Penalties by
way of monetary payments are charged under the Income Tax Act for various
defaults relating to payment of
taxes, maintenance of accounts, for noncompliance and non co-operation during proceedings, for evasion of
tax, etc. Broadly, these can be grouped as under:
1. Failure to file return of
income,
2. Failure to pay advance-tax, tax deducted at source, and self-assessment tax,
3. Failure to deduct tax at source,
4. Defaults in compliance to notices, summons, and refusal to answer questions or sign statements, etc.
5. Defaults relating to accounts, i.e. failure to maintain
account books or failure to get the accounts audited by persons
carrying on business or profession as prescribed undëi the Income Tax Act,
6. Concealment of particulars of income or furnishing of inaccurate particulars of income, and
7. Accepting loans or deposits in cash or repayment thereof
in cash, in excess of the limits prescribed for this purpose, etc.
As spelt out above, failure to comply with the various
requirements of income tax law attracts monetary penalties. For example,
if a person is required to deduct tax at source from payments like
salary, interest, contract payments, rent, etc., but omits to do so, then such
a person would be liable to pay penalty of a sum equal to the amount of tax
which was to be deducted from the payment made to the third party.
The following example of levy of penalty for a default
would further clarify the concept; If a businessman’s annual turnover or sales
exceed ‘ 40 lakh, he is required to get his accountsaudited. However, if he
fails to get his accounts audited, he would be
required to pay a penalty equal to one and a half per cent of the turnover or
the sales. The maximum penalty that can be imposed for this default is,
however, restricted to one lakh. Likewise, penalty is also imposable for
various other defaults mentioned above. Such defaults generally come to the
notice of the assessing officer during the course of assessment proceedings or other proceedings. Penalty is, however, levied only after giving an
opportunity of being heard to the concerned person in accordance with the
principles of natural justice. If there was a reasonable cause for the failure,
penalty may not be imposed.
In this book we are mainly concerned with the issue of levy
of penalty in cases where tax evasion is established. The relevant penalty provisions
are contained in section 271(1)(c) of the Income Tax Act, 1961. According to
this section, if a person is found to have concealed particulars of income or
furnished inaccurate particulars of income, it would invite levy of penalty,
which would range from 100% to 300% of the tax sought to be evaded through the
act of concealment of income.
First of all, we have to understand the meaning of the
term, “concealment of income”. Themeaning of the word “conceal” is to keep secret, to keep it under wraps, “not
allow to be seen or noticed”. In the Shorter
Oxford English Dictionary, the expression “concealment” is explained
as — “In law, the intentional suppression of truth or facts to the injury or
prejudice of another.” Concealment of income thus is an intentional attempt to
hide certain income or a portion of it from
coming to the notice of income tax authorities with a view to evade tax on it.
Mere omission of some income due to inadvertence does not come within the ambit
of the expression “concealment of income”.
So far we have understood that a person or an entity may
under-report its income to the income tax authorities either by suppressing its
receipts, or by inflating expenses, or by making false claims of deductions or
exemptions. This may be achieved either by hiding certain facts or by
presenting the facts incorrectly, which in the provision have been referred to
as “concealment of particulars of income” or “furnishing of inaccurate
particulars of income”, respectively. For example, if a manufacturer keeps away
the stock of finished goods from being reflected in his closing stock
inventory, it would tantamount to concealment of particulars of income. On the
other hand, if he includes the stock of finished goods in the closing stock
inventory but understates its value, it would amount to furnishing of
inaccurate particulars of income. Penalty is attracted under both circumstances.
For understanding the meaning of the expression, “tax
sought to be evaded”, let us take the case of a person who has reported income
of ` 8 lakh from salary and interest for assessment year
2009-10. During scrutiny proceedings in his case, it comes to light that he had also received
consultancy charges of ` 5 lakh, which were not disclosed in the
return of income, and his actualtaxable income, was ` 13 lakh. Thus, income to the extent of ` 5 Lakh was found to have been
concealed. The tax on the concealed income, i.e. ` 1.5 lakh was the tax sought to be evaded in this manner.
The minimum penalty which would be levied for concealment of income in this
case would be 100% of the tax sought to be evaded, i.e. ` 1.5 lakh, and the maximum could be as high as 300% of the
tax sought to be evaded, i.e. ` 4.5 lakh.
Thus, the penalty for concealment could be quite harsh in
as much as for concealing 5 lakh, the person may be required to pay a penalty
of ` 1.5 to ` 4.5 lakh; in addition, he will be required to
pay the tax on such income, which is ` 1.5 lakh. Thus, he may end up having to shell
out more than the amount which was concealed. And over and above this,
prosecution complaint may be filed in the court.
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