1. Introduction

Provisions for ‘Penalty and Prosecution’ are essential for the effective implementation of any fiscal statute. In this article for Special Issue on Finance Bill, 2005, it is proposed to cover the amendments in the Finance Bill concerning ‘Penalty and Prosecution’ under the Income-tax Act, 1961 (the Act). The said amendments are to be found in clauses 58 to 63 of the Bill. The proposed amendments are consequential, primarily on account of the insertion of the new Chapter XII-H in the Income-tax Act, 1961 relating to income-tax on fringe benefits. An attempt is made to explain in brief, the proposed amendments and consequences of the same.
 

Penalty

1. Clause 58: Section 271

   1. S. 271(1)(b)

      Section 271(1)(b) read with clause (ii) provides for penalty for failure to comply with notices u/ss. 142(1) & 143(2) or direction u/s. 142(2A) of the Act, of a sum of Rs. 10,000/- for each such failure. The Finance Bill has proposed to insert a new Chapter XII-H relating to income-tax on fringe benefits. Sections 115WD(2) and 115WE(2) provide for similar notices in respect of income-tax on fringe benefits. Clause 58 of the Finance Bill proposes to include in section 271(1)(b) the said new sections 115WD(2) & 115WE(2) so that the failure to comply with the notices under these two new sections would also attract penalty of Rs. 10,000/- for each such failure.
       

   2. New sub-section 271(1)(d)

      Section 271(1)(c) read with clause (iii) provides for penalty for concealment of particulars of income and for furnishing of inaccurate particulars of income. The Finance Bill has proposed to insert a new Chapter XIIH relating to income tax on fringe benefits. As a consequence it is proposed to insert a new clause (d) in section 271(1) to cover the case of the fringe benefits in penalty for concealment. The said proposed new clause (d) reads as under:

      "(d) has concealed the particulars of the fringe benefits or furnished inaccurate particulars of such fringe benefits."

      Corresponding amendment has been proposed in clause (iii).
       

   3. Insertion of new sub-section (6) in section 271

      The proposed new Chapter XIIH is intended to levy tax on fringe benefits on par with tax on income. Therefore, the new sub-section (6) is proposed to be inserted in section 271 so as to clarify that in section 271 any reference to income shall be construed as reference to income or fringe benefits.

      2.1.4 The proposed new chapter XIIH relating to income tax on fringe benefits is proposed to be operative from 1-4-2006; i.e., for the A.Y. 2006-07 and subsequent years. Therefore, the proposed amendments in section 271 will also be applicable for A.Y. 2006-07 and subsequent years.
       

2. Clause 59: New section 271FB

   1. Section 271F provides for penalty for failure to furnish return of income u/s 139. The Finance Bill has proposed to insert a new Chapter XIIH relating to income-tax on fringe benefits. The proposed section 115WD provides for the obligation to file return of fringe benefits within the prescribed time. The new proposed section 271FB provides for penalty for failure to file return of fringe benefits within the prescribed time. The said proposed section 271FB reads as under:

   "271FB. If an employer, who is required to furnish return of fringe benefits, as required under sub-section (1) of section 115WD, fails to furnish such return within the time prescribed under that sub-section, the Assessing Officer may direct that such employer shall pay, by way of penalty, a sum of one hundred rupees for every day during which the failure continues."

   2. Though the proposed section 271FB may be compared with section 271F as both are concerning failure to file return of income/fringe benefit and the proposed amendments intend to put fringe benefit on par with income the penalties provided u/ss 271F and 271FB are entirely different. Under section 271F the penalty is a sum of Rs. 5,000/-. However, the penalty u/s 271FB is Rs. 100/- for every day during which the failure continues.

   3. The new Chapter XIIH relating to income-tax on fringe benefits is proposed to be operative from 1-4-2006; i.e., A.Y. 2006-07 and subsequent years. Therefore, the proposed new section 271FB will also be applicable for A.Y. 2006-07 and subsequent years.
       

3. Clause 60: S. 272A:

   1. Clause 52 of the Finance Bill, 2005 has proposed to insert a new section 206A for furnishing quarterly return in respect of payment of interest to residents without deduction of tax.

