A brief on Penalties & Prosecutions under the Income tax Act, 1961

There are three modes built in the fiscal legislation for encouraging tax compliance: (a) Charge of Interest, (b) imposition of penalty (c) launching of prosecution against tax delinquents.  While charging of interest is compensatory on character, the imposition of penalty and institution of prosecution proceedings act as strong deterrents against potential tax delinquents.

What are the defaults which may invite levy of penalty?

Chapters XVII and XXI of Income-tax Act, 1961, contain various provisions empowering an Income-tax Authority to levy penalty in case of certain defaults.  The following defaults may invite levy of penalty:

(i)   When the assessee is in default or is deemed to be in default in making payment of tax, including the tax deducted at source, advance tax and the self assessment tax.  [Section 221 read with Sec.201(1)]

(ii)  Failure to pay the advance tax as directed by the Assessing Officer or as estimated by the assessee. [Section 273(1)]

(iii) Failure to comply with a notice issued under section 142(1) or 143(2) or failure to comply with the direction issued under section 142(2A) to get the accounts audited. [Section 271(1)(b)]

(iv)  Concealment of particulars of income or furnishing of inaccurate particulars of income. [Section 271(1)(c)]

(v)   Failure to maintain books of accounts and documents by persons carrying on profession or business as prescribed under section 44AA. [Section 271A]

(vi)  Failure to get the accounts audited in prescribed circumstances or failure to obtain the prescribed audit report within prescribed time period of failure to furnish the audit report along with the return, as required under section 44AB. [Section 271B]

(vii) Failure to subscribe to the eligible issue of capital [Section 271BB]

(viia)       Penalty for failure to deduct tax at source. [Section 271C]

(viii)        Accepting of any loan or deposit or repayment of deposit of Rs.20,000 or more otherwise than by account payee cheque or account payee draft, in contravention of the provisions of Section 269SS. [Section 271D]

(viiia)      Repayment of loan in contravention of the conditions imposed in section 269T. [Section 271E]

(viiib)          A.      Failure of file the return of income as required under Section 239 (1), shall entail imposition of penalty. [Section 271F]

B. Failure to file the return as required under the proviso to Section 139(1), in the event of assessee fulfilling the prescribed conditions, i.e., certain persons in occupation of immovable property or owner of motor vehicle or subscriber to telephone, one who incurred expenditure on foreign travel, the holder of the creditcard or a member of a club, subject to specific conditions, are required to file the return as per proviso to Section 139(1), failing which penalty may be imposed.  (Proviso to Section 271F)

(ix) Refusal to answer in contravention of legal obligation. [Section 272A(1)(a)]

(x)  Refusal to sign any statement made in the course of income-tax proceedings. [Section 272A(1)(b)]

(xi) Failure to attend or give evidence or produce books of accounts and documents in compliance with the requirements of summons under section 131(1). [Section 272A(1)(c)]

(xii) Failure to comply with the provisions of section 139A dealing with the application for and allotment of Permanent Account Number or General Index Register Number. [Section 272A(1)(d)]

(xiii)        Failure to furnish information regarding securities. [Section 272A(2)(a)]

(xiv)        Failure to give notice of discontinuance of business or profession. [Section 272A(2)(b)]

(xv) Failure to furnish in due time information sought under section 133 of Income-tax Act. [Section 272A(2)(c)]

(xvi)        Failure to furnish in due time prescribed returns/statements. [Section 272A(2)(c)]

(xvii)       Failure to allow inspection or take copies of registers of registers of companies.  [Section 272A(2)(d)]

(xviii)      Failure to furnish in due time the return of income by charitable or religious institutions.  [Section 272A(2)(e)]

(xix)        Failure to deliver in due time a copy of declaration of non-deduction of tax at source u/s.197A. [Section 272A(2)(f)]

(xx) Failure to furnish a certificate of tax deducted at source to the person on whose behalf tax has been deducted or collected as required by Section 203 or Section 206C. [Section 272A(2)(g)]

(xxi)        Failure to deduct and pay tax from salary payable to an employee as directed by the Assessing Officer or the Tax Recovery Officer as required by Section 226(2). [Section 272A(2)(h)]

(xxii)       Failure to allow an Income-tax Authority to collect any information useful or relevant to the purposes of Income-tax Act u/s.133B. [Section 272AA)]

(xxiii)      Failure to comply with the provisions of section 203a dealing with tax Deduction Account Number [Section 272BB]

Is the levy of penalty automatic?

