Penalties under the Income Tax
Act, 1961 –
Issues and Landmark Judicial
Pronouncements
Prashanth G S, FCA
Chartered Accountant
Bangalore
Meaning
The term Penalty has not been defined under the Income
Tax Act, 1961 (Act).

Punishment; Suffering or loss imposed for breach of a law; a
fine or loss agreed upon in case of non-fulfilment of some
undertaking; a fine
- Chambers 20th Century Dictionary, 1983 Edition

Penalty is a liability composed as a punishment on the party
committing the breach of contract. Agreement to pay at
default interest at a higher rate does not amount to penalty.
- P Ramanatha Aiyar’s Law Lexicon , 2nd Reprint Edition 2009
PRASHANTH G S, FCA
December 29,2012
2
Meaning contd…

Punishment imposed on wrongdoer, usually in the
form of imprisonment or fine; especially a sum of
money exacted as punishment for either a wrong to the
state or a civil wrong (as distinguished from
compensation for the injured party’s loss). Though
usually for crimes, penalties are also sometimes
imposed for civil wrongs.
- Black’s Law Dictionary, 9th Edition
PRASHANTH G S, FCA
December 29,2012
3
Contents
Section 271
Section 271F
Section 271(1B)
Section 271G
Section 271A
Section 27BB
Section 271AA
Section 273
Section 271AAA
Section 273AA
Section 271AAB
Section 273B
Section 271B
Section 274
Section 271BA
Section 275
Section 271C
Section 271D
Section 271E
PRASHANTH G S, FCA
December 29,2012
4
Sec 271 – Failure to furnish returns, comply with
notices, concealment of income etc.

If the Assessing Officer or Commissioner (Appeals) or
Commissioner in the course of any proceedings under this
Act, is satisfied that any person –
(a) ................
(b) has failed to comply with a notice
(c) has concealed the particulars of his income or
furnished inaccurate particulars of such income, or
(d) has concealed the particulars of the fringe benefits or
furnished inaccurate particulars of such fringe benefits
PRASHANTH G S, FCA
December 29,2012
5
Observations of the Supreme Court in
Anwar Ali’s case, 76 ITR 696

Gist of the offence under section 28(1)(c) is that the
assessee has concealed the particulars of his income or
deliberately furnished inaccurate particulars of such
income and, therefore, the department must establish that
the receipt of the amount in dispute constitutes income of
the assessee. If there is no evidence on the record except the
explanation given by the assessee, which explanation has
been found to be false, it does not follow that the receipt
constitutes his taxable income.
PRASHANTH G S, FCA
December 29,2012
6
Judgments – Prior to Explanation to Sec 271

Hindustan Steel Ltd, 83 ITR 26- SC observed:

Penalty will not be imposed because it is lawful to do so. It
is a matter of discretion of the authority to be exercised
judicially

Anwar Ali 76 ITR 696 –discussed earlier

Khoday Eswara & Sons, 83 ITR 369- SC :

It is clear that penalty proceedings being penal in character,
the department must establish that the receipt in dispute
constitutes income of the assessee
PRASHANTH G S, FCA
December 29,2012
7
Explanation 4 to Section 271(1) (c)




Explanation 4.-For the purposes of clause (iii) of this sub-section, the
expression "the amount of tax sought to be evaded",in any case where the amount of income in respect of which particulars
have been concealed or inaccurate particulars have been furnished has the
effect of reducing the loss declared in the return or converting that loss
into income, means the tax that would have been chargeable on the
income in respect of which particulars have been concealed or inaccurate
particulars have been furnished had such income been the total income;
in any case to which Explanation 3 applies, means the tax on the total
income assessed as reduced by the amount of advance tax, tax deducted at
source, tax collected at source and self-assessment tax paid before the
issue of notice under section 148 ;
in any other case, means the difference between the tax on the total
income assessed and the tax that would have been chargeable had such
total income been reduced by the amount of income in respect of which
particulars have been concealed or inaccurate particulars have been
furnished.
PRASHANTH G S, FCA
December 29,2012
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Explanation 5A to section 271 (1) (c)

