Art of Drafting of “Statement of Facts” and “Grounds of Appeal” for filing of Appeal before Commissioner of Income-tax (Appeals)

Statement of Facts and Grounds of Appeal are most important, but it observed that these are largely casually framed. Once the assessee decides to challenge the tax demand, it has to file an appeal before the CIT (A). Form No. 35 requires to set out a statement of facts along with the grounds of appeal. Poor preparation of grounds of Appeal may result in a good case being lost. Ground of appeal represent the those issues which show the nature of the dispute between the assessee and the revenue. Before the actual representation of matters before the CIT (A), comes the stage of filing of the appeal i.e. the Statement of Facts and Grounds of Appeal, a step which does not get the deserved attention from assessees. In many cases, it is observed that the Statement of Facts is not filed before the CIT (A) or is filed in a cursory manner. The Statement of Facts and Grounds of Appeal before CIT (A) are the vital documents when appeals are filed before the Income-tax Appellate Tribunal (the “Tribunal”) and High Court. This is because in appeals before the Tribunal or the High Court, Statement of Facts and Grounds of Appeal taken before the CIT (A) compulsorily form part of the record before them.

Before the Tribunal, Statement of Facts cannot be filed. Therefore, it may not be possible for assessees to bring out new facts on record in its favour unless the same have been duly so brought latest before the first appellate authority. Furthermore, bringing out certain additional facts directly before the Tribunal may result in the matter being remanded back to the lower authorities, resulting in delay.

It is through the Grounds of Appeal before the CIT (A) that an assessee can bring out that a particular point was raised before the lower authorities. Therefore, assessees must file a detailed and comprehensive Statement of Facts and Grounds of Appeal before the CIT (A).

Statement of facts

The Statement of Facts should be comprehensive and complete. It must be used as an opportunity to bring additional facts on record if the same could not have been so brought before the Assessing Officer. All factual mistakes/ errors/ incorrect observations of Assessing Officer must be specifically mentioned, challenged and rebutted. This would include instances where the Assessing Officer has wrongly stated in the assessment order that certain details were called for and not submitted. Wherever possible, the correct position should be expressly mentioned.

According to Rule 45(2) of the Income Tax Rules, 1962, form of appeal should accompany grounds of appeal, statement of facts and the form of  verification. All the facts necessary for ground should be prepared in details and summary of the case on each ground should be prepared.

Contents of statement of facts

(a)  General introduction of case;

(b)  Facts leading to each additions;

(c)  Issues raised by Assessing Officer on item of addition;

(d)  Reference of submission made before Assessing Officer;

(e)  Reference of documents filed in support of submission;

(f)   Summary of finding of Assessing Officer;

(g)  Despite of observations of Assessing Officer with reasons.

The following points must be kept in mind while drafting the Statement of Facts:

(i)   STATEMENT OF FACTS SHOULD BE PREPARED CAREFULLY

 It is vital for the assessee to present the statement of facts (SOF) in first appeal in such a manner so as to bring out clearly the steps in the assessment/Penalty proceedings leading to the order under challenge.

(ii)   ALL FACTS SHOULD BE FREE FROM ANY CONTRADICTIONS

       All facts should be free from any contradictions. Summary of all the relevant facts should be attached in parts giving facts with important evidences independently or in the form of paper book. All these facts must be true as the saying goes “Every man has a right to his opinion but no one has a right to be wrong on facts”.

      The general clause about the assessee sufficient enough to understand about the assessee’s business and the grounds of appeal should be part of the preamble.

(iii) STATEMENT OF FACT SHOULD BE CLEAN AND NOT COLOURED BY OPINION

The statement of fact should however be clean and not coloured by opinion as coloured facts may back track on the taxpayer. The most important thing is that the facts must be truthful as no other thing is as important as the facts.

(iv) GROUND WISE STATEMENT OF FACTS

Ground wise statement of facts should then be submitted alongwith the citations of the case laws which are relied upon

(v) STATEMENT OF FACTS SHOULD NOT BE MIXED WITH GROUNDS OF APPEAL

Ground of Appeal

It is important to remember that the purpose of filing an appeal is to get redressal in regard to the perceived injustice. If this objective is to be achieved it is necessary to ensure that the grievance is properly communicated to the appellate authority. Making dramatic claims and bringing in irrelevant factors such as the social or economic status of the assessee, or the benefits society derives from his actions may serve no purpose. This is on account of the fact that the appellate proceedings under the tax laws are well structured. Therefore, if the cause of grievance i.e. the grounds are not stated properly at the time of filing of appeal, the arguing counsel would face substantial difficulty. More importantly the issue to be decided by the appellate authority is specifically the grounds of appeal raised by the appellant. If the grounds are not clear and precise it is difficult for the appellate authority to formulate and thereafter to adjudicate upon a proposition of law. One must keep in mind that even though oral representation is made before the CIT (Appeals) and the Tribunal, what remains as a matter of record is the written representation, and therefore, it is necessary that due care is taken in drafting.

Drafting of Grounds of Appeal

It is most important part of the appeal. Ground of appeal represents those issues which show the nature of the dispute between the assessee and the revenue. A ground of appeal is in fact nature of a claim thus it is distinguished from arguments because arguments are made in support of claim. There may be several arguments in support of a claim and all the arguments cannot form ground of appeal. Some following points must be kept in mind while drafting the Grounds of Appeal.

