JUNE 11, 2009

Amend Income Tax Act to help the robbed and not robber!

By Puneet Jain, Advocate, Supreme Court of India

Legal Corner IconAN administration of law can be proper only if it contains suitable provisions for levy of penalty and launching of prosecutions in case of violations. The same is true in the case of income tax law also. But income tax law is very complex and resulting in unjust penalty provisions. An attempt has been made on the basis of in-depth study of provisions relating to concealment penalty to find out where the provisions are either not clear or punishes non-guilty and gives escape route to the real culprits. Finally the following amendments are suggested in income tax law relating to penalty provisions:-

Proposed amendments relating to penalty and prosecution provisions for concealment of income:

There are two types of taxable entities under the Income tax Act:

One, where entity earns income for others; e.g. company and cooperative society earn income for their shareholders and trust earns income for the beneficiaries. They are hereinafter referred to as representative entities.

Two, where the entity earns income for itself; e.g. individual who earns income for himself. They are hereinafter referred to as owner entities.

In these two entities the essential difference lies in the fact that the first type of entity earns income for others while the second type of entity earns income for self.

So far as paying tax is concerned, it does not make any difference whether one earns income for self or for others but it makes a lot of difference for the purpose of levy of penalty for concealment of income.

In case of representative entities, the act of concealment is done by the management which works for the entities for example, in case of a company, the concealment is done by the managing director, or board of directors. They conceal income not from the govt but also from the real owners that is the shareholders. The real owners also do not get their due share of income because the concealed income has gone to the pockets of the management. However, the penalty is levied on the entity which is ultimately borne by the real owners and not by the management. Even, cost of litigation is also borne by the company. When management has robbed the real owners, where is the justice that penalty be levied on the robbed and not on the robbers; that is,  the management. The case of Satyam Computer is an eye-opener where the funds of the company were siphoned off by the management. The shareholders suffered heavily and finally penalty may also be on the company which means it would be on the robbed shareholders.

Therefore, in case of such representative entities, provisions should be made to provide that penalty would be recoverable firstly from the management and if not recovered from them, then from the entity. This will bring more sincerity and accountability on the management; and provision would also be just and equitable. Corporate governance would automatically improve substantially.

 Concealment penalty is leviable on the basis of income concealed which, in turn, is worked out on the basis of excess of income assessed over income returned. Returned income is therefore a must for working out penalty. It follows that there cannot be any penalty where there is no return because no return does not mean nil return. Similarly there cannot be any penalty where the concealment is detected prior to filing of the return itself.  If in such situation, the Department detects concealment, penalty cannot be levied.

To overcome this situation explanation (v) has been inserted in section 271(1)( c) which provides for deemed concealment where undisclosed income is detected, even if no return has been furnished.  However, such explanation does not cover survey cases.  Both search and survey are instruments in the hands of the Department to detect concealed income and it is unfair to make provisions for deemed concealment in case of search alone and making no such provision for survey.  Explanation (v) of 271(1) ( c) should therefore, be amended to provided for deemed concealment in case of survey also.

 ++  Explanation (v) to section 271(1) ( c) provides for deemed concealment in case of concealed income detected at the time of search with an escape route that there would be no penalty if the assessee makes disclosure of his income u/s.132(4) of the I.T.Act in the course of search itself. Such deemed concealment was in respect of assessment years for which returns of income were not filed. In such situation the assessee was given the benefit of making disclosure of income to escape penalty.  The Courts have however interpreted it differently and has given benefit of immunity from penalty even in cases where returns were already filed. It may be noted that if return is already filed and then concealment is detected in the course of search, then act of concealment is completed and stands detected and established. There is no necessity of bringing in provision of deemed concealment. Hence there is no scope to invoke deeming provision for concealment and since there is no deeming concealment there is no necessity of giving benefit of immunity from penalty on the basis of disclosure at the time of search. Hence a clarificatory amendment is needed.   

++ In certain sections of I.T. Act 1961, claim of deduction/exemption is required to be certified by a C.A. for eg. Claim of exemption u/s.10A or claim of deduction u/s.80HHC etc.  When deduction or exemption is certified to be claimable by a C.A. appointed to comply with the requirement of I.T.Act then it cannot be alleged that the assessee has made a false claim because auditor is an independent authority.  Therefore, penalty in such situation  of wrong claim cannot be levied because the claim was not worked out by the assessee.  Thus penalty in such cases can never be levied. A clarificatory amendment is required to be made to provide for levy of penalty in such situation.

++ Amendment in section 263 to provide for revision against non- initiation of penalty proceedings:-  Section 263 provides for the powers for CIT to revise an order of subordinate authorities if it is erroneous or prejudicial to the interest of revenue.  If an A.O. passes an order and does not initiate proceedings for penalty u/s 271(1)( c) of the I.T. Act; then this is a case of an erroneous order and also an order which is prejudicial to the interest of revenue. However, such erroneous orders cannot be revised u/s 263. Thus the mistake of Assessing Officer cannot be rectified in any manner. However, if the A.O. initiates proceedings and drops the same, then revision is possible.  Therefore a clarificatory amendment should be made in section 263 to provide that CIT would be empowered to direct A.O. to initiate penalty proceedings.

++ Prosecution:-  At present if an A.O. files a prosecution against an assessee in a criminal court, he is examined and cross examined in the Trial Court.  This is repetition of the facts already established by a judicial process by authorities up to Income tax Tribunal.  Therefore, there should be an amendment to provide that cross examination would be only on the points which have not been accepted by the assessee for which he will have to give prior notice that these facts have not been accepted in the assessment proceedings with reasons therefor.

Moreover as per the present practice, every A.O. has to appear in the Trial Court to testify the fact of concealment by the assessee.  Since the A.O. is not an eyewitness and he alleges various facts only on the basis of available records, a provision should be made to provide that any successor in office can appear and testify the facts before the Trial Court. This would obviate the necessity of calling the particular AOs from far off places where they have been transferred out.

++ As per Explanation 3 below section 271(1)( c), concealment is presumed in case where return of income has not been filed within one year and 9 months from  the end of the assessment year and entire assessed income is treated as concealed income.  However, u/s.139(4), return of income cannot be filed after one year from the end of the assessment year.  Therefore, the provisions are anomalous requiring amendment.