Finance Bill, 2022 has proposed to amend various provisions of the Income-tax Act, 1961 (‘Act’) related to the levy of penalties and initiation of prosecution proceedings for various offences thereunder.
The changes in Penalty and Prosecution Provisions as proposed by the Finance Bill, 2022 are detailed below-
Rationalization of the provisions of sections 271AAB, 271AAC and 271AAD of the Act
Concurrent Powers given to CIT(A) under Sections 271AAB, 271AAC and 271AAD
Sections 271AAB, 271AAC and 271AAD of the Act under Chapter XXI contain provisions which give powers to the Assessing Officer to levy penalty in cases involving undisclosed income in cases where search has been initiated u/s 132 or otherwise, or for false entry etc. in books of account.
Under Chapter XXI of the Act which deals with penalties, Commissioner (Appeals) has concomitant powers with Assessing Officer to levy penalty in eligible cases under section 270A, section 271, section 271A, section 271AA, section 271G, section 271J which deal with deliberate concealment, non-disclosure and omission by an assessee to evade tax.
Similarly, sections 271AAB, 271AAC, 271AAD penalise actions pertaining to undisclosed income, unexplained credits or expenditures, or deliberate falsification or omission in books of accounts.
Therefore, in order to improve deterrence against non-compliance among tax payers, it is proposed to amend the sections 271AAB, 271AAC and 271AAD by enabling the Commissioner (Appeals) to levy penalty under these sections to the along with Assessing Officer.
It is proposed to amend the sections 271AAB, 271AAC and 271AAD to enable the Commissioner (Appeals) to levy penalty under these sections along with Assessing Officer.
Clause 73, 74 and 75 of the Finance Bill, 2022 proposes to amend section 271AAB, section 271AAC and section 271AAD respectively-
Amendment of section 271AAB.
73. In section 271AAB of the Income-tax Act,–
(a) in sub-section (1), in the opening portion, after the words “The Assessing Officer”, the words and brackets “or the Commissioner (Appeals)” shall be inserted;
(b) in sub-section (1A), in the opening portion, after the words “The Assessing Officer”, the words and brackets “or the Commissioner (Appeals)” shall be inserted;
(c) in the Explanation, in clause (a), for the words figures and letter “under section 153A”, the words, figures and letter “under section 148 or under section 153A, as the case may be,” shall be substituted and shall be deemed to have been substituted with effect from 1st April, 2021.
Amendment of section 271AAC.
74. In section 271AAC of the Income-tax Act, in sub-section (1), after the words “The Assessing Officer”, the words and brackets “or the Commissioner (Appeals)” shall be inserted.
Amendment of section 271AAD.
75. In section 271AAD of the Income-tax Act,––
(i) in sub-section (1), in the long line, after the words “the Assessing Officer”, the words and brackets “or the Commissioner (Appeals),” shall be inserted;
(ii) in sub-section (2), after the words “the Assessing Officer”, the words and brackets “or the Commissioner (Appeals)” shall be inserted.
Explaining the proposed amendment in section 271AAB vide Clause 73 of the Finance Bill, 2022
Clause 73 seeks to amend section 271AAB of the Act relating to penalty where search has been initiated. Sub-sections (1) and (1A) of the said section, inter alia, enables the Assessing Officer to levy penalty in cases where search has been initiated under section 132.
It is proposed to amend sub-sections (1) and (1A) of the said section to extend the powers to levy penalty to Commissioner (Appeals) also.
These amendments will take effect from 1st April, 2022.
The Explanation to the said section defines certain expressions for the purposes of the said section.
It is proposed to amend clause (a) of the said Explanation to make applicable a notice issued under section 148 also, in case where search is initiated on or after 1st April, 2021.
This amendment will take effect retrospectively from lst April, 2021.
Explaining the proposed amendment in section 271AAC vide Clause 74 of the Finance Bill, 2022
Clause 74 seeks to amend section 271AAC of the Act relating to penalty in respect of certain income. Sub-section (1) of the said section, inter alia, enables the Assessing Officer to levy penalty in cases where the income determined includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D for any previous year.
It is proposed to amend sub-section (1) of the said section, to extend the powers to levy penalty to the Commissioner (Appeals) also.
This amendment will take effect from 1st April, 2022.
Explaining the proposed amendment in section 271AAD vide Clause 75 of the Finance Bill, 2022
Clause 75 seeks to amend the section 271AAD of the Act relating to penalty for false entry, etc. in books of account.