No penalty under the Income-tax Act is imposed unless the person concerned has been given reasonable opportunity of being heard.

What is the minimum and maximum penalty leviable?

The quantum of penalty leviable depends upon the nature of default.  The relevant section of Income-tax Act prescribe the minimum and maximum penalties which can be levied.

Can the penalty be reduced or waived?

The Commissioner of Income-tax may reduce or waive the amount of any penalty imposed or imposable, if prescribed conditions are satisfied.  The assessee should voluntarily and in good faith make full and true disclosure of income prior to the detection of concealment by the Assessing Officer.  In certain cases of genuine hardship,  the penalty levied can be reduced/waived if the assessee has co-operated in any enquiry relating to the assessment and recovery of taxes.  The waiver/reduction of penalties is discretionary and dependent upon satisfaction or prescribed conditions.  No assessee can, a matter of right, claim waiver or reduction of penalty imposed or imposable upon him.  [Section 273A]

Office and prosecution under the income tax act.  why is prosecution necessary?

In the fight against tax evasion, the imposition of monetary penalty alone is not sufficient.  A calculating tax evader finds it profitable to evade tax for years, if he knows that he may get away with it by paying penalty in the year in which he is caught.  However, the prospect of landing in jail is a far more dreaded consequence and works as a deterrent.  Further, for more serious defaults, sometimes launching of prosecution is prescribed without prescribing monetary penalties.

The Parliament has, therefore, been enacting deterrent laws for effective implementation of tax laws.  The Income-tax Act contains a separate chapter XXII wherein offences have been defined and punishment provided.

What are the offences punishable under the income tax act?

The following offences committed by a person are punishable:

(i)     Removal, parting with or otherwise dealing with books of accounts, documents, money, bullion, jewellery or other valuable article or thing put under restraint during the search. [Section 275A]

(ii)    Fraudulent removal, concealment, transfer or delivery of any property or any interest in the property with the intention to thwart recovery of tax. [Section 276]

(iii)   Failure on the part of a liquidator or receiver of a company to give notice of his appointment to the Assessing Officer or failure to set apart amount notified by the Assessing Officer, or parting away of company’s properties in contravention of income-tax provision. [Section 276A]

(iv)    Failure to enter into written agreement or failure to furnish the statement of immovable property intended to be transferred u/s.269UC, or failure to surrender or deliver the property u/s.269UE, purchased by the Appropriate Authority or doing or omitting to do anything u/s.269UL, which will have the effect oftransfer of property without the permission of the Appropriate Authority (under the provisions of Chapter XX-C) [Section 276AB]

(v)     Failure to pay to the credit of the Central Government the tax deducted at source.  [Section 276B]

(va)   Failure to pay the tax collected at source. [Section 276BB]

(vi)    Willful attempt to evade any tax, penalty or interest [Section 276C(1)]

(vii)   Willful attempt to evade the payment of any tax, penalty or interest levied under Income Tax Act. [Section 276C(2)]

(viii)  Willful failure to furnish in due time return of income.  [Section 276CC)]

(viiia)    Failure to furnish return of income in Search Cases as required under section 158BC [Section 276CCC]

(ix)    Willful failure to produce accounts and documents as directed by issue of notice under section 142(1) [Section 276D]

(x)     Willful failure to get the accounts audited as directed by the Assessing Officer under section 142(2A). [Section 276D]

(xi)    Making of a statement in verification or delivery of an account or statement which is false and which the concerned person knows or believes to be false or does not believe to be true. [Section 277]

(xii)   Abetting or inducing another person to make and deliver an account or statement or declaration relating to any taxable income which is false and which he either knows or believes to be false. [Section 278]

(xiii)  Punishment for 2^nd & subsequent offences in cases of certain defaults. [Section 278A]

No person shall be punished for any failure if he proves that there is reasonable cause failure. [Section 278AA].

Who is liable to be prosecuted?

Any person, committing the offence is liable to be prosecuted.  In this connection it is not necessary that the person should be an assessee under the Income-tax Act.  In the case of an offence committed by a Company, Firm, Association of Persons or Body of Individuals, every person in charge of or responsible for the conduct of the business of the concern as well as the concern are deemed to be guilty.  Similarly, in the case of an offence by a Hindu Undivided Family, the karta thereof is deemed to be guilty of the offence.

Is mens rea or culpable mental state or guilty intention necessary?

In case of willful act of omission or commission, the court shall presume the existence of culpable mental state.  However, the accused can rebut this presumption by producing necessary evidence before the court.  (Section 278E).