In the course of search initiated after 01.06.2007, assessee found to
be the owner of :


Any money, bullion, jewellery etc.. And assessee claims that such asset
have been acquired by him utilising wholly or partly his income for
previous year; or
Any income based on any entry in any books of account or other
documents or transactions and he claims that such entry represents his
income wholly or partly for any previous year, ended before search date
and

Where return of income has been furnished before the said date
without declaring the said income;

Where return of income has not been filed and due date has
expired.
Notwithstanding that income has been declared by him, in return
furnished on or before the date of search, he shall for the purpose of penalty
u/s 271(1)(c) be deemed to have concealed the particulars of income.
PRASHANTH G S, FCA
December 29,2012
9
Judgments – Post Explanation to Sec 271

Suresh Chandra Mittal, 251 ITR 9 –SC :
It is well settled that initial burden lies on revenue to establish that the assessee
had concealed /furnished inaccurate particulars of income. Burden shifts to
assessee if he fails to offer any explanation. However, Expl 1 provides for
shifting of this burden again where the explanation offered by the assessee is
found to be bonafide.

K C Builders & Another , 265 ITR 562 – SC :
The word "concealment" inherently carried with it the element of mens rea.
Therefore, the mere fact that some figure or some particulars have been
disclosed by itself, even if it takes out the case from the purview of nondisclosure, it cannot by itself take out the case from the purview of furnishing
inaccurate particulars.
PRASHANTH G S, FCA
December 29,2012
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Contd …

Virtual Soft Systems, 289 ITR 83 – SC :

This court as well as the various High Courts of the country have consistently held that
the statute creating the penalty is the first and the last consideration and must be
construed within the term and language of the particular statute. In Bijaya Kumar
Agarwala v. State of Orissa [1996] 5 SCC 1 it has been held by this court in paragraphs
17 and 18 as under:

"17. Strict construction is the general rule of penal statutes. Justice Mahajan in Tolaram
Relumal v. State of Bombay, AIR 1954 SC 496, at pages 498-499, stated the rule in the following
words:

'If two possible and reasonable constructions can be put upon a penal provision, the
court must lean towards that construction which exempts the subject from penalty
rather than the one which imposes penalty. It is not competent to the court to stretch the
meaning of an expression used by the Legislature in order to carry out the intention of
the Legislature.'
PRASHANTH G S, FCA
December 29,2012
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contd …

Gold Coin Health Food P Ltd , 304 ITR 308 -SC :

Whether the penalty was leviable even in a case where addition of
concealed income reduces the returned loss?
Finding: Yes.

The court has to analyse the nature of the amendment to come to
a conclusion whether it is in reality a clarificatory or declaratory
provision. Therefore, the date from which the amendment is made
operative does not conclusively decide the question. The court has
to examine the scheme of the statute prior to the amendment and
subsequent to the amendment to determine whether the
amendment is clarificatory or substantive.
PRASHANTH G S, FCA
December 29,2012
12
Contd…

T Ashok Pai ,292 ITR 11- SC :

It is not a case where penalty has been imposed for
breach or contravention of a commercial statute where
lack of intention to contravene or existence of bona fides
may not be of much importance. It is also not a case
where penalty is mandatorily imposable. It was,
therefore, not a case where the enabling provision should
have been invoked.
PRASHANTH G S, FCA
December 29,2012
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CIT Vs. Reliance Pertroproducts Pvt. Ltd - 322 ITR
158 – SC

Penalty – Concealment of “particulars” of income

In order to be covered by section 271 (1)(c), there has to
be concealment of particulars by the assessee. Making
incorrect claim does not amount to concealment of
particulars.

To attract penalty, the details furnished in return must
not be accurate or correct.

Mere making of claim which is not sustainable in law
will not amount to furnishing of inaccurate particulars.
PRASHANTH G S, FCA
December 29,2012
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Dilip Shroff’s case – 291 ITR 519 – SC

The role of the Explanation having regard to the principle of
statutory interpretation must be borne in mind before interpreting
the aforementioned provisions.