(i)  ALL THE CAUSES FOR GRIEVANCE NEED TO BE INCLUDED IN THE GROUNDS

 All the causes for grievance need to be included in the grounds. E.g. even if an assessee is aggrieved by the addition and the chances of success are limited on account of factual weaknesses or legal interpretation, the assessee should take that ground. A common example is reopening of assessment. The powers of assessing authority to reopen the assessment are now substantially wide. However, the law on the subject is continuously evolving and it may so happen that at the time that the appeal is fixed, an interpretation of law in favour of the assessee may be available. It is, therefore, advisable to include and highlight all controversies involved and all the grounds on which the assessee is aggrieved. They should not be vague or general in nature.

(ii)  GROUNDS SHOULD BE SIMPLE, CONCISE ANY SPECIFIC

 Ground of appeal should be simple, clear, precise, concise, specific and without any ambiguity. Grounds should avoid repetition. In the grounds of appeal, the assessee must only state the cause of grievance and avoid using long sentences. One has to strike the right balance between grounds being adequately clear without any significant matter being omitted and yet concise. But the grievance to be raised must not be left out.

(iii)  GROUNDS MUST BE BRIEF AND AVOID ARGUMENTS

 Nature of dispute and relief expected should be clearly mentioned and highlighted. The grounds must be brief and should not be argumentative. A ground of appeal is in fact nature of a claim thus it is distinguished from arguments because arguments are made in support of claim. There may be several arguments in support of a claim and all the arguments cannot form ground of appeal.

(iv)  GROUNDS SHOULD NOT CONTAIN INTEMPERATE LANGUAGE

(v) ISSUES SUCH AS LACK OF PROPER OPPORTUNITY OF BEING HEARD OR VIOLATION OF ANY OTHER       PRINCIPLE OF NATURAL JUSTICE MUST BE SPECIFICALLY TAKEN IN THE GROUNDS OF APPEAL - VERY FIRST SPECIFIC GROUND

     Issues such as lack of proper opportunity of being heard or violation of any other principle of natural justice (such as denial of opportunity of cross examination, relying on material behind assessee’s back etc.) must be specifically brought out.  In case the time limit for the compliance is very short or if further opportunity as should be given was not provided or in case copies of statements recorded, even asked for, were not provided or when the books were in the custody of the department without being available either at the time of return or hearing or there is any other non-observance of principles of natural justice, all these or any of them can be stressed as a preliminary ground. In case opportunity of being heard is not granted to the assessee, the same should be clearly mentioned in grounds. Not providing an opportunity to the appellant, should specifically be mentioned in the statement of facts as well as in the grounds of appeal. It can be be taken as an independent ground in the grounds of appeal. This will also help the assessee’s case for admission of additional evidence under Rule 46A of the Income-tax Rules, 1962, if required.

As lack of opportunity is a ground relating to jurisdiction, therefore, if possible it should be taken as the very first specific ground.

(vi)  GROUNDS MUST BE SERIALLY NUMBERED

 Grounds must be serially numbered and if an assessee is aggrieved by the addition for 2 or 3 reasons, the ground should be divided into sub-clauses. For example - a particular disallowance may be erroneous for 2 or 3 different reasons, and those 2 or 3 different reasons may be stated by way of sub-clauses.

(vii)  SEPARATE GROUND FOR EACH ADDITION/ ISSUE MUST BE TAKEN

        In case of more than one issue involved in appeal, draft one separate ground for one  issue and preference of grounds should be decided.

(viii)  AVOID REFERRING CASE LAW WHILE DRAFTING GROUNDS, IF ANY

   Grounds should not refer case law unless binding decisions

(ix)  ALL GROUNDS ARE REQUESTED TO BE DEALT WITH

 The Appellate Authority is bound to deal with all the grounds taken by the assessee. Where objection is taken against the jurisdiction of the Assessing Officer, it has to be dealt with. It should be decided as a preliminary issue before embarking on the merits of the controversy. It is desirable that both jurisdiction  and merits are decided, where both are contested, though it would ordinarily not be necessary to deal with merits, if jurisdiction is lacking. All the same, a second round is avoided, in case the objections against the jurisdiction are found to be not maintainable.

(x)   ALTERNATIVE PLEA, WITHOUT PREJUDICE GROUNDS

       Alternative plea, without prejudice grounds must be taken, where the circumstances so require;

Grounds of Appeal could be:

(i)       FACTUAL GROUNDS:

For example: Method of accounting, available records etc.

(ii)    LEGAL GROUNDS:

For example: Misinterpretation of law, jurisdictional grounds etc.

(iii)   GROUNDS OF PROCEDURAL VIOLATIONS (TECHNICAL GROUNDS):

For example: Notice served beyond limitation, notice not served , Invalid notice , Violation of Principles of natural justice, Inadequate hearing etc.

Specimen draft of Grounds of Appeal

Grounds of appeals should be drafted in logical sequences and be numbered properly. The first ground should be a general ground – Income assessed and Income declared. In the last ground, crave, leave for addition, modification, substitution or withdrawal of grounds of appeal. A specimen draft of grounds of appeal is as under:—

(1) FIRST GROUND TO BE GENERAL, CHALLENGE AGGREGATE ADDITIONS:

“That the appellant denies his liability to be assessed at total income of .............. against returned income of ................. and accordingly denies his liability to pay tax and interest demanded thereon”.

