequently be reversed, the disallowance made in respect of the same is not to be included in the amount of under-reported income. Similarly, the assessee considering the facts of the case may consider that its claim is duly allowable. The Assessing Officer, however, may not agree with the claim of the assessee.

9. Clause (b) of sub-section (6) of section 270A provides that the amount of under-reported income shall not include the addition made on the basis of an estimate if the accounts are correct and complete to the satisfaction of the Assessing Officer but the method employed is such that income cannot properly be deduced there from. Again the scope of above clause is not free from controversy. Firstly, it is a matter of satisfaction of the Assessing Officer whether the accounts are correct and complete, which is always a matter of controversy. Further, this condition that accounts are correct and complete but method employed is such that income cannot properly be deduced there from will also give controversy. Normally, if the accounts are correct and complete, there is no question of estimating the income and the computation of income as made by the assessee should be accepted by the Assessing Officer. In case the Assessing Officer is of the view that correct income cannot be deduced from the accounts, it would mean that accounts are not correct and complete. In such circumstances he will resort to the estimation basis. Therefore, the provision made appears to be self-contradictory that though accounts are complete and correct but income cannot be deduced there from.

10. Clause (c) of sub-section (6) of section 270A of the Act also provides that the amount of under-reported income will not include the addition made by the Assessing Officer on an estimated basis in a case where the assessee has made addition of a lower amount on estimated basis. There is again a condition attached herein that the assessee has disclosed all the material facts in respect of the addition or disallowance made by him on estimated basis. It will again be a question of litigation whether disclosure has been made by the assessee or not.

11. Clause (d) of sub-section (6) of the section 270A is also to the effect that under-reported income shall not include the addition made on account of difference in Arm’s Length Price determined by the Transfer Pricing Officer when the complete information and documents as prescribed u/s. 92D have been maintained and disclosure of all material facts relating to the transaction has been made. This condition will again be a subject matter of litigation. Further, the exclusion has been provided only in respect of addition made for international transactions and not in respect of specified domestic transactions, which are also at par and covered by the provisions of section 92D and Chapter X of the Income-tax Act.

12. Sub-section (9) of section 270A of the Act provides the circumstances in which the amount of under-reported income shall be considered to be misreporting of income. Circumstances provided in above sub-section will also be subject matter of litigation. The Assessing Officer is likely to allege in most of the cases that under-reported income is consequence of any misreporting and, therefore, same is subject to penalty @ 200%. In this regard, it may be stated that:

    1. Clause (a) of sub-section (9) provides that there is misrepresentation or suppression of facts. The meaning and scope of terms “misrepresentation or suppression of facts will be subject matter of litigation. The term “misrepresentation” or “suppression of facts” indicates a mala fide intention on the part of the assessee to submit wrong facts or to conceal the particulars of an income or expenditure. It would involve a guilty mind. Therefore, in order to hold whether there is misrepresentation or suppression of facts, onus will be on the Assessing Officer. Broadly, the term “suppression of facts” would mean concealment of income and “misrepresentation”, refers to furnishing of inaccurate particulars. Therefore, the issue will arise whether the assessee has concealed the particulars of income or has furnished inaccurate particulars so as to fall within the scope of “misreporting of income” and penalty will be leviable @ 200% of the tax payable on the amount of under-reported income.