Imposition of penalty is not automatic. Levy of penalty is not only
discretionary in nature but such discretion is required to be
exercised on the part of the Assessing Officer keeping the relevant
factors in mind. Some of those factors apart from being inherent in
the nature of penalty proceedings as has been noticed in some of
the decisions of this court, inheres on the face of the statutory
provisions.
PRASHANTH G S, FCA
December 29,2012
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Dilip Shroff contd …

Section 271(1)(iii) again provides for a discretionary
jurisdiction upon the assessing authority inasmuch as the
amount of penalty may not be less than the amount of tax
sought to be evaded by reason of such concealment of
particulars of his income, but it may not exceed three times
thereof.
PRASHANTH G S, FCA
December 29,2012
16
Dharmendra Textile Processors’ Case- 306 ITR
277 –SC

The question which arises for determination in all these
appeals is whether section 11AC of the Central Excise Act,
1944 (in short "the Act") inserted by Finance Act, 1996,
with the intention of imposing mandatory penalty on
persons who evaded payment of tax should be read to contain
mens rea as an essential ingredient and whether there is
scope for levying penalty below the prescribed minimum.
PRASHANTH G S, FCA
December 29,2012
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Contd …

Conclusion :

It is pointed out that in Dilip N. Shroff's case, the
question relating to discretion was not the basic issue.
In fact, section 271(1)(c) of the Income-tax Act provides
for some discretion and, therefore, that decision has no
relevance. So far as the present dispute is concerned,
whether the discretion has been properly exercised is a
question of fact.
PRASHANTH G S, FCA
December 29,2012
18
Contd …

Dilip N. Shroff's case was not correctly decided but
Chairman, SEBI's case [2006] 5 SCC 361 has analysed the
legal position in the correct perspectives. The reference is
answered.
PRASHANTH G S, FCA
December 29,2012
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Post Dharmendra Decision Cases

Rajasthan Spinning & Weaving Mills ,23 DTR 158 – SC :

The decision in Dharmendra case must therefore, be understood
to mean that once the section is applicable ,the concerned
authority would have no discretion in quantifying the amount
and penalty must be imposed


M/s Siddhartha Enterprises –184 Taxmann 460–P&H
The judgment in Dharmendra Textile cannot be read as laying
down that in every case where particulars of income are
inaccurate, penalty must follow.
PRASHANTH G S, FCA
December 29,2012
20
Contd…

Kanbay Software India P Ltd, 22 DTR 481- Pune Tri.

The views expressed in Dharmendra case cannot be viewed
as an authority for the proposition that penalty u/s
271(1)(c) is an automatic consequence being made to
addition to the income .

Final conclusion :

By resorting to a process of interpretation, we must not
dilute the law laid down by their Lordships in
Dharmendra Textiles case.
PRASHANTH G S, FCA
December 29,2012
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Observations of the Supreme Court in D M
Manasvi’s case 86 ITR 557

at pages 561 & 562
Satisfaction in the very nature of things precedes the issue of notice and
it would not be correct to equate the satisfaction of the Income-tax
Officer or Appellate Assistant Commissioner with the actual issue of
notice. The issue of notice is a consequence of the satisfaction of the Income-tax
Officer or the Appellate Assistant Commissioner and it would, in our opinion,
be sufficient compliance with the provisions of the statute if the Income-tax
Officer or the Appellate Assistant Commissioner is satisfied about the matters
referred to in clauses (a) to (c) of sub-section (1) of section 271 during the
course of proceedings under the Act even though notice to the person proceeded
against in pursuance of that satisfaction is issued subsequently.
PRASHANTH G S, FCA
December 29,2012
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Independent proceedings

Bhadra Advancing Pvt Ltd vs ACIT, Karnataka HC

Madhushree Gupta vs Union of India and Another,
Delhi HC

CIT vs Atul Mohan Bindal, 317 ITR 1 – SC
PRASHANTH G S, FCA
December 29,2012
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Agreed Additions

Sir Shadilal Sugar & General Mills Ltd, 168 ITR
705 –SC :

From agreeing to additions, it does not follow that the
amount agreed to be added was concealed income. There
may be a hundred and one reasons for such admission