OR

“That on the facts and in the circumstances of the case and in Law, the Ld. Assessing Officer has erred in assessing the income of the appellant at .............., instead of .............. returned. As such Aggregate additions of .............. may please be deleted”.

“That having regard to the facts and circumstances of the case, Ld. Assessing Officer has erred in law and on facts in making above the additions and disallowance without giving an adequate opportunity of being heard and by not observing the principles of natural justice”; or

“That the conclusion and inferences of the Assessing Officer are based on suspicious, conjectures, surmises and extraneous and irrelevant consideration”.

(2)   LEGAL GROUNDS [Eg: MISINTERPRETATION OF LAW, JURISDICTIONAL GROUNDS etc.]

“That on the facts and in the circumstances of the case and in law, the Assessing Officer has erred in framing the assessment under section 147 of the Act, without following the mandatory procedure prescribed under sections 147 to 151 of the Act. As such, the assessment may please be held as bad in law and additions made thereon may kindly be deleted.”

 That the Ld. Assessing Officer has erred on facts and in law in reopening of the assessment by invoking the provisions of section 147 of the Income Tax Act when no fresh facts or material were available to the assessing authority after the completion of the assessment under section 143(3) of the Act.

(3)  PRINCIPLES OF NATURAL JUSTICE

 That having regard to the facts and circumstances of the case, the Ld. Assessing Officer has erred both on facts and in law in deciding the appeal ex parte in violation of the principles of natural justice and without granting to the assessee a fair, proper and meaningful opportunity and the findings of the Ld. Assessing Officer that the assessee is not serious and sincere to pursue the case is wholly incorrect and in disregard of the fact that there was reasonable cause for alleged non-compliance on the dates fixed for hearing. OR

“That having regard to the facts and circumstances of the case, Ld. Assessing Officer has erred in law and on facts in making above the additions and disallowance without giving an adequate opportunity of being heard and by not observing the principles of natural justice”

(4)  SPECIFIC GROUNDS

 SECTION 41(1)

 “That having regard to the facts and circumstances of the case, the Ld. Assessing Officer has erred on facts and in law in making addition of ...... under section 41(1) of the Act in contravention of the provisions of the section without appreciating the fact that ledger account statement submitted by the assessee of the creditor M/s.............................................. for the F.Y........... relevant to assessment year ............ has not been contradicted by either the creditor and the Assessing Officer merely because such liabilities are outstanding for the last many years, it cannot be presumed that the said liabilities have ceased to exit”.

(5)  DISALLOWANCES BASED ON THE PAST HISTORY OF THE CASE

“That having regard to the facts and circumstances of the case, the Ld. Assessing Officer erred on facts and in law in making disallowances purely on the past history of the case without bringing any fresh material on record to give a finding as to their disallowance in a new and fresh manner”.

(6)  REJECTION OF BOOKS OF ACCOUNT

“That having regard to the facts and circumstances of the case, the Ld. Assessing Officer has erred on facts and in law in rejecting books of account which have been duly audited and the audit of which has not been disputed by the Assessing Officer at any stage of the assessment proceedings to be invalid and legally untenable mere non-filing of the details of...... cannot lead to the inference that books of account are not proper and are liable to be rejected”.

(7)  INVOKING PROVISIONS OF SECTION 145

“That having regard to the facts and circumstances of the case, the Ld.  Assessing Officer has erred on facts and in law in invoking the provisions of section 145 and rejected the audited accounts without  pointing out any specific defects or shortcomings in the audited accounts without pointing out any defect in the accounts which could lead to the belief that proper profit cannot be deducted from the books of account”.

(8)   HOLDING EXPENSES TO BE CAPITAL IN NATURE

“That having regard to the facts and circumstances of the case, the Ld. Assessing Officer has erred on facts and in law in making disallowance of a sum of .............on account of repair and maintenance expenses holding them to be capital in nature, that too without any basis and merely on the basis of surmise and conjectures and by making incorrect observations and giving incorrect findings”.

(9)  STAFF WELFARE EXPENSES

“That the Ld. Assessing Officer has apparently erred on facts and in law in making disallowance/addition at ............ out of staff welfare expenses incurred only for the purpose of business, even when its details are contained in the vouchers”.

(10) DIFFERENCE AS PER TDS CERTIFICATE ETC.

  “That having regard to the facts and circumstances of the case, Learned Assessing Officer has erred on facts and in law in making on addition of ............allegedly being difference between commission as per TDS certificate and commission as shown in the Profit & Loss account”.

(11)  RECORDING INCORRECT FACTS & IRRELEVANT OBSERVATIONS

  “That having regard to the facts and circumstances of the case, Ld. Assessing Officer has erred on facts and in law in assessing it as AOP and taxing it at maximum marginal rate and that too by recording incorrect facts and irrelevant observations”.

(12)  REOPENING OF CASE

  “That he Ld. Assessing Officer has erred in reopening the case of the appellant under section 148 of the Income Tax Act, 1961 and hereby making an assessment under section 147 read with section 143(3) of the Income-tax Act”.