    2. It is also stated in this regard that if we read the provisions of clause (a) of sub-section (9) of Section 270A of the Act with provisions of clause (a) of sub-section (6) of Section 270A of the Act, the conclusion would be that there would be no such income which will fall within the normal category of under-reported income subject to penalty @ 50% in the cases where the assessee has made a claim in the return of income which has been disallowed by the Assessing Officer. In case the assessee furnishes the explanation in respect of the claim and substantiate the same with evidence and Assessing Officer is satisfied that explanation was bona fide, such addition or disallowance has to be excluded from the scope of the under-reported income in terms of clause (a) of sub-section (6) of Section 270A of the Act. In case the Assessing Officer is not satisfied with the explanation and evidence submitted by the assessee, he will hold that there was misrepresentation or suppression of facts and, therefore, will categorise the addition under the category of misreporting of income and will levy the penalty @ 200% of the tax payable. Since there would be no such case where penalty will be levied @ 50%, and the Assessing Officer will levy the penalty @ 200%, litigation in regard to all such additions / disallowances will be there. Similar will be the situation with reference to clause (c) of sub-section (9) of section 270A. Aforesaid clause provides that under-reporting income will be deemed to be misrepresenting of income when claim of expenditure is not substantiated by any evidence. The effect of this condition will also be the same. Either the assessee will be able to satisfy the Assessing Officer that his claim was bona fide and has made disclosure of all material facts or in the alternative the Assessing Officer will categorise the transaction as misreporting of income.

    3. Other clauses of sub-section (9), such as, clauses (d), (e) and (f) will also result in litigation. It would again be a question of facts whether assessee has made false entry in the books of account or not or whether there was any failure of the assessee to record any receipt in the books of account. In order to hold that there is false entry, a guilty mind is necessary and therefore, onus will be on the department to prove that entry is false. It will be a question of argument whether entry is false or not. Further, as regards entry for receipt of an income, the assessee may be of opinion that same is of capital nature or may be that the assessee would have made the entry in subsequent year when the income was actually received whereas the Assessing Officer might have taken a view that income is assessable in an earlier year and he may hold that the assessee has failed to record the receipt chargeable to tax in that very year. In regard to clause (f) also there would be litigation since it is also a matter of controversy whether a transaction with a foreign party is in the nature of ‘international transaction’ covered u/s. 92B of the Income-tax Act or not. Similarly, there can be a controversy whether a transaction is in the nature of ‘specified domestic transaction’ or not in terms of section 92BA of the Act.

13. On first reading of sub-sections (3) & (4) of Section 270AA of the Act which provides immunity from imposition of penalty, one gets the impression that in a case of under-reported income the Assessing Officer has a discretion to accept the application or reject the application and order for the same has to be passed within a period of one month from end of the month in which the application is received. In case of misreporting of income referred to in sub-section (9) of Section 270A of the Act, the Assessing Officer has no power to grant the immunity. On careful reading of sub-section (3) of Section 270AA, however, it is evident on the basis of the word “shall” that the Assessing Officer has no discretion to reject the application for immunity in the case of under-reported income. The aforesaid provision, however, excludes the case for levy of penalty in case of misreporting of income. Further, sub-section (4) provides that the Assessing Officer can either accept or reject the application. In case the Assessing Officer has no power to reject the application in case of under-reported income, as stated above, logical and meaningful interpretation with reference to sub-section (4) would only be that the discretion available to accept or reject the application under sub-section (4) is with reference to application for grant of immunity in the case of misreporting of income. Hence, it is stated that the section has provided for filing an application by the assessee and grant of immunity by the Assessing Officer even in the cases of misreporting of income.

14. Lastly, it may be stated that provisions of section 270A(3) provides for determination of under-reported income with reference to income assessed and income determined on processing of return u/s. 143(1)(a) of Income-tax Act. As per provisions of clause (a) of sub-section (1) of Section 143 of the Act adjustments can be made while processing the return in the amount of income shown in the return on account of arithmetical error, incorrect claim, loss claimed as per belated return, disallowance of expenditure as per Tax Audit Report, disallowance of deduction and addition to income as per Form 26AS, Form 16A or Form 16. As per provisions any difference in income on account of adjustments made while processing return u/s 143(1)(a) of the Act will not be considered to be under-reported income and no penalty will be leviable with reference to the same. This position is quite clear from the provisions of section 270A of the Act as well as from the examples given by the Government in the Memorandum explaining the provisions of Finance Bill, 2016.