CIT vs. Saran Khandsari Sugar Works – Allahbad HC

CIT vs Mansa Ram and Sons – Allahabad HC
PRASHANTH G S, FCA
December 29,2012
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Contd…

K P Madhusudhanan, 251 ITR 99 – SC :
that the assessee had agreed to the additions to his income referred to
hereinabove to buy peace and it did not follow therefrom that the amount
that was agreed to be added was concealed income. That, it did not follow
that the amount agreed to be added was concealed income, is undoubtedly
what was laid down by this court in the case of Sir Shadilal Sugar and
General Mills Ltd and that, therefore, the Revenue was required to prove
the mens rea of a quasi-criminal offence. But it was because of the view
taken in this and other judgments that the Explanation to section 271
was added. By reason of the addition of that Explanation, the view taken
in this case can no longer be said to be applicable.
PRASHANTH G S, FCA
December 29,2012
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Penalty on Estimate Basis

Harigopal vs CIT – P&H

CIT vs Sangrur Vanaspati Mills Ltd – P&H

CIT vs Dhillon Rice Mills – P&H

CIT vs Kailash Crockery House – Patna

Teja Constructions vs ACIT – Hyd.
PRASHANTH G S, FCA
December 29,2012
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Sufficient cause - SC says …

Supreme Court in Rampal vs Rewa Coalfields Ltd, 1962
AIR 361 / 1962 SCR (3) 762 held that ‘sufficient cause' receiving a liberal construction so as
to advance substantial justice when no negligence nor
inaction nor want of bona fide is imputable to the
appellant
PRASHANTH G S, FCA
December 29,2012
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Contd…

Supreme Court in Price Waterhouse Coopers Pvt
Ltd vs CIT, 348 ITR 306

No penalty on inadvertent ‘silly’ mistakes
PRASHANTH G S, FCA
December 29,2012
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Sec 271 – Contd…

The person may be directed to pay penalty :
Section
Penalty
271(1)(b)
Rs. 10,000
271(1)(c)
100- 300% of tax sought to be evaded
PRASHANTH G S, FCA
December 29,2012
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Sec 271 (1B) – Satisfaction of AO for Initiation of
Penalty

Assessment order deemed to constitute satisfaction of
the Assessing Officer :

On addition or disallowance of any amount in
computing the total income in an assessment order;
and

The penalty proceedings have been initiated under
section 271(1)(c)
PRASHANTH G S, FCA
December 29,2012
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Sec 271AAA – Penalty where Search has been
initiated

Search initiated after 1.06.2007 but before 01.07.12

Penalty at the rate of 10% of the undisclosed
income of the specified previous year

No penalty under section 271(1)(c) in respect of
undisclosed income
PRASHANTH G S, FCA
December 29,2012
31
Sec 271AAA – Contd…

Search initiated after 1.06.2007 but before 01.07.12
Conditions
1. Assessee admits the undisclosed income
2. Assessee specifies and substantiates the
manner of deriving undisclosed income
3. On or before the specified datePays the tax together with interest on
undisclosed income
Penalty not applicable
4. On or before the specified dateFurnishes the return of income for the
specified year declaring such undisclosed
income
PRASHANTH G S, FCA
December 29,2012
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Sec 271AAB – Penalty where Search has been
initiated

Search initiated after 01.07.12
Conditions
Penalty
1. Admits the undisclosed income
2. specifies and substantiates the manner
of deriving undisclosed income
3. On or before the specified datePays the tax together with interest on
undisclosed income
10% of undisclosed income
4. On or before the specified date Furnishes the return of income for the
specified year declaring such
undisclosed income
PRASHANTH G S, FCA
December 29,2012
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Sec 271AAB – Contd…

Search initiated after 01.07.12
Conditions
Penalty
1. Does not admit the undisclosed
income
2. On or before the specified datePays the tax together with interest on
undisclosed income
20% of undisclosed income
3. On or before the specified date –
Declares such income in the return of
income furnished for the specified
year
PRASHANTH G S, FCA
December 29,2012
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Sec 271AAB – Contd…