The said section, inter alia, enables the Assessing Officer to levy penalty in cases where, during any proceeding, it is found that in the books of account maintained by any person there is a false entry or an omission of any entry which is relevant for computation of total income of such person, to evade tax liability.
It is proposed to amend sub-sections (1) and (2) of the said section to extend the powers to levy penalty to the Commissioner (Appeals) also.
This amendment will take effect from 1st April, 2022.
Penalty under section 271AAE for passing on unreasonable benefits to trustee or specified persons
Under section 13 of the Act, trusts or institution under the second regime are required not to pass on any unreasonable benefit to the trustee or any other specified person.
In order to discourage such misuse of the funds of the trust or institution by specified persons, it is proposed to insert a new section 271AAE in the Act to provide for penalty on trusts or institution which is equal to amount of income applied by such trust or institution for the benefit of specified person where the violation is noticed for the first time during any previous year and twice the amount of such income where the violation is notice again in any subsequent year.
The proposed section seeks to operate without prejudice to any other provision of chapter XXI. Thus, if any penalty is leviable under any of the other provisions of this chapter, in addition to the proposed penalty, that penalty would also be applicable.
The proposed new section seeks to provide that, if during any proceeding under the Act, it is found that a person, being any trust or institution under the first or the second regime, has violated the provisions of twenty-first proviso to clause (23C) of section 10 or clause (c) of sub-section (1) of section 13, as the case may be, the Assessing Officer may direct that such person shall pay by way of penalty,
i) a sum equal to the aggregate amount of income applied, directly or indirectly, by such person, for the benefit of any person referred to in sub-section (3) of section 13 where the violation is noticed for the first time during any previous year; and
ii) a sum equal to two hundred percent of the aggregate amount of income of such person applied, directly or indirectly, by such person, for the benefit of any person referred to in sub-section (3) of section 13, where violation is noticed again in any subsequent previous year.
Clause 76 of the Finance Bill, 2022 proposes to insert section 271AAE to provide for penalty for passing on unreasonable benefits to trustees or specified persons
Insertion of new section 271AAE.
76. After section 271AAD of the Income-tax Act, the following section shall be inserted with effect from the 1st day of April, 2023, namely:––
Benefits to related persons.
“271AAE. Without prejudice to any other provision of this Chapter, if during any proceedings under this Act, it is found that a person, being any fund or institution referred to in sub-clause (iv) or any trust or institution referred to in subclause (v) or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via) of clause (23C) of section 10, or any trust or institution referred to in section 11 has violated the provisions of the twenty-first proviso to clause (23C) of section 10, or clause (c) of sub-section (1) of section 13, as the case may be, the Assessing Officer may direct that such person shall pay by way of penalty–
(a) a sum equal to the aggregate amount of income applied, directly or indirectly, by such person, for the benefit of any person referred to in sub-section (3) of section 13, where the violation is noticed for the first time during any previous year; and
(b) a sum equal to two hundred per cent. of the aggregate amount of income of such person applied, directly or indirectly, by that person, for the benefit of any person referred to in sub-section (3) of section 13, where violation is noticed again in any subsequent previous year.”.
Explaining the newly inserted provisions of section 271AAE relating to penalty for benefits to related persons by a trust or institution
Clause 76 seeks to insert section 271AAE in the Act relating to benefits to related persons.
The proposed new section provides that without prejudice to any other provisions of Chapter XXI of the Act, if during any proceedings under this Act, it is found that a person, being any fund or institution referred to in sub-clause (iv) or trust or institution referred to in sub-clause (v) or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via) of clause (23C) of section 10, or any trust or institution referred to in section 11 has violated the provisions of the twenty-first proviso to clause (23C) of section 10 or clause (c) of sub-section (1) of section 13, as the case may be, the Assessing Officer may direct that such person shall pay by way of penalty–
(a) a sum equal to the aggregate amount of income of such person applied, directly or indirectly, by such person, for the benefit of any person referred to in sub-section (3) of section 13, where the violation is noticed for the first time during any previous year; and
(b) a sum equal to two hundred per cent. of the aggregate amount of income of such person applied, directly or indirectly, by that person, for the benefit of any person referred to in sub-section (3) of section 13, where violation is noticed again in any subsequent previous year.
This amendment will take effect from 1st April, 2023 and will, accordingly, apply in relation to the assessment year 2023-2024 and subsequent assessment years.
Alignment of the provisions relating to Offences and Prosecutions under Chapter XXII of the Act
Amendment for Penalty under Section 271C or Prosecution under Section 276B
Section 271C provides for penalty for failure to deduct TDS or pay tax under section 115-O or under the second proviso to section 194B. The penalty amount is equal to the amount of tax which is failed to be deducted or paid.
