STUDY NOTE - 27

PENALTIES & PROSECUTION

This Study Note includes
• Different Defaults and Penalties related thereto
PENALTIES

Section Nature of Default Minimum Penalty Maximum

Penalty

158BFA Undisclosed income determined 100% of the tax on 300% of the tax
by the Assessing Officer undisclosed income on undisclosed
u/s.158BC(c) income

221(1) Default in making a payment of Such amount as the Tax in arrears

tax within prescribed time Assessing Officer
may impose

271(1)(b) Failure to comply with a notice Rs.10000 for each Rs. 25,000 for
u/s. 142(1) or 143(2) or with a failure each failure.
direction issued u/s.142(2A). (upto 31.5.2001)

271(1)(c) Concealment of the particulars of 100% of Tax sought 300% of Tax

income or furnishing inaccurate to be evaded. sought
particulars of income. to be evaded.

271A Failure to keep or maintain books Rs.25000 Rs.1,00,000

of A/c, document as required
u/s.44AA.

271AA Failure to keep and maintain a sum equal to two a sum equal to
information and document in per cent of the value two per cent of
respect of international of each international the value of each
transaction. transaction entered international
into by such person. transaction
entered into by
such person.

271AAA Penalty where search has been a sum computed at a sum computed
initiated the rate of ten per at the rate of ten
cent of the per cent of the
undisclosed income undisclosed
of the specified income of the
previous year. specified
previous year.

Applied Direct taxation 357

Penalties & Prosecution

271

271

271

271

271
358 Applied Direct taxation
 Refuses to sign any statement
272A(1)(b) made by a person in course of I.T. Rs.10,000 for each Rs. 10,000 for
Proceeding. default each default

Failure to comply with summons

272A(1)(c) issued u/s.131(1) Rs.10,000 for each Rs. 10,000 for
default each default

Failure to comply with provisions

272AA of Sec. 133B. Any amount upto Rs. 1000

Failure to comply with the

272B provisions of section 139A or for Rs. 10,000 Rs. 10,000
quoting or intimating a PAN
which is false. [w.e.f. 1.6.2002]

Failure to comply with the

272BB provisions of section 203A (i.e. Rs. 10,000 Rs. 10,000
failure to obtain TAN or after
obtaining failure to quote TAN in
all challans, certificates and
returns etc.)

Failure to comply with the

272BBB provisions of of sec. 206CA (i.e. Rs. 10,000 Rs. 10,000
failure to obtain TCAN or after
obtaining failure to quote TCAN
in all challans, certificates and
returns etc.) (w.e.f. 1.6.2002)

Applied Direct taxation 359

Penalties & Prosecution

276C(1) Wilful attempt to evade tax If tax evaded If tax evaded

penalty or interest imposable exceeds Rs. 1,000, 6 exceeds Rs.
under the Act (non-cognizable months; otherwise 1,00,000,
as per sec. 279A) 3 months and fine. 7 years;
otherwise 3
years and fine.

276C(2) Wilful attempt to evade the 3 months and fine 3 years and fine
payment of any tax, penalty or
interest (non-cognizable
as per sec. 279A).

276CC Wilful failure to file return of If tax evaded If tax evaded

income in time u/s. 139(1), or exceeds Rs. exceeds Rs.
in response to notice u/s. 1,00,000; 6 months 1,00,000,
142(1) or sec. 148(Non- and fine In any 7 years;
cognizable as per sec. 279A) other case, 3 otherwise 3
months and fine. years and fine

Note: No
prosecution if :
(i) the return is
filed
before the expiry
of the
assessment year ;
or
(ii) the tax payable
on regular
assessment, as
reduced by TDS
and advance tax
does not
exceed Rs. 3,000

276CCC Wilful failure to furnish in due 3 months and fine 3 months and
time the return of total income fine
which is required to be
furnished u/s. 158BC.
1 year and fine
276D Wilful failure to produce Any period upto 1 of
books of account and year and fine of Rs. Rs. 10 every day
documents u/s. 142(1) or 4 for every day during which

360 Applied Direct taxation

Case Laws:

Section Case Laws

i) Burden is on Revenue: In the matter of penalty, read with section
221 201, an obligation is cast upon the Assessing Officer to be satisfied that
default by assessee was without good and sufficient reason. The
burden is upon the revenue to establish that the assessee has not
deposited the tax at source without good and sufficient reasons. In
other words, in absence of such finding, no negative terms for levying
penalty can be made and the burden specifically lies on the revenue -
CIT v. Munni Lal & Co. 157 Taxman 466
ii) Penalty is attracted the moment default has occurred - An assessee
incurs a liability to penalty the moment default has occurred,
notwithstanding the fact the default has ceased to exist by the time the
authorities concerned take action to penalise the assessee for the said
default - CIT v. Smt. Vijayanthimala

i)Levy of penalty is attracted only if there is no reasonable cause - Levy

271C of penalty under section 271C is not automatic. Before levying penalty,
the concerned officer is required to find out that even if there was any
failure referred to in the concerned provision the same was without a
reasonable cause. The initial burden is on the assessee to show that
there existed reasonable cause which was the reason for the failure
referred to in the concerned provision. Thereafter the officer dealing
with the matter has to consider the explanation offered by the assessee
or the person, as the case may be. ‘Reasonable cause’ as applied to
human action is that which would constrain a person of average
intelligence and ordinary prudence. It can be described as probable
cause. It means an honest belief founded upon reasonable grounds, of
the existence of a state of circumstances, which assuming them to be
true, would reasonably lead any ordinary prudent and cautious man,
placed in the position of the person concerned, to come to the
conclusion that the same was the right thing to do. The cause shown
has to be considered and only if it found to be frivolous, without
substance or foundation, the prescribed consequences follow -
Woodward Governor India (P) Ltd. v. CIT 253 ITR 745
The Supreme court in this case held that in force from 1st April 2003,
271(1)(c) there cannot be liability to penalty when there is no liability to tax
especially because penalty has to be worked out with reference to the
tax payable as contrasted with the income concealed. Virtual Soft
Systems ltd vs CIT 289 ITR 83(SC).

Applied Direct taxation 361

Penalties & Prosecution

i.) If penalty has been levied under section 271C for failure to deduct
272A tax at source, question of levying penalty under section 272A(2)(c) and
272A(2)(g) would also not arise - Once a person prescribed or
concerned or the assessee has been subjected to a penalty under
section 271C, for not deducting the tax at source, there would not arise
any occasion for levying a penalty under section 272A(2)(c) and
272A(2)(g) for non-compliance of the provisions of sections 203 and
206. In other words, in case the tax has not been deducted at source,
the question of issuing the certificate of tax under section 203 or that of
filing of return under section 206 would not arise at all. That being so,
the question of imposing penalty for violation of the aforesaid
provisions, would also not arise - CIT v. Sri Ram Memorial Education
Promotion Society 150 Taxman 58
i). Delayed payments are also covered - The wording of section 276B
276B does not afford scope for treating the words ‘fails to pay’ as confined
only to those cases where there is a total failure to pay the tax and not
having application to those cases where there has been failure to pay
within the prescribed time - Rayala Corporation (P.) Ltd. v. V.M.
Muthuramalingam, ITO 129 ITR 675
ii) Merely because tax has been deposited to the credit of the Central
Government before filing of the complaint, it will not absolve the
assessee of the offence under section 276B - Rishikesh Balkishandas v.
I.D. Manchanda, ITO 167 ITR 49
iii) Mens rea is not essential - Section 276B does not contain the word
‘knowingly’. Therefore, in a case under section 276B, read with section
194A, mens rea is not required - Rishikesh Balkishandas v. I.D.
Manchanda, ITO/Dy. CIT v. Modern Motor Works 87 Taxman 182/220
ITR 415

i).Company, whether can be prosecuted- A company cannot be

276C prosecuted for offences under sections 276C, 277 and 278, since each
one of these sections requires imposition of a mandatory term of
imprisonment coupled with a fine and leaves no choice to Court to
impose only a fine - Asstt. Commissioner v. Velliappa Textiles Ltd. 132
Taxman 165/263 ITR 550.
ii).Though a company cannot be sentenced to imprisonment, for that
reason only company cannot be given complete immunity from prose-
cution for graver offences where mandatory punishment is impris-
onment coupled with fine; Court has to resort to punishment of
imposition of fine which is also a prescribed punishment - Standard
Chartered Bank v. Directorate of Enforcement 145 Taxman 154/275 ITR 81.
iii) Mens rea must be present - To bring an act under the provisions of
section 276C, the action of the person concerned has to be a wilful
attempt to evade any tax, penalty or interest chargeable or imposable

