The main object of penal provisions in the Act is
to enforce compliance of law and also act as a deterrence against defaults. Penal
provisions needs to be invoked judiciously wherever necessary, as prescribed in
the Act. Penalty may be imposed only if it is proved and not merely because it
is to do so
In this article, one of the important
areas covered is ‘How to Draft penalty Orders. The tax assessment depends on
complete holistic exercise of application of laws and reflecting it in the penalty
orders. Many times, because of hurriedly drafted penalty order not containing
sufficient materials or discussions, or is not logically coherent can go
against the revenue in appellate forums resulting in loss of efforts and time. Hence,
a sustainable penalty order observing all the principles of natural justice in
form and in the procedure involved is the key to successful revenue
mobilization. This article will give some pointers and guidance to the regarding
how to draft penalty orders.
Procedure for levy of penalty [Section 274]
[1] Hearing opportunity to be given [Section 274(1)]
Section 274(1)
provides that order imposing a penalty under Chapter XXI shall not be made
unless the assessee has been heard, or has been given a reasonable opportunity
of being heard. If the penalty order is passed without giving any opportunity
to the assessee of being heard, such order is void ab-initio as it is violative
of principles of natural justice.
[2] Requirement
of prior approval of Joint Commissioner [Section 274(2)]
The prior approval of Joint
Commissioner has been made obligatory under sub-section (2) of Section 274
where order is passed
(a) by the Income-tax Officer imposing a penalty
exceeding Rs. 10,000;
(b) by the
Assistant Commissioner or Deputy Commissioner imposing a penalty exceeding Rs. 20,000
No approval is required to any
amount of penalty imposed if it is imposed by Joint Commissioner or Joint
Commissioner (Appeals) or Commissioner (Appeals).
[3] Overview of Faceless Penalty
(Amendment) Scheme, 2022 [Section 274(2A)]
[CBDT Notification 54/2022, Dated
27.05.2022]
(i) Allowing mandatory
personal hearing through electronic mode to any taxpayer who has sought a
hearing.
It
has been provided that where the request for personal hearing has been
received, the income-tax authority of relevant penalty unit shall, instead of
Regional Facessless Penalty Centre, allow such hearing, through National
Faceless Penalty Centre. Hearing shall be conducted exclusively through video
conferencing or video telephony, including use of any telecommunication
application software which supports video conferencing or video telephony.
Earlier,
for a personal hearing, the taxpayer or any other person was required to obtain
approval from the Chief Commissioner of Income-tax or Director General of
Income-tax who is in charge of RFPC. This requirement has been done away this.
Thus, the concerned PU shall allow personal hearing through the NFPC.
(ii) Regional Faceless Penalty Centres (RFPC)
removed from the Scheme
Omitted
the Regional Faceless Penalty Centre from the Faceless Penalty Scheme and
provides that electronic records shall be authenticated by the National
Faceless Penalty Centre and even hearing should be done via them and not
regional faceless penalty centre.
(iii) Penalty
Units (PU) and Penalty Review Units (PRU) will
now be referred to as Assessing Officer
Penalty Units (PU) and Penalty Review Units
(PRU) wherever referred to in the Scheme will now be referred to as Assessing Officer. The Assessing Officer will have the
powers as assigned by the CBDT.
(iv) Draft Order’ replaced with ‘Penalty Imposition Proposal’
The
Penalty Units (PU) will prepare a penalty imposition proposal to levy a penalty
instead of draft order. Further, where the Penalty Review Units (PRU) provides
input on the penalty proposal, the National Faceless Penalty Centre (NFPC)
shall send such inputs (review report) to the same PU. Further, PU has been
granted the power to either accept or reject the review report. Where the
review report is rejected, PU shall provide reasons for such rejection.
(v) Provisions for Rectification
Proceedings omitted
As
per the earlier Scheme, NFPC was authorized to rectify any mistake apparent
from the record by passing an order in writing. The amendment scheme of 2022
has taken away this power. Thus, there is no provision for rectifying the
penalty order.
(vi) Penalty Imposition Proposal to
be examined as per Board’s guidelines
As
per the amendment scheme, 2022, the National Faceless Penalty Centre shall
examine the penalty imposition proposal in accordance with the guidelines
issued by the Board instead of the earlier parameter of risk management
strategy.
