The Income Tax Department is adopting a very strict stance regarding cases of hiding income or giving wrong information by taxpayers. Recently, a case has come to light where a taxpayer faced a penalty notice of Rs 3.99 lakh (approximately ₹4 lakh) for not filing correct returns on time and subsequently disclosing his actual income during investigation.
This matter pertains to assessment year 2018-19. The taxpayer had not disclosed his true income at the initial stage. When the notice of investigation was issued by the Income Tax Department, the taxpayer filed a return declaring an income of about Rs 12.9 lakh.
The Assessing Officer (AO) believed that if the department had not issued a notice under Section 148 or related provisions, this income would have remained completely out of the ambit of tax. On this basis, the officer considered it a case of concealment of income and misreporting and started the process of penalty.
Under Section 270A of the Income Tax Act, if a taxpayer under-reports or misreports his income, a heavy penalty can be imposed on the amount of tax.
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Under-reporting: In normal cases, if income is under-reported, the amount of tax payable 50% fine Is imposed.
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Misreporting (false or hiding facts): If the underreporting of income involves hiding facts, showing fake accounts or not providing evidence, then the tax payable Penalty up to 200% There is a provision to install.
In this particular case, tax liability of about Rs 1.99 lakh was arising on undisclosed income of Rs 12.9 lakh. Considering this as serious misreporting, the Assessing Officer issued a penalty order of ₹ 3.99 lakh (approximately ₹ 4 lakh) at the rate of 200% as per rules.
The taxpayer filed a petition against this decision in the Commissioner of Income Tax (Appeals), but from there also the penalty order was upheld. After this the taxpayer approached the Income Tax Appellate Tribunal (ITAT) for justice.
The Income Tax Appellate Tribunal (ITAT) bench, after hearing the arguments of both the parties, completely quashed the department's order imposing a fine of Rs 4 lakh. This decision of ITAT has attracted the attention of lakhs of taxpayers and tax practitioners of the country.
ITAT clarified in its order that the Income Tax Department has the right to impose penalty, but this right will be considered valid only when the due process of law is completely followed.
In this case, ITAT found that the Assessing Officer (AO) had not explained the exact reason for the charges imposed under Section 270A while issuing the penalty notice and assessment order. That is, it was not clear in the notice whether the taxpayer is accused of 'Under-reporting' or 'Misreporting' and which sub-clause of Section 270A(9) applies to him.
The ITAT in its judgment said that unless the tax department mentions the exact nature of the offense in its notice, the taxpayer does not get a fair opportunity to defend himself.
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Lack of clarity: The notice did not specify what information the taxpayer had hidden or misrepresented.
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Ignoring legal process: Citing the precedents of the High Court, ITAT held that a penalty notice issued without clear charge is a defective notice.
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Procedural Flaw: Because of this fundamental failure the entire penalty proceeding was voidable in law.
The court dismissed the entire penalty proceeding without allowing the department to issue a fresh notice.
This decision sends a clear message about how important it is to check the legality and procedures of the orders of the tax authorities. However, experts say this decision does not give license to taxpayers to hide their income.
Taxpayers should keep these things in mind:
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File ITR on time: Always file your Income Tax Return (ITR) with correct and accurate information before the due date.
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Check AIS and TIS: Before filing ITR, check your Annual Information Statement (AIS) and Taxpayer Information Summary (TIS) carefully so that no interest, share market transaction or bank income is left out.
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Review the notice carefully: If you receive any notice from the Income Tax Department under Section 148, 143(2) or 270A, then definitely understand the allegations and legal sections written in it from your CA or tax expert.
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Appeal wrong notice: If there are procedural flaws in the notice or the penalty is imposed without explanation, appellate relief can be sought at forums such as ITAT.