(13)  ALWAYS TAKE A RESIDUARY GROUND

  “That the appellant craves, leave to add, alter, amend or vary and/or withdraw any or all of the aforesaid grounds of Appeal or at time of hearing of the above appeal”.

   OR

   “The Appellant craves to add, alter, delete, modify or withdraw any of the above grounds of appeal”.

(14) OTHER MISCELLENEOUS GROUNDS

  “That the Ld. Assessing Officer has misdirected himself in law in levying penalty under section 271(1)(c) of ................ and his order is thus prima facie devoid of merits and contrary to law and needs to be quashed and prayed for accordingly”.

  “That the aforesaid grounds of appeal are without prejudice to each other.

  

  “That the Appellant prays that the addition/disallowance of ................... made in respect of/out of ................ be deleted.”

(15) LAST GROUND

 In the last ground, a prayer to crave, leave for addition, modification, substitution or withdrawal of grounds of appeal must be made in the end.

 That the relief prayed for may kindly be allowed and the order of the Assessing Officer may kindly be quashed, set aside, annulled or modified.

PENALTIES IN SEARCH CASES

Default in complying with provisions of or with conditions prescribed under the Income-tax Act would attract certain penalty and in critical cases prosecutions as well. 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. Chapter XXI of Income-tax Act, 1961, contain various provisions empowering an Income-tax Authority to levy penalty in case of certain defaults in search cases.

Penalty in case of Search

At present, the penalty provisions existing in Income-tax Act relating to search and seizure action carried out under section 132 of the Act are summarised as under : –

S. No.	Section	Applicability
1.	270A	Penalty for under - reporting and misreporting of income [With effect from assessment year 2017-18]
	271(1)(c) read with Explanation 5A [Applicable upto assessment year 2016-17]	Applicable to search initiated on or after 01.06.2007 and for the years other than specified previous years defined in section 271AAA / 271AAB (1) / (1A)
2.	271AAA	Applicable to Search carried out on or after 01.06.2007 but before 01.07.2012 AND for specified previous years.
	271AAB (1)	Applicable for search initiated on or after 01.07.2012 but before 15.12.2016 AND for specified previous years
	271AAB (1A)	Applicable for search initiated on or after 15.12.2016 AND for specified previous years

(1)  Penalty for under - reporting and misreporting of income [Section 270A]

       [With effect from assessment year 2017-18]

Section 270A has been inserted by the Finnce Act, 2016, with effect from 01.04.2017 i.e. from the assessment year 2017-18. Under this section, the Assessing Officer, CIT (Appeals) or Principal CIT or CIT may, during the course of any proceedings under the Act, levy penalty if a person has under-reported his income. The penalty may range from 50% to 200%.

Under-reported income [Section 270A(2)]

A person shall be considered to have under-reported his income, if –

(a)   the income assessed is greater than the income determined in the return processed under clause (a) of sub-section (1) of section 143;

(b)    the income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished;

(c)    the income reassessed is greater than the income assessed or reassessed immediately before such reassessment;

(d)    the amount of deemed total income assessed or reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income determined in the return processed under clause (a) of sub-section (1) of section 143;

(e)     the amount of deemed total income assessed as per the provisions of section 115JB or section 115JC is greater than the maximum amount not chargeable to tax, where no return of income has been filed;

(f)    the amount of deemed total income reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income assessed or reassessed immediately before such, reassessment;

(g)   the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.

Computation of under- reported income [Section 270A(3)]

(i)   Income is assessed for the first time

       (a)   Return is furnished

Ø  Assessed income – Income as per intimation under section 143(1)(a)

       (b)   Return is not furnished

                (A)   In the case of a Company, firm or local authority

Ø  Assessed income

                (B)   Others

Ø  Assessed Income – Maximum amount not chargeable to tax

(ii)   Income is reassessed

        (a)    Reassessed income – Assessed income as per preceeding order

        (b)    Loss case

Ø  Difference between income or loss assessed and loss claimed

Intangible Addition Section 270A (4) & (5)

Section 270A(4) is somewhat similar to erstwhile explanation 2 to section 271(1) and provides that where the source of any receipt, deposit or investment in any assessment year is claimed to be an amount added to income or deducted while computing loss, as the case may be, in any preceding assessment year and no penalty was levied in such preceding assessment year then, the underreported income shall include such amount as is sufficient to cover such receipt, deposit or investment.

Further, section 270A(5) specifies that the amount for the purpose of subsection (4) shall firstly be from the immediately preceding assessment year and then from the year preceding that and so on.

Under-reporting exclusions - Addition to returned Income – No Under-Reported Income [Section 270A(6)]

Section 270A(6) prescribe following six situations, when addition to retuned income will not be considered as under-reported income.