   2. The existing section 272A of the Act provides for penalty for failure to answer questions, sign statements, furnish information, returns or statements, allow inspection etc. Clause 60 of the Finance Bill proposes to insert new clause (l) in section 272A(2) to provide for penalty for failure to deliver quarterly returns. The proposed clause (l) reads as under.
      
      "(l) to deliver or cause to be delivered the quarterly return within the time specified in sub-section (1) of section 206A."
      The penalty is of Rs. 100/- for each days default.

   3. The proposed amendment is to take effect from 1-6-2005 and accordingly will be applicable for defaults on or after 1-6-2005.
       

4. Clause 61: S. 273B

   1. Section 273B provides that the penalty under the sections prescribed therein would not be imposable if the assessee concerned proves that there was reasonable cause for the said failure.

   2. Clause 59 of the Finance Bill has proposed to insert a new section 271FB for penalty for failure to furnish return of fringe benefits. Clause 61 of the Finance Bill proposes to include the said section 271FB in the coverage of section 273B so that, if the assessee proves that the failure to furnish the return of fringe benefits is on account of reasonable cause then penalty u/s 271FB would not be imposable.

   3. This is an amendment in consequence of the proposed insertion of Chapter XIIH relating to income-tax on fringe benefits which is proposed to be operative from 1-4-2006; i.e., A.Y. 2006-07 and subsequent years. Therefore, the proposed amendment to section 273B will also be applicable for A.Y. 2006-07 and subsequent years.
       

Prosecution

1. Clause 62: Section 276CC

   1. Section 276CC of the Act provides for prosecution for offence of failure to furnish return of income u/s 139(1) or section 148 and the punishment provided is rigorous imprisonment for a term not less than six months but extending up to seven years.

   2. The Finance Bill has proposed to insert a new Chapter XIIH relating to income-tax on fringe benefits. In the said new Chapter section 115WD(1) provides for an obligation to file voluntarily a return of fringe benefits. Section 115WH(1) also provides for a notice for reassessment of fringe benefits and an obligation to file return pursuant to such notice. The obligation u/s 115WD(1) is similar to that u/s 139(1) and the obligation u/s 115WH(1) is similar to that u/s 148.

   3. As a consequence of insertion of the new Chapter XIIH the Finance Bill has proposed to insert the reference to the new sections 115WD(1) and 115WH(1) in section 276CC so that the failure to furnish return under those two sections also would attract the provisions for prosecution u/s 276CC.

   4. The proposed new Chapter XIIH relating to income tax on fringe benefits is proposed to be operative from 1-4-2006; i.e., for the A.Y. 2006-07 and subsequent years. Therefore, the proposed amendments in section 276CC will also be applicable for A.Y. 2006-07 and subsequent years.

2. 3.2) Clause 63: S. 278

   1. Section 278 of the Act, relating to abetment of false return etc, provides that if a person abets or induces another person to make and deliver an account or statement or declaration of any income chargeable to tax which is false he is liable for punishment with rigorous imprisonment for a term not less than six months but extending up to seven years.

   2. The Finance Bill has proposed to insert a new Chapter XIIH relating to income-tax on fringe benefits in line with the tax on income. As a consequence to the insertion of the new Chapter XIIH, the Finance Bill has proposed to amend section 278, to cover the case of fringe benefits in line with income, as regards the offence of abetment.

   3. The proposed new Chapter XIIH relating to income tax on fringe benefits is proposed to be operative from 1-4-2006; i.e., for the A.Y. 2006-07 and subsequent years. Therefore the proposed amendments in section 278 will also be applicable for A.Y. 2006-07 and subsequent years.
       

Conclusion

As observed above, the amendments concerning ‘Penalty and Prosecution’ are only consequential in nature. Further, there are some errors, may be of printing. As for example, in clause 62 for amending section 276CC there is a reference to a notice given u/s. 115WH(2) which in fact should have been 115WH(1). It seems that this is a typing error which will be corrected in due course.