Can the offence be compounded?

Section 279(2) of Income-tax Act empowers a Chief Commissioner of Director General of Income-tax to compound an offence either before or after the institution of prosecution proceeding.

When public servant liable to be prosecuted?

If a public servant furnishes any information in contravention of the provisions of Section 138(2), prosecution may be instituted against him with the previous sanction of the Central Government. (Section 280).

Penalties Chart under Income Tax Act

Section	Nature of Default	Basis of Charge	Quantum of penalty
221(1)	Failure to pay tax; i.e., non-payment of tax required by notice u/s. 156.	–	Amount of tax in arrears
271(1)(b)	Non-compliance with notice u/s. 142(1) to file returns or to produce documents required by assessing officer or u/s. 143(2) to produce evidence on which assessee relies or u/s. 142(2A) to get accounts audited.	–	Rs. 10,000
271(1)(c)	Concealment of the particulars of income, or furnishing inaccurate particulars thereof.	Tax sought to be evaded	100 % to 300 % of tax sought to be evaded
271A	Failure to maintain books or documents u/s. 44AA.	–	Rs. 25,000
271AA	Failure to keep and maintain information and documents u/s. 92D.	International transaction	2% of International transaction
271B	Failure to get accounts audited and furnish Tax Audit Report as required u/s. 44AB.	Total Sales, Turnover, or Gross Receipts	0.5% of total sales, turnover or gross receipts, or Rs. 1,00,000 whichever is less
271BA	Failure to furnish a report as required u/s. 92E.	–	Rs. 1,00,000
271C	Failure to deduct the whole or part of the tax as required by or under Chapter XVII-B (Ss. 192 to 196D) or failure to pay the whole or part of tax u/s. 115-O.	Tax failed to be deducted	Equal to the amount failed to be deducted
271D	Contravention of the provisions of S. 269SS; i.e., by taking or accepting any loan or deposit otherwise than by ways specified therein.	Amount of loan or deposit so taken or accepted	Equal to the amount of loan or deposit so taken or accepted
271E	Contravention of S. 269T; i.e. repayment of any deposit otherwise than by modes specified therein.	Amount of deposit so repaid	Equal to the amount of deposit so repaid
271F	Failure to furnish Return of Income under sub-section (1) of S. 139 before the end of the relevant Assessment Year.	–	Rs. 5,000
Failure to furnish Return of Income under proviso to sub-section (1) of S. 139 by the due date.	–	Rs. 5,000
271G	Failure to furnish information or document u/s. 92D (3).	International transaction	2 % of such default.
272A(1)	Failure to answer questions, sign statements, attend summons u/s. 131(1), apply for permanent account number u/s. 139A.	–	Rs. 10,000
272A(2)	Failure to:		Rs. 100 for every day during which the failure continues.
	Comply with notice u/s. 94(6) furnishing information regarding securities
	Give notice of discontinuance of business – S. 176(3)
	Furnish in due time returns, statements, or particulars u/s. 133, 206 or 285B
	Allow inspection of any register(s) – S. 134
	Furnish returns u/s. 139(4A)
	Deliver in due time a declaration mentioned in S. 197A
	Furnish a certificate u/s. 203.
	Deduct and pay tax u/s. 226(2)
	Furnish returns/ statements/ certificate u/s. 206C
	Furnish a statement of particulars of perquisites and profits in lieu of salary u/s. 192(2C)
272AA(1)	Failure to furnish the prescribed information required u/s. 133B (Refer to Form No. 45D).	–	Rs. 1,000
272B	Failure to apply for Permanent Account Number (PAN)	–	Rs. 10,000
272BB(1)	Failure to apply for Tax Deduction Account No. (TAN) (S. 203A)	–	Rs. 10,000
272BBB	Failure to apply for Tax Collection Account No. (TCN)	–	Rs. 10,000

Note:
No penalty is imposable for any failure u/ss. 271(1)(b), 271A, 271AA, 271B, 271BA, 271BB, 271C, 271D, 271E, 271F, 271G, 272A(1)(c) or (d), 272(2), 272AA(1), 272B, 272BB(1) and 272BBB(1), if the person or assessee proves that there was a reasonable cause for such failure (S. 273B).