Similarly, section 276B provides for prosecution for a term ranging from three months to seven years with fine for failure to pay tax to the credit of Central Government under Chapter XII-D or XVII-B. Under this section, a person shall be punishable for failure to
a) deduct the tax as required under the provisions of Chapter XVII-B which deals with deduction of tax at source, or
b) to pay the tax, as required by or under–
(i) sub-section (2) of section 115-O or
(ii) the second proviso to section 194B.
Section 194B was amended vide Finance Act 1999 w.e.f. 01.04.2000 by which the first proviso to the section was omitted and the section currently has only one proviso.
However, section 271C and section 276B dealing with penalty and prosecution of offences respectively in cases of failure to comply with the provisions of section 194B still refers “second proviso to section 194B”.
Therefore, to avoid ambiguity among sections 276B and 194B, it is proposed to substitute the sub-clause (ii) of clause (b) of section 276B with “proviso to section 194B”.
Similar amendment is proposed in Section 271C.
Clause 77 of the Finance Bill, 2022 amends section 271C to omit the reference to the ‘second’ proviso to section 194B, rather it corrects the reference to the ‘proviso to section 194B’.
Amendment of section 271C.
77. In section 271C of the Income-tax Act, in sub-section (1), in clause (b), in sub-clause (ii), the word “second” shall be omitted.
Clause 80 of the Finance Bill, 2022 amends section 276B to omit the reference to the ‘second’ proviso to section 194B, rather it corrects the reference to the ‘proviso to section 194B’.
Amendment of section 276B.
80. In section 276B of the Income-tax Act, in clause (b), in sub-clause (ii), the word “second” shall be omitted.
Explaining the proposed amendments to section 271C and section 276B
Clause 77 seeks to amend the section 271C of the Income-tax Act relating to penalty for failure to deduct tax at source. It provides for penalty for failure to credit tax deducted at source to the Central Government or the tax payable by him as required by or under the second proviso to section 194B.
The first proviso to section 194B was omitted by the Finance Act, 1999 with effect from the 1st day of April, 2000 and the said section currently has only one proviso.
To give consequential effect, it is proposed to omit the word “second” in sub-clause (ii) of clause (b) of sub-section (1) of the section.
This amendment will take effect from 1st April, 2022.
Clause 80 seeks to amend section 276B of the Act relating to failure to pay tax to the credit of Central Government under Chapter XII-D or XVII-B.
The first proviso to Section 194B was omitted vide the Finance Act, 1999 with effect from the 1st April, 2000 and the section currently has only one proviso. It is proposed to omit the word “second” in the said section 276B.
This amendment will take effect from 1st April, 2022.
Increase in Penalty Amount under section 272A
Section 272A of the Act provides for penalty for failure to answer questions, sign statements, furnish information, returns or statements, allow inspections etc. At present, the amount of penalty for failures listed under sub-section (2) of section 272A is one hundred rupees for every day during which the failure continues.
Section 272A ensures compliance with various obligations under the Income-tax Act by penalising non-compliance and acting as a deterrent.
However, the penalty of one hundred rupees had been commented upon by the CAG in their report on the entertainment sector as being too low. The penalty had not been increased since the section was introduced in 1999 and does not have an adequate deterrence value.
Therefore, it is proposed to increase the amount of penalty for failures listed under sub-section (2) of section 272A to five hundred rupees from the existing sum of one hundred rupees.
This amendment will take effect from 1st April, 2022.
Clause 78 of the Finance Bill, 2022 proposes to increase the penalty amount for non-compliances listed in section 272A
Amendment of section 272A.
78. In section 272A of the Income-tax Act, in sub-section (2), in the long line, for the words “one hundred rupees”, the words “five hundred rupees” shall be substituted.
Explaining the provisions of section 272A
Clause 78 seeks to amend section 272A of the Act relating to penalty for failure to answer questions, sign statements, furnish information, returns or statements, allow inspections, etc.
It is proposed to increase the existing penalty under sub-section (2) from one hundred rupees to five hundred rupees.
This amendment will take effect from 1st April, 2022.
Defaults liable to penalty under section 272A(2)
(for which penalty amount is raised to Rs. 500 per day of default)
Insertion of sunset clause to section 276AB
Sections 269UC/UE/UL along with other provisions of Chapter XX-C have been made inapplicable with effect from 01.07.2002. Vide Finance Act, 2002, section 269UP was introduced providing that the provisions of the Chapter shall not apply to, or in relation to, the transfer of any immovable property effected on or after 01.07.2002. Consequently, prosecution provisions u/s 276AB are not relevant, as launching prosecution against offences committed more than twenty years ago, that is prior to 2002 would be beyond reasonable time.