(i)   Bona fide

       (a)   Assessee offer an explanation

       (b)   Assessee should have disclosed all material facts to substantiate the explanation

       (c)  the Assessing Officer/CIT or PCIT/CIT(A) is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered

(ii)   Estimated amount of under-reported income if :

       (a)   Amounts are correct and complete

       (b)   But method employed is such that income cannot be deducted therefrom

(iii)   Estimated amount of under-reported income if :

         (a)  Ahas estimated addition/ disallowance on same issue but on a lower side

         (b)  offered to tax such lower amount

         (c)  Disclosure of all related material facts

(iv)   Additions on account of ALP (arm’s length price) determined by Transfer Pricing Officer (TPO)

         The amount of under-reported income is represented by any Transfer Pricing addition made in conformity with the ALP (arm’s length price)  determined by the Transfer Pricing Officer, where the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X, and, disclosed all the material facts relating to the transaction Transfer Pricing adjustments of information maintained, transaction reported ad disclosure of facts

(v)    Search cases covered by Section 271AAB

The amount of undisclosed income referred to in section 271AAB

Penalty For Under-Reporting [Section 270A(7)]

The penalty referred to in section 270A(1) shall be a sum equal to 50% of the amount of tax payable on under-reported income

Where the under-reporting is because of misreporting than provision of Section 270A(6) shall not apply [Section 270A(8)]

Section 270A(8) provides that incase where the under-reporting is because of misreporting than provision of sub-section(6) shall not apply (i.e. exceptions not applicable in case of Misreporting) and also that the penalty shall be levied at 200% of the amount of tax payable on under reported income.

“Misreporting of income” means [Section 270A(9)]

As per section 270A(9), the cases of misreporting of income reffered to in section 270A(8) shall be the following namely:-

(a)       Misrepresentation or suppression of facts;

(b)      Failure to record investments in the books of account;

(c)       Claim of expenditure not substantiated by any evidence;

(d)      Recording of any false entry in the books of account;

(e)      Failure to record any receipt in books of account having a bearing on total income; and 

(f)        Failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.

KEY NOTE

In the above cases penalty @ 200% of the tax leviable on the amount of Unreported Income. Under-reporting shall be considered as misreporting.

Tax payable in respect of the under-reported income [Section 270A(10)]

The tax payable in respect of the under-reported income shall be—

(a)  where no return of income has been furnished and the income has been assessed for the first time, the amount of tax calculated on the under-reported income as increased by the maximum amount not chargeable to tax as if it were the total income;

(b)  where the total income determined under clause (a) of sub-section (1) of section 143 or assessed, reassessed or recomputed in a preceding order is a loss, the amount of tax calculated on the under-reported income as if it were the total income;

(c)   in any other case determined in accordance with the formula—

        (X - Y)

        where,

        X =  the amount of tax calculated on the under-reported income as increased by the total income determined under clause (a) of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order as if it were the total income; and

        Y =   the amount of tax calculated on the total income determined under clause (a) of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order.

      

Quantum of penalty that can be levied under section 270A

If income is under-reported due to misreporting of income, then penalty shall be levied at 200% of tax payable on such under-reported income.However, if income is under-reported due to any other circumstances, then penalty shall be 50% of tax payable on under-reported income.

In case of under reporting	50% of the amount of tax payable on the under reported income
In case of Misreporting of income	200% of the amount of tax payable on under reported income

KEY NOTE

For Example 

If your income is say Rs. 20,00,000 and you have not reported an income of Rs 4,00,000 while filing your ITR. Then Assessing Officer can impose a penalty under section 270A of about Rs 60,000 (50% of the tax on under-reported income, i.e., Rs 1,20,000 (400000*30%)). However, If the under reporting is due to misreporting of income then penalty can be up to 200% of the tax on unreported income. That means  200% of Rs. 1,20,000 (400000*30%) amounting to Rs. 2,40,000.

     

     Penalty under section 271(1)(c) of the Income-tax Act, 1961, read with the Explanation 5A thereof  [Applicable upto Assessment year 2016-17]

Penalty under section 271(1)(c) of the Act, is leviable for concealment of income or furnishing inaccurate particulars of such income. Whereas, Explanation 5A creates a deeming fiction in respect of undisclosed income/assets declared during the course of search as follows:

Where undisclosed asset/income is found during the course of search initiated under section 132 on or after 01.06.2007 for any previous year which has ended before the date of search and,—

(a)	where the return of income for such previous year has been furnished before the said date but such income has not been declared therein; or
(b)	the due date for filing the return of income for such previous year has expired but the assessee has not filed the return,

then, notwithstanding that such income is declared by him in any return of income furnished on or after the date of search, he shall, for the purposes of imposition of a penalty under section 271(1)(c), be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income.

Text of Explanation 5A to Section 271(1)(c)

      Explanation 5A.—Where, in the course of a search initiated under section 132 on or after the 1st day of June, 2007, the assessee is found to be the owner of—

(i )  any money, bullion, jewellery or other valuable article or thing (hereafter in this Explanation referred to as assets) and the assessee claims that such assets have been acquired by him by utilising (wholly or in part) his income for any previous year; or

(ii )  any income based on any entry in any books of account or other documents or transactions and he claims that such entry in the books of account or other documents or transactions repre­sents his income (wholly or in part) for any previous year,

       which has ended before the date of search and,—

     (a)  where the return of income for such previous year has been furnished before the said date but such income has not been declared therein; or

     (b)  the due date for filing the return of income for such previous year has expired but the assessee has not filed the return,

     then, notwithstanding that such income is declared by him in any return of income furnished on or after the date of search, he shall, for the purposes of imposition of a penalty under clause (c) of sub-section (1) of this section, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income.

Section 271(1)(c) : Penalty – Concealment – Penalty imposed on addition made on the basis of confessional statement of assessee and supplier after search was held to be valid.