(vii) Authentication of electronic records
Earlier, an electronic record shall be authenticated by:
§ the NFPC – by affixing its digital signature
§ the taxpayer or any other person – either by affixing a digital signature
or through an electronic verification code
Now, the electronic record shall be authenticated by:
§ the NFPC – by way of an electronic communication
§ Penalty Units (PU) or Penalty Review Units (PRU) or Technical Unit or
Verification Unit - by affixing a
digital signature
§ Taxpayer or any other person - by affixing his digital signature or under
electronic verification code, or by
logging into his registered account in the designated portal
Exclusion
of certain cases from Faceless Penalty Scheme
The
Faceless Penalty Scheme was made applicable w.e.f. 12.01.2021 and the CBDT vide
Order F. No. 187/4/2021-ITA-1, dated 26.02.2021 & 20.01.2021, had notified
that this scheme would not be applicable to the following cases:
(a) Penalty proceedings arising/pending in the
Investigation Wing, the Directorate of I&CI, erstwhile DG (Risk-Assessment)
or by any prescribed authority;
(b)
Penalty proceedings arising out of any
statute other than the Income-tax Act, 1961;
(c) All the penalties imposable by officers
above the rank of Addl. CIT or by designated Authorities are not within the
scope of FPS. [Vide
Notification №2/2021 (S.O. 117(E)) dated 12.01.2021]
(d) Penalty proceedings in cases assigned to
Central Charges;
(e) Penalty proceedings in cases assigned to
International Tax Charges; and
(f) Penalty proceedings arising in TDS charges.
The board has notified another class
of penalties that shall not be covered by the Faceless Penalty Scheme 2021 vide CBDT leter F No. 187/4/2021-ITA-I, dated 10.03.2022.
It has been specified that penalty
proceedings in cases where pendency could not be created on ITBA because of
technical reasons or cases not having a PAN shall be out of the purview of the
Faceless Penalty Scheme 2021.
Exchange of communication
exclusively by Electronic Mode
[Faceless Penalty Scheme, 2021 -
Notification S.O. 117(E) [No. 2/2021/F. No. 370142/51/2020-TPL], Dated
12.01.2021]
8. (1) For the purposes of this
Scheme, -
(a) all communications between the National
Faceless Penalty Centre and the assessee or any other person, as the case may
be, or his authorised representative, shall be exchanged exclusively by
electronic mode; and
(b) all internal communications between the
National Faceless Penalty Centre, National Faceless Assessment Centre, Regional
Faceless Penalty Centres, any income-tax authority, the penalty unit or the
penalty review unit shall be exchanged exclusively by electronic mode.
§ Where the FPU opts not to impose penalty, the order should be well reasoned and speaking so that if the same is selected for review, the Review Unit (RU) should be able to clearly ascertain the reasons for non-imposition of the penalty through an “Office Note” or through the body of the order.
[4] Copy of order to be sent to Assessing Officer [Section 274(3)]
An income-tax
authority on making an order under the Chapter XXI imposing a penalty, unless
he is himself the Assessing Officer, shall forthwith send a copy of such order
to the Assessing Officer.
[5] Timely completion of proceedings [Section
275]
Section 275 of the Income Tax Act
has laid down that penalty proceedings shall be completed normally within 6
months from the end of the Financial year in which
proceedings for the imposition of penalty were initiated.
In case where the assessment is in
appeal, then the Assessing Officer shall complete penalty proceedings within
one year from the end of the financial year in which the appellate decision is
received by the Principal Chief Commissioner or Chief Commissioner or Principal
Commissioner or Commissioner
Change of incumbent of office -
Legal provisions
The relevant provision in the
Income-tax Act, 1961 is contained in section 129 which runs as follows :
129. Change of incumbent of an
office.
Whenever in respect of any
proceeding under this Act an income-tax authority ceases to exercise
jurisdiction and is succeeded by another who has and exercises jurisdiction,
the income-tax authority so succeeding may continue the proceeding from the
stage at which the proceeding was left by his predecessor :
PROVIDED that the assessee
concerned may demand that before the proceeding is so continued the previous
proceeding or any part thereof be reopened or that before any order of
assessment is passed against him, he be reheard.
The use of the term ‘any
proceedings’ signifies both assessment and penalty proceedings.
NOTE
Expressed in the proviso to Section
129, that if the
assessee demands that before the proceeding is continued the previous
proceedings or any part thereof shall be reopened or that before any assessment
order is passed against him, he shall be reheard, such a demand has to be
accepted. If as a result of accepting the assessee’s demand under the proviso
to Section 129 some time is taken and the assessment proceedings cannot be
completed within the normal period of limitation, then the period of limitation
gets extended by such time taken for giving the assessee an opportunity to
reopen the earlier proceedings or for rehearing.
