Section 271(1)(c) – Penalty for Concealment or Misreporting of Income

Section 271(1)(c) of the Income Tax Act, 1961, is one of the most stringent provisions dealing with non-compliance and tax evasion. It empowers the Assessing Officer (AO) to impose a penalty on a taxpayer who has either concealed particulars of income or furnished inaccurate particulars of income.

This section aims to deter taxpayers from manipulating their financial records or deliberately omitting income to reduce their tax liability. The implications of a penalty under Section 271(1)(c) can be severe, involving significant financial repercussions.

When is Penalty Imposed?

A penalty under Section 271(1)(c) is typically imposed after an assessment or reassessment proceeding (e.g., scrutiny assessment under Section 143(3) or reassessment under Section 147) where the AO finds that income has been concealed or inaccurate particulars furnished. The AO must record a clear finding to this effect in the assessment order.

It's important to note that merely disallowing an expense or making an addition to income during assessment does not automatically trigger this penalty. The AO must demonstrate that the taxpayer concealed or furnished inaccurate particulars, and the burden of proof often shifts to the taxpayer to explain the discrepancy.

Quantum of Penalty

The penalty imposable under Section 271(1)(c) is based on the "amount of tax sought to be evaded". As per the current provisions, the penalty can range from:

• 100% to 300% of the tax sought to be evaded.

However, with the introduction of Section 270A from Assessment Year 2017-18, the provisions for penalty for under-reporting and misreporting of income have been rationalized and simplified. While Section 271(1)(c) technically still exists, practically for defaults occurring from AY 2017-18 onwards, the penalty for under-reporting/misreporting is primarily levied under Section 270A.

Under Section 270A:

• Under-reporting of Income: Penalty is 50% of the tax payable on under-reported income.
• Misreporting of Income: If under-reporting of income results from misreporting of income, the penalty is 200% of the tax payable on such misreported income.

It's crucial to understand the distinction between under-reporting and misreporting under Section 270A, as the penalty rate differs significantly.

Immunity from Penalty (Section 270A(6))

Section 270A (and previously Section 271(1)(c) under certain circumstances) provides for situations where a penalty may not be levied:

• If the taxpayer furnishes a complete and true disclosure of all material facts related to the income and substantiates the same to the satisfaction of the AO.
• If the under-reported income is based on an estimate, and the taxpayer has disclosed all relevant facts and estimates in the return.
• Where the taxpayer explains the difference adequately and the explanation is bona fide and all facts related thereto have been disclosed.

It is critical for taxpayers to provide a clear and satisfactory explanation for any discrepancy in their return when questioned by the tax authorities to avoid a penalty.

Procedure for Imposing Penalty

1. Initiation of Penalty Proceedings: The AO must first record their satisfaction that the taxpayer has concealed or furnished inaccurate particulars during the course of any proceedings (assessment, appeal, revision, etc.).
2. Show Cause Notice: A show-cause notice is issued to the taxpayer, requiring them to explain why a penalty should not be imposed.
3. Opportunity of Being Heard: The taxpayer is given a reasonable opportunity to present their case, provide explanations, and submit evidence.
4. Penalty Order: After considering the taxpayer's response, the AO (or higher authority, in some cases) passes a penalty order, specifying the quantum of penalty and the reasons for its imposition.

The penalty proceedings are distinct from the assessment proceedings, although they often arise from the findings of the latter.

Conclusion

Section 271(1)(c), or its modern equivalent Section 270A, represents the Income Tax Department's robust approach to combating tax evasion and ensuring accurate reporting of income. The penalties involved are substantial, highlighting the importance of diligent and honest tax compliance. Taxpayers should ensure that their Income Tax Returns are filed accurately, reflecting all sources of income and legitimate claims. In case of any discrepancies or receipt of a penalty notice, seeking professional tax advice is highly recommended to understand the implications and formulate an appropriate response.