The levy of penalty was not on estimated basis but based on confessional statement of the Assessee and the supplier post the search action is based on the incriminating evidence which was revealed on the proceedings pursuant to search and seizure action that led to the addition and hence the levy of penalty is justified. However, the penalty shall be levied to the extent of tax sought to be evaded relating to the additions finally sustained by Tribunal - (Related Assessment year 2007-08 , 2008-09)

[Dr. P. Sasikumar v. CIT (2018) 163 DTR 358 (Ker)]

No penalty for mere non-reflection of Income surrendered voluntarily in ITR

In the present case, the assessee not only surrendered the income during the course of survey but also paid the tax thereon before filing the return of income. However, the assessee did not reflect the surrendered amount and tax paid thereon in the said return but when the mistake was pointed out, the assessee surrendered that income. It is well settled that the assessment proceedings and the penalty proceedings are two different and separate proceedings. Therefore, even when some addition is to be made to the income of the assessee, it is not always necessary that the penalty under section  271(1)(c) of the Act is to be levied. In the present case, it cannot be said that the surrendered income was not voluntarily and the assessee wanted to conceal the income since the tax had already been paid on the amount which was surrendered during the course of survey.

Moreover, the Assessing Officer in the notice issued under section 274 r.w.s. 271 of the Act (copy of which is placed ate page no. 28 of the assessee’s paper book) was not sure as to whether the assessee concealed the particulars of income or furnished inaccurate particulars of such income which is evident from the said notice wherein neither of the two was struck off. (Related Assessment Year : 2009-10)

[Sudhir Khandelwal v. ITO - Appeal Number : ITA No. 4950/Del/2017 - Date of Judgement : 07.05.2018 (ITAT Delhi)]

Penalty under section 271(1)(c) can not be imposed based on original Return in section 153A assessment

When the revised return is accepted and the income is assessed as per the revised income, there is no scope for penalty. In the case of Kirit Dahyabhai Patel v. ACIT, (2017) 80 Taxmann.com 162 (Guj), the Hon’ble High Court held that in view of specific provision of Section 153A, the return of income filed in response to notice under section 153A is to be considered as return filed under section 139, as the Assessing Officer has made assessment on the said return and, therefore, the return has to be considered for the purpose of penalty under section 271(1)(c) of the Act and the penalty is to be levied on the income assessed over and above the income returned under section 153A, if any. Admittedly, in this matter both the returned income and the assessed income are nil. On this ground also, we cannot sustain the penalty order. (Related Assessment Year : 2009-10) to 2013-14

(M/s OSE Infrastructure Ltd. v. ACIT Appeal Number : ITA Nos. 5891 to 5895/Del/2016 - Date of Judgement : 14.08.2018 (ITAT Delhi)

(2)  Penalty  under section 271AAB - where search has been initiated on or after 01.07.2012

       

Where search has been initiated on or after 15.12.2016 [Section 271AAB (1A)]

Section	Conditions for applicability of the penalty	Quantum of Penalty as % of Undisclosed income of specified previous year
271AAB(1A)(a)	If the following conditions are satisfied: (a)  Assessee must have admitted the undisclosed income in statement recorded under section  132(4) (b) Assessee specifies & substantiates the manner in which such undisclosed income was derived (c) Pays Tax & Interest on such undisclosed income before the specified date; (d) Files the Return of Income for specified previous year declaring such undisclosed income therein	30% of undisclosed income of specified previous year
271AAB(1A)(a)	60% of undisclosed income of the specified previous year in any other case.	60% of undisclosed income of the specified previous year

Where search has been initiated on or after 01.07.2012 but before 15.12.2016 [Section 271AAB (1A)]

Section	Conditions for applicability of slab of the penalty	Quantum of Penalty as % of Undisclosed income of specified previous year
271AAB(1)(a)	If the following conditions are satisfied: (a)  Assessee must have admitted the undisclosed income in statement recorded under section 132(4) (b) Assessee specifies & substantiates the manner in which such undisclosed income was derived (c) on or before the specified date— (i)     pays the tax, together with interest, if any, in respect of the undisclosed income; and (ii)    furnishes the return of income for the specified previous year declaring such undisclosed income therein.	10% of undisclosed income of specified previous year,
271AAB(1)(b)	If the following conditions are satisfied: (a) Assessee does not admit the undisclosed income in statement recorded under section 132(4) (b)  on or before the specified date—       (i)  declares such income in the return of income furnished for the specified previous year; and      (ii)  pays the tax, together with interest, if any, in respect of the undisclosed income.	20% of undisclosed income of specified previous year,
271AAB(1)(c)	in any other case i.e. where undisclosed income of specified previous year , if it is not covered by the provisions of clauses (a) and (b) of section 271AAB(1).	30% to 90% – (Flat 60% w.e.f. 01.04.2017) of undisclosed income of specified previous year,

Penalty - Search initiated on or after 1st day of July 2012 - Levy of penalty on the basis of loose sheets found on the course of search was held to be not justified as loose sheets represented only projection -Imposition of penalty is directory and not mandatory

Dismissing the appeal of the revenue the Tribunal held that ; Levy of penalty on the basis of loose sheets found on the course of search was held to be not justified as loose sheets represented only projection .Imposition of penalty is directory and not mandatory. (Related Assessment year 2013-14)