Body
sequence [Contents of a Model Penalty Order arranged in Logical Sequence]
These
guidelines are only illustrative in nature, not exhaustive and can further be
elaborated looking to the need and requirement of a given case:-
[i]
Check the assessment year and
section for which penalty notice has been issued
[ii]
Ensure that the penalty notice is properly served on the assessee
according to the modes of Service prescribed under the Act.
[iii]
Show cause notice is the foundation in
the matter of penalty proceedings
Show cause notice is the foundation
in the matter of penalty and if a particular point is not raised in the show
cause notice, it cannot be raised later at any of the appellate stage(s).
The Show Cause Notice is more than
a notice. It gives an opportunity to the Department of leading evidence in
support of its allegations and equally it gives an opportunity to the
person/firm/company charged with, to make representation and adduce evidence
against the allegations or charges made out against them
It is mandatory that a Show Cause
Notice (SCN) is issued if the department contemplates any action prejudicial to
the assessee. The SCN would detail the provisions of law allegedly violated and
ask the noticee to show cause why penalty should not be levied against him
under the relevant provisions of the Act. Thus, an SCN gives the noticee an
opportunity to present his case.
§
The
Show Cause Notice should be issued only after proper inquiry/investigation i.e.
when the facts used are ascertained and allegations are justified.
§
The
Show Cause Notice should be brief, comprehensive and to the point. There should
be no repetition of facts.
§
The
Show Cause Notice should be in writing (not oral). The date of issue of Show
Cause Notice should be clearly written.
§
The
Show Cause Notice should be clear on facts and legal provisions. Violation of
the provisions of law should be clearly brought out in the Show Cause Notice.
§
The
charges should be specific. They should not be vague/or contradictory.
§
The
provisions for imposing penalty and reasons and conclusion for the same be
clearly mentioned.
§
If
the time limit to reply is provided in Law, it should be adhered to, otherwise,
adequate time should be given for filing a written reply.
§
The
Show Cause Notice should clearly mention whether the noticee(s) wishes to be
heard in person, apart from filing a written representation, in the matter.
Show Cause Notice (SCN) [SOP for
Penalties Under Faceless Penalty Scheme, 2021, Dated 09.08.2021]
First SCN issued by FPU is
automated and format based, where reference is made to penalty section and
earlier notice initiating penalty issued to the assessee. The assessee is given
opportunity to file written reply and if required seek personal hearing after filing
of written reply through VC. Looking to the timelines, 5 to 7 days’ time
(flexible) should be given to the assessee to respond from the date of issue of
notice. The Faceless Penalty Officer (FPO) should preview the date of notice at
the time of final generation and amend the date of compliance if required to
ensure providing adequate time.
Para 5(xx) (a) of the Faceless
Penalty Scheme - 2021 envisages issue of another show cause notice by new FPU
in case where the modifications suggested by the penalty review unit are
prejudicial to the interest of assessee or any other person. The FPU can use
the same SCN format with comments in free text area provided in its Annexure.
[iv] Objections regarding
(i)
Lack
of jurisdiction,
(ii)
Limitation
and
(iii)
non-compliance
of natural justice
Ø
have
to be taken up and answered as the first issue.
[v]
Ensure that all the parameters of natural justice are properly acted
upon, such as
(i) Opportunity to show cause,
(ii) Opportunity of being heard in person,
(iii) Requests of adjournment etc.,
Principles
of natural justice be followed
The
quasi-judicial functions require that the principles of
natural justice be followed. The first principle of natural justice is that
there should be no bias. The rule against bias is expressed in the maxim that
"no one must be a judge in his own cause". The second broad rule is
that "no party is condemned unheard". This right to be heard needs to
be substantive and therefore, the party must know precisely the case he has to
meet. He also must have a reasonable opportunity to present his case both in
writing and orally. The third rule entitles the party to know the reasons for
eventual decision taken.
[vi] Replies of the assessee should be duly considered and rebutted
Ensure that all the contentions
raised by the assessee has been taken up and discussed in the penalty order.
[vii]
A reasoned order is one of the requirements of natural justice
§ Not passing a reasoned order has an
impact on tax administration. Notices in files which may have all the
materials, may get stayed by Hon’ble High Courts, only for the reason of bad
drafting or not containing sufficient materials.
§ A badly drafted order not containing sufficient materials or discussions, or is not logically coherent can go against the revenue in appellate forums.
