The income-tax law provides for levy of penalty for concealment of income or for furnishing inaccurate particulars of income. The penalty ranges from 100 per cent to three times the amount of tax sought to be evaded. There was a controversy about such levy of penalty in cases of over statement of losses. The Finance Act, 2002 amended Section 271 (1) (c) of the Income-Tax Act, 1961 and laid down that penalty would be levied even in cases of inaccurate computation of losses. The Supreme Court ruled that the amendment is prospective and will not apply to past cases [Virtual Soft Systems Ltd., vs. CIT 289 ITR 83 (SC)].

Problems arise when the Tax Department makes a search of the premises of the taxpayer and thinks there has been an omission to account for income or an attempt to conceal such income. The concealment may be spotted during the search and the assessee may claim that he was going to admit such income in the Return to be filed, though there is no entry in the regular books of accounts with regard to the same. The Explanation 5 to Section 271(1) deems there has been concealment of income though the income may be admitted in the post-search return. The present law is that the taxpayer can escape penalty by admitting the income and explaining how the same was earned. Finance Act, 2007 lays down that the above law will prevail only in cases of search under Section 132 initiated before June 1, 2007.

`Undisclosed income'

In cases involving discovery of concealment in the course of a search initiated under Section 132 on or after June 1, 2007, there is modification of the law by the insertion of Explanation 5A to Section 271(1). A new Section 271AAA has been inserted in the Act. Penalty will be levied at the rate of 10 per cent of the undisclosed income of the specified previous year, which came to light because of the search. There is a definition of the term "undisclosed income" as meaning money, bullion, jewellery or other valuable article or thing or any entry in books of accounts or other documents or transactions found in the course of search but not recorded before the date of search in the books of accounts maintained in normal course. Unrecorded expenses will also fall in this category.

There is also a definition of the term "specified previous year" as meaning the previous year, which has ended before the date of search, but the date of filing the return of income for such year has not expired before the date of search and return is still awaited. For escaping the rigors of this 10 per cent of penalty calculated on income, the assessee must admit the undisclosed income and substantiate the manner in which it was derived. He must also pay the tax thereon. If he admits concealment, he will escape Section 271(1)(c) also.

Imposition of Penalty

The newly inserted Section 271 AAA envisages the imposition of penalty for what the Income-Tax Department thinks may be an attempted concealment. All that has happened for inviting this penalty is that some entry, gold or cash is spotted during the search and the same is not reflected in the regular books of accounts.

The deeming clause is brought into presume concealment. All these years, concealment has been thought of only in relation to a return of income or loss filed in the normal course under the Act. For the first time, tax law has started talking of concealment without reference to the Return of income to be filed on a date after the search. Plenty of cases are on the statute book showing how admissions and confessions during the search are retracted later on. The Chelliah Committee drew the attention of the government to the practice of obtaining forced confessions during search. Victims of search may admit concealment to escape the fury of the tax officials during the search and later on appeal against the levy of penalty under Section 271 AAA.

There is now a two-tier system of penalties for concealment one covering cases of search initiated before June 1, 2007, and the other concerning cases of search initiated after this date. The quantum of penalty will vary between the two depending on the extent of undisclosed income. The new law will give rise to controversies about entries in diaries, memorandum of books, home-chest accounts, etc. Apart from these two types of cases, there will be penalties for concealment brought out by investigation during the course of scrutiny of returns and also because of surveys conducted by the department.

Some simplification of the law indeed.

T. C. A. Ramanujam
(The author is a former Chief Commissioner of Income-Tax.)