[ACIT v. Marvel Associates. (2018) 194 TTJ 338 : 170 ITD 353 : 166 DTR 409 (ITAT Vishakha)]

 Where search has been initiated before 01.07.2012

Section	Conditions for applicability of the penalty	Quantum of penalty
271AAA	·     where search has been initiated  before 01.07.2012 •  undisclosed income found	10% of undisclosed income

Penalty-Search initiated on or after 1st day of July 2012 - Disclosure of undisclosed income - Disclosed manner of earning of income and paid tax along with interest - liable to pay penalty at 10% and not at 30%

Tribunal held that, when the assessee suomotu admitted undisclosed income and substantiated manner in which such undisclosed income was earned and had also paid tax together with interest, assessee is  liable to pay penalty at rate of 10 per cent in terms of clause (a) of section 271AAB(1) but not under clause (c) at rate of 30 per cent of section 271AAB(1). (Related Assessment Year : 2013-14)

[ACIT v. Vishal Agarwal. (2019) 175 DTR 127 : 174 ITD 125 : (ITAT Kolkata); ACIT v. Shailaja Park (P) Ltd (2019) 175 DTR 127 (ITAT Kolkata); ACIT v. Vikash Agarwal (2019) 175 DTR 127 (ITAT Kolkata)]

Penalty - Search initiated on or after 1st June, 2007 – Failure to specify and substantiate manner in which undisclosed income was derived rather embarked upon mercy plea that he was making surrender to buy peace of mind and avoid litigation - levy of penalty is held to be justified

Pursuant to notice under section 153A, assessee filed its return wherein certain income was surrendered on account of unexplained investment in construction of a project and difference in stock. Assessing Officer  levied the  penalty for failure to specify and substantiate manner in which undisclosed income was arrived. CIT(A) confirmed the order of Assessing Officer. On appeal the Tribunal held that failure to specify and substantiate manner in which undisclosed income was derived rather embarked upon mercy plea that he was making surrender to buy peace of mind and avoid litigation- levy of penalty is held to be justified. (Related Assessment year 2009-10)

[Narsi Iron & Steel (P) Ltd. v. DCIT (2019) 175 ITD 213 (ITAT Delhi)]

Search initiated on or after 1st June, 2007 – Manner of earning the undisclosed income to be given in the statement under 132(4) only if a question is asked to that effect- Deletion of penalty is held to be justified

As per sub-section (2) of section 271AAA, no penalty is leviable under sub-section (1) if the assessee in his statement recorded under section 132(4) admits the undisclosed income, specifies the manner in which such income has been earned and satisfies certain other conditions. Held that where the assessee had admitted the undisclosed income but not specified the manner in which such income was earned in his statement under section 132(4), penalty under the section was still not leviable since the Officer had not asked a question requiring the assessee to specify the manner in which such income was earned.  Appeal of revenue is dismissed .

[PCIT v. Phoenix Mills Ltd. (2019) 307 CTR 700 : 175 DTR 433 (Bom)]

Search initiated on or after 1st June, 2007 –Manner in which undisclosed income earned was not satisfied -Deletion of penalty was held to be not valid

Allowing the appeal of the revenue the Court held that ; the appellate authorities misdirected themselves in holding that the conditions under Section 271AAA(2) were satisfied by the assessee. The second condition for availing of the immunity from penalty was that the assessee should have specified in the statement under Section 132(4) the manner in which such income stood derived. The assessee had merely stated that the sums advanced were undisclosed income. However, she had not specified how she had derived that income and under what head it fell (rent, capital gains, professional or business income out of money lending, source of money, etc.). Unless such facts were mentioned with some specificity, it could not be said that the assessee had fulfilled the requirement that she had in her statement under Section 132(4), “substantiated the manner in which the undisclosed income was derived”. The order of the appellate authorities deleting the penalty was erroneous. (Related Assessment Year : 2009 -10)

[CIT v. Ritu Singal (Smt) (2018) 403 ITR 97 : 303 CTR 738 : 164 DTR 153 (Del)]

Section  271AAA : Penalty – Search initiated on or after 1st June, 2007 –When no specific query to substantiate the manner of earning undisclosed income was put forward to the assessee by the authorised officer levy of penalty was held to be not valid when the taxes were paid on the amount surrendered

Dismissing the appeal of the revenue the Tribunal held that , When no specific query  to substantiate the manner of earning undisclosed income was put forward to the assessee by the authorised officer levy of penalty was held to be not valid when the taxes were paid on the amount surrendered (Related Assessment year 2010-11  )

[ACIT v. Beena Kedia (ITA No 4807/4808/Del/2015 dated 28.02.2018) (ITAT Delhi)]

Penalty under section 271AAB / 270A 

 PROVISIONS ILLUSTRATED

Assessment Year	Case - 1	Case -2
Date of search	24.06.2019	17.12.2019
2020-21	271AAB	271AAB
2019-20	271AAB	270A
2018-19	270A	270A
2017-18	270A	270A
2016-17	271(1)(c)	271(1)(c)
2015-16	271(1)(c)	271(1)(c)
2014-15	271(1)(c)	271(1)(c)

Time limit for passing the penalty order [Section 275]

