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.