Search initiated after 01.07.12

In any case not covered above, penalty shall not be
less than 30% and shall not exceed 90% of such
undisclosed income.
PRASHANTH G S, FCA
December 29,2012
35
Sec 271D and 271E - Failure to comply with the
provisions of section 269SS and 269T
Section Conditions
271D
Acceptance of loans/deposits in
contravention to section 269SS
271E
Repayment of loans/deposits in
contravention to section 269T
PRASHANTH G S, FCA
December 29,2012
Penalty
Shall be liable for penalty at
the rate of 100% of such loans
/ deposits that are
accepted/repaid.
It shall be imposed by the
Joint Commissioner.
36
Sec 271C – Penalty for failure to deduct tax at source


If any person fails to –

Deduct the whole or any part of tax as per Chapter XVII-B;

Pay the whole or any part of the tax a required by or under

Section 115-O(2); or

the second proviso to section 194B
Attracts Penalty to the extent of tax to be deducted or paid
as aforesaid

Penalty shall be imposed by Joint Commissioner
PRASHANTH G S, FCA
December 29,2012
37
Sec 271AA and Sec 271G
Person in respect of International Transaction or specified
domestic transaction
Section 271AA :

Particulars
Conditions
Penalty
Without prejudice to provisions of section 271 or 271BA
Failure to keep,
maintain or retain
books of account,
documents, etc. in
respect of certain
transactions
PRASHANTH G S, FCA
December 29,2012
1. Fails to keep and maintain
books as required by section
92D(1) or sec 92D(2)
2. Fails to report such
transaction which he is
required to do so
3. Maintains or furnishes an
incorrect information or
document
2% of the value of
each international
transaction or
specific domestic
transaction
38
Sec 271AA and Sec 271G
Person in respect of International Transaction or specified
domestic transaction
Section 271G :

Conditions
Penalty
Failure to furnish information or document
within 30days from receipt of notice as
required under section 92D
2% of the value of each
international transaction or
specific domestic transaction
PRASHANTH G S, FCA
December 29,2012
39
Others
Section
271A
271B
271BA
271F
PRASHANTH G S, FCA
December 29,2012
Particulars
Penalty
Failure to keep, maintain or retain books
of accounts, documents etc.
Rs. 25,000
Failure to get accounts audited u/s 44AB
0.5% of total sales,
turnover or gross
receipts or Rs.
1,50,000/Whichever is less
Failure to furnish report u/s 92E
Rs. 1,00,000
Failure to furnish return of income
Rs. 5,000
40
Sec 273B – Penalty not to be imposed in certain
cases

Notwithstanding anything contained in the provisions of
sections
271 (1)(b), 271A, 271AA, 271B, 271BA, 271BB, 271C,
271CA, 271D, 271E, 271F, 271FA, 271FB, 271G, 271H,
272A(1)( c), 272A(2)(d), 272AA(1), 272B, 272BB(1) &
(1A), 272BBB(1),273(1) (b),273(2) (b),(c)

no penalty shall be imposable on the person or the assessee,
as the case may be, for any failure referred to in the said
provisions if he proves that there was reasonable cause for
the said failure.
PRASHANTH G S, FCA
December 29,2012
41
Action based on CA certificate


The Punjab & High Court has held that no penalty
is leviable when the assessee has acted in a bonafide
manner based on the certificate issued by the
Chartered Accountant.
The CA was directed to be examined.


275 ITR 206 , S D Rice Mills;
274 ITR 603, Deep Tools Pvt Ltd
PRASHANTH G S, FCA
December 29,2012
42
Sec 273A – Power to reduce or waive penalty, etc., in
certain cases

The Commissioner may, reduce or waive the amount of
penalty under section 271(1)(iii)

On disclosure of full particulars by the assessee of income,
prior to Assessing Officer detecting concealment of income

Co-operation of assessee in all enquiries relating to the
assessment of his income

Payment or satisfactory arrangement to make payment of
any tax and interest
PRASHANTH G S, FCA
December 29,2012
43
Sec 273A – Contd…

