Lower fines, but more powers to assessing officers

On the one hand, the government is trying to reduce litigation by giving additional freedom to income-tax assessees and reducing penalties. On the other, the assessing officer (AO) has been given unlimited powers in certain situations.

A sore point that has emerged from the Finance Bill 2016 is the creation of two new categories of misdemeanours: Under-reporting and misreporting. The penalties have been pegged at either 50 per cent or 200 per cent of the evaded tax for the two categories, respectively. AOs can’t levy a rate in between at their discretion.

A more critical clause is worrying tax experts: The recourse to appeal has been more difficult for the assessee. The proposed laws say if the case is classified as one of under-reporting, the penalty can be waived off only if the assessee accepts the order and pays the relevant tax with interest within the stated period, usually 30 days. More importantly, in case the officer classifies the case as one of misreporting, there is no recourse to filing an appeal. The assessee will need to file a writ petition in a high court to challenge the order.
 

“According to the regulations, an assessee can go to income-tax tribunal only against the orders of the commissioner. But, if the order is passed by the AO, then the court is the only recourse as one cannot approach tribunals against the orders passed by the AO,” says Gautam Nayak, tax partner at CNK & Associates. Tax experts say this is a harsh provision and, hence, necessary changes might be made in the final Finance Bill as this goes against the principle of natural justice.

The new penalty regime could create a fresh set of complications for taxpayers. Although the government has done its best to define the two new terms, there is a fine line between what constitutes under-reporting and misreporting.

In the earlier regime, the AO could levy a penalty on the tax payer for concealment of income or for furnishing inaccurate particulars. The penalty ranged from 100 per cent to 300 per cent of the evaded tax. However, when the AO issued an order under Section 143(2), the assessee could offer an explanation. If the AO was satisfied with the explanation, the assessee had to pay only the tax. The AO had the power to waive penalty and interest.

Experts say the government has tried to explain the new terms under-reporting and misreporting.

“While no proper legal definition of what constitutes under-reporting and misreporting has been provided, the newly inserted Section 270A (which replaces Section 271) of the income tax Act, 1961, provides all that is needed to implement such penalties,” says Amar Gahlot, tax consultant at Lakshmikumaran & Sridharan Attorneys.

The government has provided a list of cases where under-reporting shall not apply. Cases of misreporting have been specified as follows: misrepresented or suppressed facts; not recorded any investment or receipt or recorded false entry in the books of account; claimed any expenditure not substantiated by evidence; and not reported any international transaction, to which transfer pricing provisions would apply. “Looking at these situations, it seems where the default seems to be malafide, it would be considered as misreporting,” says Gahlot.

Some legal experts also see a few positives for taxpayers in the new provisions. Says Rakesh Nangia, managing partner of Nangia & Co, “In the past, every case where there was a dispute led to a penalty. But now, the government has included a new clause: Where the assessee offers an explanation and the income tax authority is satisfied that the explanation is bonafide, and all the materials have been disclosed; in such cases, there will be no penalty. By including this clause, the government has ensured that many cases will not be subject to penalty.”

Adds Kuldip Kumar, partner and leader (personal tax) at PwC India: “The proposed new laws take into consideration the genuine mistakes one can possibly make and have them out of the purview of penalty.” The absence of precedents is yet another drawback. Says Delhi-based High Court lawyer Prakash Kumar: “For older terms like concealment of income and furnishing inaccurate particulars, several judgments of the High Court and the Supreme Court existed, which served as precedents. Now, it will take some time before cases based on these new terms go to the higher courts and the judges interpret these laws.”