Service tax on laying of cables under or alongside roads and similar activities

Circular No. 123/05/2010-ST, dated 24-5-2010

Disputes have arisen in some parts of the country regarding applicability of service tax on certain activities such as shifting of overhead cables to underground on account of renovation/widening of roads; laying of electrical cables under or alongside roads/railway tracks; between grids/sub-stations/transformers the distribution points of residential or commercial complexes and such activities as electrification of railways, installation of street-lights, traffic lights, flood-lights. This clarification takes into account the taxability of different activities taking into account the scope of all services (such as site formation/excavation/ earth moving service, commercial or industrial construction services; erection, commissioning or installation services; or works-contract service) that are presently taxable as well as those which are covered under the Finance Act, 2010.

2. Scope of certain taxable services in brief;

(i)‘Commercial or industrial construction services', in brief, cover construction of and the completion, finishing, repair, alteration, renovation, restoration or similar activities pertaining to buildings, civil structures, pipelines or conduits. Therefore, only such electrical works that are parts of (or which result in emergence of a fixture of) buildings, civil structures, pipelines or conduits, are covered under the definition of this taxable service. Further, such activities undertaken in respect of roads, railways, transport terminals, bridges, tunnels and dams are outside the scope of levy of service tax under this taxable service.

(ii) Under ‘Erection, commissioning or installation services', the activities relevant to the instant issue are (a) the erection, commissioning and installation of plant, machinery, equipment or structures; and (b) the installation of electrical and electronic devices, including wiring or fitting there for. Thus, if an activity does not result in emergence of an erected, installed and commissioned plant, machinery, equipment or structure or does not result in installation of an electrical or electronic device (i.e. a machine or equipment that uses electricity to perform some other function) the same is outside the purview of this taxable service.

(iii) ‘Works Contract' incorporates the inclusions and exclusions of the aforementioned two taxable services (amongst others) and it is the nature of the contract (i.e. a contract wherein the transfer of property in goods involved is leviable to a tax as sale of goods) rather than the nature of activities undertaken, that distinguishes it from the previously stated taxable services. Thus, even in the case of ‘works contract' if the nature of the activities is such that they are excluded from aforesaid two services then they would generally remain excluded from this taxable service as well.

(iv) ‘site formation and clearance, excavation, earthmoving and demolition services' are attracted only if the service providers provide these services independently and not as part of a complete work such as laying of cables under the road

3. The taxable status of various activities, on which disputes have arisen

Based on the foregoing, the following would be the tax status of some of the activities in respect of which disputes have arisen,-

S.No.	Activity	Status
1.	Shifting of overhead cables/wires for any reasons such as widening/renovation of roads	Not a taxable service under any clause of sub-section (105) of section 65 of the Finance Act, 1994
2.	Laying of cables under or alongside roads	Not a taxable service under any clause of sub-section (105) of section 65 of the Finance Act, 1994
3.	Laying of electric cables between grids/sub-stations/transformer stations en route	Not a taxable service under any clause of sub-section (105) of section 65 of the Finance Act, 1994
4.	Installation of transformer/ sub-stations undertaken independently	Taxable service, namely Erection, commissioning or installation services [section 65 (105] (zzd].
5.	Laying of electric cables up to distribution point of residential or commercial localities/complexes	Not a taxable service under any clause of sub-section (105) of section 65 of the Finance Act, 1994
6.	Laying of electric cables beyond the distribution point of residential or commercial localities/complexes.	Taxable service, namely commercial or industrial construction' or ‘construction of complex' service [section 65(105) (zzq)/(zzzh)], as the case may be.
7.	Installation of street lights, traffic lights flood lights, or other electrical and electronic appliances/devices or providing electric connections to them	Taxable service, namely Erection, commissioning or installation services [section 65 (105] (zzd].
8.	Railway electrification, electrification along the railway track	Not a taxable service under any clause of sub-section (105) of section 65 of the Finance Act, 1994

4. The conclusions drawn above are essentially general in nature and would have to be applied in an individual case depending upon its facts and circumstances. The pending disputes /cases may be decided based on the clarifications contained in this circular.

Service tax circular giving relief for claiming CENVAT

Circular No. 122/03/2010 – ST

F. No. 137/71/2009 – CX.4

Government of India

Ministry of Finance

Department of Revenue

Central Board of Excise and Customs

***

New Delhi, dated the 30^th April 2010

To

The Chief Commissioners of Central Excise and Service Tax (ALL),

The Director General of Service Tax

The Director General of Audit

The Director General of Central Excise Intelligence,

The Commissioners of Service Tax (ALL)

Madam/Sir,

Subject: Clarification regarding availment of credit on input services - reg

****************

Representations have been received by Board regarding denial of CENVAT credit on input services in certain cases. Some of the cases where doubts have been raised by field formations are given below:

2.         As per Rule 4 (7) of the CENVAT Credit Rules, 2004, the CENVAT credit on input services is available only on or after the day on which payment of the value of input service and service tax is made. The section 67 (4) of the Finance Act, 1994, provides that gross amount charged includes payment made by issue of credit / debit notes or by entries in the books of account, where the transaction is with any associated enterprise.