362 Applied Direct taxation

 i).Company, whether can be prosecuted- A company cannot be
276C prosecuted for offences under sections 276C, 277 and 278, since each
one of these sections requires imposition of a mandatory term of
imprisonment coupled with a fine and leaves no choice to Court to
impose only a fine - Asstt. Commissioner v. Velliappa Textiles Ltd. 132
Taxman 165/263 ITR 550.
ii).Though a company cannot be sentenced to imprisonment, for that
reason only company cannot be given complete immunity from prose-
cution for graver offences where mandatory punishment is impris-
onment coupled with fine; Court has to resort to punishment of
imposition of fine which is also a prescribed punishment - Standard
Chartered Bank v. Directorate of Enforcement 145 Taxman 154/275 ITR 81.
iii) Mens rea must be present - To bring an act under the provisions of
section 276C, the action of the person concerned has to be a wilful
attempt to evade any tax, penalty or interest chargeable or imposable
under the Act. The word ‘wilful’ imparts the concept of mens rea, and if
mens rea is absent, no offence under this section is made out - Jarnail
Singh v. ITO 179 ITR 426 /CIT v. Gangaram Chapolia 103 ITR 613
iv) If accused makes a full and complete disclosure, then prosecution
under section 276C/277 should not be proceed - If accused makes a
full and complete disclosure to get benefit of pardon under section 306
of the Code of Criminal Procedure, 1973, prosecution under section
276C/277 should not be allowed to proceed - Dipesh Chandak v. Union
of India 270 ITR 85/140 Taxman 166.

Applied Direct taxation 363

Penalties & Prosecution

i). Mens rea is not an essential requirement - If section 276CC is read in

276CC isolation, the mens rea is an essential requirement of law and it would
be for the prosecution to lead evidence to prove that the return was
wilfully filed late. However, it is not so. Section 278E provides that in
any prosecution for the offence under this Act which requires
‘culpable mental state’ on the part of the accused, the Court shall
presume the existence of such mental state. The burden is shifted to
the accused that he had no such mental state. As per the Explanation,
the culpable state would include ‘intention’, ‘motive’ and ‘knowledge’.
It further provides that the absence of such culpable mental state shall
have to be proved by the accused in defence beyond reasonable doubt.
The Act does not differentiate in any way between natural and juristic
persons. As per the settled law, charge can be framed even on the basis
of strong suspicion - V.P. Punj v. Asstt. CIT 119 Taxman 543
ii) Whether there is wilful failure to furnish return is a matter which is
to be adjudicated factually by the Court which deals with the
prosecution case. Section 278E is relevant for this purpose. There is a
statutory presumption prescribed in section 278E. The Court has to
presume the existence of culpable mental state, and absence of such
mental state can be pleaded by an accused as a defence in respect to
the act of charged as an offence in the prosecution - Prakash Nath
Khanna v. CIT 135 Taxman 327/266 ITR 1.
iii) Filing of voluntary return under section 139(4) will not absolve
assessee from infraction of not filing return in time - One of the
significant terms used in section 276CC is ‘in due time’. The time
within which the return is to be furnished is indicated only in section
139(1) and not in section 139(4). That being so, even if a return is filed
in terms of section 139(4), that would not dilute the infraction in not
furnishing the return in due time as prescribed under section 139(1).
Otherwise, the use of the expression ‘in due time’ would lose its
relevance and it cannot be said that the said expression was used
without any purpose. A person who had not filed a return within the
due time as prescribed under sub-section (1) or (2) of section 139
would otherwise, get benefit by filing the return under section 139(4)
much later. This cannot certainly be the legislative intent. Sub-section
(4) of section 139 cannot by any stretch of imagination control
operation of sub-section (1) wherein a fixed period for furnishing the
return is stipulated - Prakash Nath Khanna v. CIT 135 Taxman 327 .

364 Applied Direct taxation

 i) Effect of omission of section - Prosecution under section 276DD could
276DD not have been launched or continued by invoking section 6 of General
Clauses Act after omission of section 276DD with effect from 1-4-1989 -
General Finance Co. v. Asstt. CIT 257 ITR 338/124 Taxman 432.

i) Meaning of ‘person in charge’ - A person in charge must mean that

278B the person should be in overall control of the day-to-day business of
the firm - State of Karnataka v. Pratap Chand 128 ITR 573.
ii) A plain reading of section 278B goes to show that it is for the
prosecution in the first instance to demonstrate by averments and
proof that the person was in charge of and was responsible to the
company for the conduct of the business of the company. Therefore,
while the company may be deemed to be guilty of the offence, so far as
the partners or directors are concerned, only those persons can be
prosecuted who are in charge of and responsible to the company for
the conduct of its business - Smt. Sitaben v. Union of India 120 CTR
(MP) 444.

Applied Direct taxation 365