§ [viii] Speaking Order
Speaking order
may be defined as an order which contains not only the conclusions and
directions but also the reasons that have led to the conclusions. Orders
passed by an quasi -judicial authority affecting the right of the parties “must
speak”. Mere giving an opportunity of hearing is not enough. It is necessary for
quasi - judicial authorities to give reasons for their decision.
Speaking order
should necessarily contain the following
(a) Context
§ The order
should narrate the background of the case
§ As has been
laid down in a catena of decision, law is not to be applied in vacuum.
§ The
circumstances that have caused the initiation of penalty have to be brought out
clearly in the introductory portion of the penalty order.
(b) Contentions
Assessee’s submissions,
must be brought out in the Penalty order.
(c) Consideration
Penalty order should explicitly evaluate the submissions made by the
assessee in the light of the relevant statutory provisions.
Each
submission of the assessee must be considered with a view to decise about its
acceptability or otherwise.
(d) Conclusions
Outcome of the consideration is the
ultimate purpose of the penalty order.
It
must be ensured that each conclusion arrived at in the penalty order must rest
on facts and law.
[ix] Consideration of Case Laws
Appropriate care should be taken
not to load it with all legal knowledge on the subject as citation of too many
judgements creates more confusion rather than clarity. The foremost requirement
is that leading judgements should be mentioned and the evolution that has taken
place ever since the same were pronounced and thereafter, latest judgement, in
which all previous judgements has been considered should be mentioned.
Case laws relied upon by the
assessee in his defence should be carefully gone through. Each order of the
High Court and Supreme Court, inter alia, has two important portion –
(i) obiter dictum – (it is by way of
observation and it is not an issue under consideration of the court) and
(ii) ratio decidendi - ratio laid down by
the court. For the purposes of judicial precedent, ratio decidendi is binding,
whereas obiter dicta are persuasive only.
While considering the case laws
quoted by the party, entire case has to be gone through thoroughly, not the
head notes alone. Each case law relied upon by the notice has to be examined
from the consideration of its applicability to the facts and circumstances of
the impugned case. On consideration, if the assessing authority finds that it
is not applicable to the impugned case, then the authority should mention in
its order as to why the case law relied upon by the assesee in its defence is
not applicable to the impugned case.
If the adjudicating authority finds
that the case law is relevant and is in favour of the asseessee, but there is
another case which is contrary to the case law quoted and relied upon by the
assessee, then it must be mentioned in the order.
Maintaining Judicial
Discipline/Judicial Precedence
Judgement delivered by Hon’ble
Supreme Court is of the highest precedence as it becomes law of the land. If,
under any circumstances, the Hon’ble Apex Court reverts its own judgment, then
the lordships discuss the earlier judgment and also give reasons for reverting
the earlier Judgment and more often, the orders are reverted by larger bench.
In that case, the last Judgement becomes the law.
As regard interpretation of any
law, sometimes different high courts may take different view. In that case,
normally, the issues go to Hon’ble Supreme Court which finally decides the
issue. But in other cases, the jurisdictional High Court Judgement is binding
upon all in its jurisdiction. If contrary judgements exist on the same issue at
the same level (i.e. High Court/Tribunal), then two more aspects comes into
play:
(i) Number of judges/Members in the bench
delivering the Judgement; and
(ii) Date of the Judgement.
Sometimes, the case laws of lower
appellate authority lower than Supreme Court are stayed by higher forum on
department appeal against that order. Then it must be checked as to whether it
is so in the case law relied upon by the party. If it is so, then the case law
need not be applied on ground of stay.
Case Law to be considered with
Reference to the Law existed at Material time
Since the law as well as its
interpretation by Court/Tribunal is dynamic, the case law must be seen in the
light of law (i.e. text of legal provision) which existed at the time of the
case. Or in other words, the case law must be seen in the light of law with
reference to which it was given. At times, the relevant provisions of law which
existed at the time of booking of impugned case is not the same with reference
to which the case law relied upon by the assessee (in his/her defence) pertains.
At times, assessing authority summarily dismisses all the case laws relied upon
by the assessee by writing in the order as under:
“I have gone through the case laws
relied upon by the assessee in its defence and find that the facts and
circumstances of these case laws are different from the facts and circumstances
of the impugned case and therefore the same are not applicable to the instant
case.”
The case laws relied upon by the assessee cannot be dismissed summarily as explained above. Such approach by adjudicating authority may be interpreted as non application of mind and order being non-speaking or non-reasoned order. It is important to discuss as to why and how the case laws relied upon by the assessee are not applicable to the impugned case. It is MUST for every adjudicating authority.
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