A doubt has arisen as to whether CENVAT credit can be taken by “Associate Enterprises” when debit is made in book of accounts or when book adjustments/ debit or credit in accounts is made, or if the CENVAT credit of the service tax paid on input service is available only after the actual payment of the value of input service has been made in money terms.

3.         As per sub-rule (7) of Rule 4 of the CENVAT Credit Rules, 2004,

“Credit in respect of input service shall be allowed, on or after the day on which payment is made of the value of input service and the service tax paid or payable as is indicated in invoice, bill or as the case may be, challan referred to in Rule 9”.

A doubt raised is as to whether the receiver of input service can take credit only after the full value that is indicated in the invoice, bill or challan raised by the service provider, and also the service tax payable thereon, has been paid. It has been represented that in many cases, after the invoice is issued by the service provider, the service receiver does not make the full payment of the invoiced amount on account of discount agreed upon after issuance of invoice; or deducts certain amount due to unsatisfactory service; or withholds some amount as security to be held during contract period. Due to these reasons the value paid may not tally with the amount indicated in the invoice, bill or challan. In such cases the department has raised objections to the taking of credit as it does not meet the requirement of the said sub-rule (7).

4.         Thus the following issues relating to availment of CENVAT credit need clarification,-

Whether CENVAT credit can be claimed

(a)             when payments are made through debit/credit notes and debit/credit entries in books of account or by any other mode as mentioned in section 67 Explanation (c) for transactions between associate enterprises; or

(b)             where a service receiver does not pay the full invoice value and the service tax indicated thereon due to some reasons.

5.         Matter has been examined and clarification in respect of each of the above mentioned issues is as under,-

(a) When the substantive law i.e. section 67 of the Finance Act, 1994 treats such book adjustments etc., as deemed payment, there is no reason for denying such extended meaning to the word ‘payment’ for availment of credit. As far as the provisions of Rule 4 (7) are concerned, it only provides that the CENVAT credit shall be allowed, on or after the date on which payment is made of the value of the input service and of service tax. The form of payment is not indicated in the same and the rule does not place restriction on payment through debit in the books of accounts. Therefore, if the service charges as well as the service tax have been paid in any prescribed manner which is entitled to be called ‘gross amount charged’ then credit should be allowed under said rule 4 (7). Thus, in the case of “Associate Enterprises”, credit of service tax can be availed of when the payment has been made to the service provider in terms of section 67 (4) (c) of Finance Act, 1994 and the service tax has been paid to the Government Account.

(b) In the cases where the receiver of service reduces the amount mentioned in the invoice/bill/challan and makes discounted payment, then it should be taken as final payment towards the provision of service. The mere fact that finally settled amount is less than the amount shown in the invoice does not alter the fact that service charges have been paid and thus the service receiver is entitled to take credit provided he has also paid the amount of service tax, (whether proportionately reduced or the original amount) to the service provider. The invoice would in fact stand amended to that extent. The credit taken would be equivalent to the amount that is paid as service tax. However, in case of subsequent refund or extra payment of service tax, the credit would also be altered accordingly.

6.         The contents of this circular may be suitably brought to the notice of the field formations. In case any difficulty is faced in implementing these instructions, the same may be brought to the notice of the undersigned.

Yours faithfully

(Himanshu Gupta)

Commissioner (Service Tax)

CBEC, New Delhi

Workers of contractor not eligible for ESI benefits

The workers of a contractor engaged by an establishment do not get the benefits of the Employees State Insurance Corporation Act, the Supreme Court stated last week in the judgment, Managing Director, Hassan Co-operative Milk Producer’s Society Union Ltd vs ESI Assistant Regional Director.

The ESI authorities demanded contribution to the fund from the milk coop maintaining that the loaders of the contractor engaged to bring milk to the main plant were in effect engaged by the coop. The ESI tribunal and the Karnataka high court upheld the demand. But on appeal, the Supreme Court overruled them and stated that the coop had no direct control over the workers of the contractors and had no supervisory power over them. The wages were not paid by the coop. Therefore it was not bound to pay the contribution under the law.