Since such cases involve transfer of immovable property, it is not improbable that prosecution cases launched previously while the relevant provisions were still in effect might be ongoing. Therefore, in order to take those cases to logical conclusion without any interpretational issue arising on applicability of the section or otherwise, it is proposed to amend section 276AB to align it with the provisions of the Act that have been made inapplicable, by providing a sunset clause. Hence, it is proposed that no fresh prosecution proceeding shall be initiated under this section on or after 1st April, 2022.
Clause 79 of the Finance Bill, 2022 proposes to insert a sunset clause in section 276AB
Amendment of section 276AB.
79. In section 276AB of the Income-tax Act, after the proviso, the following proviso shall be inserted, namely:––
“Provided further that no proceeding under this section shall be initiated on or after the 1st day of April, 2022.”.
Explaining the proposed amendments to section 276AB
Clause 79 seeks to amend section 276AB of the Act relating to failure to comply with the provisions of sections 269UC, 269UE and 269UL.
It is proposed to insert a second proviso to the said section so as to provide that no proceeding under this section shall be initiated on or after the 1st day of April, 2022.
This amendment will take effect from 1st April, 2022.
Relief from Prosecution under section 276CC in case ‘updated return of income’ is filed under section 139(8A)
Section 276CC provides for punishment by way of prosecution in case a person fails to furnish a return of income within the due date stipulated and as required in section 139(1) or section 142(1)(i) or section 148 or section 153A.
The first proviso excludes the person from the above punishment in a case where the person has furnished the return of income before the expiry of the relevant assessment year.
Clause 81 of the Finance Bill, 2022 proposes to amend the provisions of section 276CC and proposes to insert in the above proviso to exclude from prosecution in a case where the person has furnished an updated return of income as per the provisions of section 139(8A).
Amendment of section 276CC.
81. In section 276CC of the Income-tax Act, in the proviso, in clause (ii), in sub-clause (a), after the words “expiry of the assessment year”, the words, brackets, figures and letter “or a return is furnished by him under sub-section (8A) of section 139 within the time provided in that sub-section” shall be inserted.
Explaining the proposed provisions of section 276CC
Clause 81 seeks to amend the section 276CC of the Act relating to failure to furnish returns of income.
The proviso to the said section, inter alia, provides that a person shall not be proceeded against under the said section, for failure to furnish the return of income in due time, if a return is furnished by such person before the expiry of the assessment year or the tax payable by such person, not being a company, on the total income determined on regular assessment does not exceed rupees ten thousand.
It is proposed to amend sub-clause (a) of clause (ii) of the said proviso to provide that a person shall not be proceeded against under the said section for failure to furnish in due time the return of income under sub-section (1) of section 139, if such a person has furnished return under sub-section (8A) of section 139 for the relevant assessment year.
This amendment will take effect from 1st April, 2022.
Scope of section 278A and section 278AA Widened
Sections 278A and 278AA are related to punishment with the prosecution against persons for failure to pay tax to the credit of Central Government under Chapter XVII-B for tax deducted at source. However, similar provisions for the offence with respect to tax collected at source under Chapter XVII-BB, providing for punishment with prosecution against persons failing to pay tax collected at source is not there under sections 278A and 278AA.
Therefore, it is proposed to include section 276BB under sections 278A and 278AA owing to the similar nature of offences that are punishable under section 276B and section 276BB.
Clause 82 seeks to amend section 278A of the Act relating to punishment for second and subsequent offences.
Amendment of section 278A.
82. In section 278A of the Income-tax Act, after the word, figures and letter “section 276B”, the words, figures and letters “or section 276BB” shall be inserted.
Section 276B provides for prosecution for failure to credit tax deducted at source to the Central Government and section 276BB provides for prosecution for failure to credit tax collected at source to the Central Government.
It is proposed to amend the said section 278A so as to bring section 276BB within the purview of said section.
Clause 83 seeks to amend section 278AA of the Act relating to punishment not to be imposed the certain cases.
Amendment of section 278AA.
83. In section 278AA of the Income-tax Act, after the words, figures and letter “or section 276B”, the words, figures and letters “or section 276BB” shall be inserted.
Section 276B provides for prosecution for failure to credit tax deducted at source to the Central Government and section 276BB provides for prosecution for failure to credit tax collected at source to the Central Government.
It is proposed to amend the said section 278AA so as to bring section 276BB also within the purview of said section.
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