Keep records of transactions or face penalty
ARVIND RAO
Shanti Kumar is a typical salaried employee – at least with regard to
her income- tax compliance. She is not averse to paying taxes on her
income and believes that since the entire tax applicable on her salary
is being deducted at source ( TDS), filing of annual returns is a mere
formality. She generally rushes to file them only towards the end of
July every year, since July 31 is the last date for salaried employees
to file tax returns.
Therefore, Kumar ensures that she furnishes Form 16 (statement of TDS
on salary) to the agency appointed by her company for bulk tax filing
and assumes she has completed her tax filing procedure.
But her peace was disturbed when she received a notice from the
Income- Tax Department asking her to reconcile the differences
observed in the income filed under her tax returns and the one in her
Annual Statement of TDS available with the Department (Form 26AS). She
approached a tax consultant to understand and comply with the notice.
The tax consultant pointed out that the difference in income was on
account of the interest earned on her bank fixed deposits, which were
reported in Form 26AS ( TDS on fixed deposits with her bank). This
interest income had to be shown separately in her tax returns and
added to her salary income. Under the Income Tax Act, tax payable by a
tax payer should be calculated on all such income. Credit for TDS,
including tax deducted by the bank on FD interest, would be available,
and a tax payer would have to pay only the balance tax liability
before filing tax returns.
Kumar was not convinced.
She thought that the bank deducted tax due on the FD interest just
like her employer deducted tax on her salary income. The tax
consultant pointed out that under the provisions of the Act, the bank
was liable to deduct, at 10 per cent, tax on the interest, whereas tax
due on total interest income would be calculated according to slab
rates applicable to an individual. As a result, Shanti was liable to
pay the difference.
The reader's attention is invited to the penalty provisions under the
Act, where in cases such as Kumar's described above, the tax officer
is empowered to levy an additional penalty at a minimum rate of 100
per cent, which can go up to a maximum of 300 per cent, on the tax
amount sought to be evaded. This is a perilous provision. It entails
that a tax payer not only pays the tax due on the interest income that
did not form a part of the returns, but also pays an equivalent amount
or more in penalties. The penalty provision, however, can be invoked
only when the tax officer is of the opinion that the tax payer had
furnished inaccurate particulars or concealed income in the returns.
So, the relevant question in Kumar's case is: Can a tax officer levy a
penalty for not furnishing particulars of interest income in a tax
return? Various judgements are available by different adjudicating
authorities on this matter.
In one such, it was held that the mere raising of a query by a tax
officer did not amount to detection of concealment. Thus, if a tax
payer filed a revised return, disclosing additional income under any
head of income, which had not been correctly shown in the original
return, it avoided the charge of concealment of income under the
relevant provisions of the Act. Thus, a tax payer could be absolved
from a penalty.
In a similar matter that came up before the Supreme Court recently, a
tax payer during the assessment proceedings offered to voluntarily
disclose the additional income not included in the return of income,
with a view to avoid litigation and buy peace, and to come to an
amicable settlement.
The tax officer, while accepting the additional income, brought it
under the tax net and initiated penalty provisions under the relevant
section of the Act. In the course of the hearing, the tax payer
contended that penalty proceedings were not maintainable on the ground
that the surrender of income was aconditional surrender to avoid
penalties.
The tax officer, however, went ahead and levied the applicable
penalty. At the appellate level, the tax tribunal was of the view that
the amount disclosed by the tax payer was surrendered to settle the
dispute with the tax department, and the imposition of the penalty
solely on the basis of the tax- payer's surrender could not be
sustained. Accordingly, the tribunal set aside the penalty order.
At the High Court level, the tax department pleaded that the tax payer
had offered no explanation for concealment of income and, thus, it was
justified in levying the penalty. The High Court accepted the
department's point of view and upheld the penalty. When the matter
reached the Supreme Court, the court held that, in such cases, what is
relevant is whether the tax payer had offered any explanation for
concealment of particulars of income. In the given case, the tax payer
had only stated that he had surrendered the additional income with a
view to avoid litigation, buy peace and channel energy and resources
towards productive work, as also to come to an amicable settlement
with the Income- Tax Department. The Court observed that the law did
not provide for absolution from the penalty when a tax payer made
avoluntary disclosure of concealed income; under the penalty
provisions, the law did not recognise such a defence.
It is the duty of a tax payer to record all his/ her transactions, to
explain sources of payments made by him/ her and to declare the true
income in the returns of income filed every year. In the absence of
this, the scope for the tax department to levy penalty is wide open.
The author is a Certified Financial Planner
If a taxpayer fails to explain the sources of payments, the tax
department could levy a penalty
--
CS A Rengarajan
9381011200
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