S. No.	Particulars	Time limit for imposing penalty
1.	Where the order of the Assessing Officer is contended before the CIT(A) or ITAT
	(a) Where order is passed by CIT(A) and no appeal is made to ITAT	1 year from the end of Financial Year in which the order of CIT(A) is received
	(b)  Where order is passed by the ITAT	6 months from the end of the month in which order of the ITAT
2.	Where revision application has been made under section 264	6 months from the end of the month in which revision order under section 264 is passed
3.	No appeal/ revision application has been made/filed	(a)  End of Financial Year in which the assessment proceedings are completed; or (b)  6 months from the end of the month in which the penalty proceedings are initiated Ø  Whichever is later

Penalty under section 271F for failure to furnish return under section 153A

Facts in brief are that for all the assessment years under consideration, notice under section 153A was issued on 21.9.2007 calling for the assessee to file his return of income. The assessee did not file his return of income under section 153A. As no return of income was filed by the assessee, penalty proceedings under section 271F of the Act for non-filing the return of income, were initiated and show cause notice was issued to the assessee. The assessee did not file any reply. Therefore, the Assessing Officer after examining the provisions of section 271F and 153A, concluded that the provisions of section 139 are applicable in respect of returns to be  filed under section 153A. He, therefore, levied the penalty of Rs.5,000/- for each of the assessment years.

Ld CIT (A) following the order for the assessment year 2000-2001, confirmed the Assessing Officer’s action. Being aggrieved, the assessee was in appeal before the Tribunal. It was held that “From a bare reading of both sections, it is evident that the provisions of section 271F are attracted when a person is required to furnish the return in accordance with section 139(1) or by provisos of that section. Section 153A starts with non-obstante clause and the purpose is only to specify separate time limit for filing the return. The only distinction in section 153A is that the Assessing Officer is required to issue notice to the assessee requiring him to furnish the return within such period, as may be specified in notice, but otherwise the provisions of the Act have been made applicable accordingly, as if such return were a return required to be furnished under section 139. Therefore, all the consequences following for failure to file the return under section 139 will follow under section 153A also. We, therefore, do not find any infirmity in the order of ld CIT (A) to interfere and, accordingly, uphold the same.” (Related Assessment Years : 2001 to 2001 to 2006- 2007)

[Kashinath Tapuriah v. DCIT - Date of Judgement : 16.04.2010 (ITAT Mumbai)

Other Penalties

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

Text of Section 272A(1)(a)

      272A. (1) If any person,—

(a) being legally bound to state the truth of any matter touching the subject of his assessment, refuses to answer any question put to him by an income-tax authority in the exercise of its powers under this Act;

Quantum of penalty

Maximum : Rs. 10,000 for each such default or failure

       Maximum : Rs. 10,000 for each such default or failure

Authority by whom leviable [Section 272(3)(a)]

Income tax authority not lower in rank than a Joint Director or a Joint Commissioner, by such income-tax authoritty

       No order under this section shall be passed by any income-tax authority referred to in sub-section 272(3)(a) unless the person on whom the penalty is proposed to be imposed is given an opportunity of being heard in the matter by such authority.

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

Text of Section 272A(1)(a)

272A. (1) If any person,—

(b) refuses to sign any statement made by him in the course of any proceedings under this Act, which an income-tax authority may legally require him to sign;

Quantum of penalty

Maximum : Rs. 10,000 for each such default or failure

Maximum : Rs. 10,000 for each such default or failure

Authority by whom leviable [Section 272(3)(a)]

     Income tax authority not lower in rank than a Joint Director or a Joint Commissioner, by such income-tax authoritty

  No order under this section shall be passed by any income-tax authority referred to in sub-section 272(3)(a) unless the person on whom the penalty is proposed to be imposed is given an opportunity of being heard in the matter by such authority.

(3) 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)]

 Text of Section 272A(1)(c)

 272A. (1) If any person,—

(c) to whom a summons is issued under sub-section (1) of section 131 either to attend to give evidence or produce books of account or other documents at a certain place and time omits to attend or produce books of account or documents at the place or time.

Quantum of penalty

Maximum : Rs. 10,000 for each such default or failure

Maximum : Rs. 10,000 for each such default or failure

Authority by whom leviable [Section 272(3)(a)]

Income tax authority not lower in rank than a Joint Director or a Joint Commissioner, by such income-tax authoritty

No order under this section shall be passed by any income-tax authority referred to in sub-section 272(3)(a) unless the person on whom the penalty is proposed to be imposed is given an opportunity of being heard in the matter by such authority.

Argument that penalty under section 272A(1)(c) can be levied only for non-compliance of section 131(1) and not section 131(IA) is not correct because section 131(1A) has to be read with section 131(1)

So far as the arguments of the ld. counsel for the assessee that there was a reasonable cause on the part of the assessee in not submitting the details as called for by the ADIT (Investigation) is concerned, we find from the record that there was a deliberate defiance on the part of the assessee for non- submission of the same under the pretext that some of the details are available in the records of the Income Tax Department or some of the details are available in the Website of the Ministry of Corporate Affairs. On facts, the penalty is justified because the conduct of the assessee is not bona fide. There is deliberate and complete defiance to the summons issued under section 131(1A).

       [Young Indian v. ADIT – Date of pronouncement : 30.08.2018) (ITAT Delhi)]

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