The Commissioner can waive or reduce penalty only with
prior approval of Chief Commissioner or Director General
in cases where the income on which the penalty is levied is
greater than Rs. 5,00,000
PRASHANTH G S, FCA
December 29,2012
44
Sec 273AA – Power of Commissioner to grant
immunity from penalty


An Application may be made to Commissioner for granting
immunity from penalty, if:

Application is made for settlement u/s 245C and the
proceedings for settlement have been abated under section
245HA; and

The penalty proceedings have been initiated under this Act.
Application for grant of immunity of penalty shall not be
made after imposition of penalty after abatement
PRASHANTH G S, FCA
December 29,2012
45
Sec 273AA – Power of Commissioner to grant
immunity from penalty

The Commissioner may grant immunity from penalty if he is
satisfied that the assessee has given:

Full co-operation with income tax authorities in
proceedings before him

Made true disclosure of his income and the manner in
which such income has been derived

Immunity granted stands withdrawn if the person fails to
comply with any condition subject to which the immunity
was granted
PRASHANTH G S, FCA
December 29,2012
46
Sec 274– Procedures

No order imposing penalty under this Chapter shall be made :

unless the assessee has been heard or has been given
reasonable opportunity of being heard;

No order imposing penalty under this Chapter shall be made :

By the ITO, where the penalty exceeds ten thousand
rupees;

By the ACIT or DCIT, where the penalty exceeds twenty
thousand rupees except with prior approval of Joint
Commissioner
PRASHANTH G S, FCA
December 29,2012
47
Sec 275– Bar of Limitations for imposing
penalties

Limitation for passing the order of penalty
Condition
Limitation
1. Assessments/Revision of order u/s
263 or 264
Six months from the end of the month
in which the order is passed
2. In case of Appeal to
Commissioner(Appeals) or
Appellate Tribunal
Expiry of the FY in which penalty
proceedings are completed or six
months from the end of the month in
which the CIT(A)/ITAT order is
received by CCIT or CIT
Whichever is later
3. In any other case
Expiry of the FY in which penalty
proceedings are completed or six
months from the end of the month in
which penalty is initiated
Whichever is later
PRASHANTH G S, FCA
December 29,2012
48
Sec 272BB – Failure to comply with provisions of
section 203A

Wrong quoting of tax deduction account number or tax
collection account number or tax deduction and collection
account number in challans, certificates, statements or
documents referred to under section 203A(2)

Assessing Officer may direct a penalty of Rs. 10,000
PRASHANTH G S, FCA
December 29,2012
49
Sec 273 – False estimate of, or failure to pay, advance tax

Penalty in case of an assessee who furnished an advance tax
statement u/s 209A(1)(a) which he knew or had reasons to
believe to be untrue :

10% to 1 ½ times of the amount by which the advance
tax paid falls short of :
(1)
(2)
75% of the assessed tax as per section 215(5), or
the actual amount of advance tax, had the assessee
furnished a correct statement as per section 209A(1),
Whichever is less
PRASHANTH G S, FCA
December 29,2012
50
Sec 273 – Contd…

Penalty when assessee fails to furnish advance tax statement
u/s 209 (1)(a)


10% to 1 ½ times of 75% of the assessed tax as per
section 215(5)
In case of company assessees, the provisions of this
section shall have effect after substituting the word “75 %”
with “83 1/3 ” wherever it occurs.
PRASHANTH G S, FCA
December 29,2012
51
Section 221 - Penalty payable when tax in default

When an assessee is in default or is deemed to be in default
in making a payment of tax, he shall, in addition to the
amount of the arrears and the amount of interest payable
under sub-section (2) of section 220, be liable, by way of
penalty, to pay such amount as the Assessing Officer may
direct, and in the case of a continuing default, such further
amount or amounts as the Assessing Officer may, from time
to time, direct, so, however, that the total amount of penalty
does not exceed the amount of tax in arrears …….
PRASHANTH G S, FCA
December 29,2012
52
Thank You
prashanth@gspconsulting.co.in
+91-98454-80269
PRASHANTH G S, FCA
December 29,2012
53