It is important for the government to receive a timely collection of taxes to go about its functions. Thus, a stringent and robust system has been put in place in case of non-compliance. Income Tax Act has a plethora of provisions with respect to offences, penalties and prosecution.
There are primarily three modes for ensuring compliance:
- Charging of interest
- Imposition of penalty
- Launching of a prosecution
Charging of interest is mostly for minor and technical issues, like delay in compliance, late payment for instance. This is compensatory in nature. On the other hand, penalties and prosecution are punitive in nature and serve the function of being deterrents against tax delinquents.
While both penalties and prosecutions in the Act are for serious wilful acts rather than inadvertent faults on part of the assessee, the acts inviting prosecution are undoubtedly more serious than the ones inviting a fixed penalty.
There are various provisions for penalties in the act, for instance, a penalty of 25000 INR for non maintenance of books of accounts ( section 271A), 1,50,000 or 0.5 % of gross receipts or turnover for not auditing accounts under section 44AB ( section 271B), 30 % or 60 % of the undisclosed income ( section 271AAB(1A) etc. Various instances of non-compliance invite penalties.
But apart from the penalties for defaults, the act also carves out offences for worse cases which will invite prosecution. This prosecution for more serious wilful acts of non-compliance are necessary to prevent tax evasion as there exist many legal persons that can afford to take the risk of evading taxes for good profits and pay the definite penalty amount in case they get caught. A prosecution which consists of likelihood of imprisonment, and as in most cases of prosecuting sections under the act, an indefinite amount of fine, thus serves as a better tool against such acts.
Seriousness of an offence
There are various ways of perceiving the seriousness of an offence. However, certain reliable indicators can give a good objective view of what’s more serious or grave, at least as per the lawmakers. One such good indicator are the compounding provisions. As a rule, compoundable offences are generally less serious and non-compoundable offences are graver. A compoundable offence is one which allows a compromise and it includes offences like defamation, criminal trespass etc. On the other hand, non-compoundable offences have state representing the society as a party and no compromise is possible and it includes offences like rape, murder etc. Thus, it would serve well to observe the offences that have been categorised as compoundable and non-compoundable by the income tax act. Further, beyond that, the magnitude of the punishment would also indicate which offences have been dealt with a heavier hand and are thus deemed more serious by the lawmakers. And finally, one can also take note of what the courts have said, and the other measures to deal with certain offences that display a more concentrated approach towards offences, the more serious it is.
Non-compoundable offences under the Income Tax Act
There were certain guidelines of December 2014 issued by the Central Board of Direct Taxes operating over compounding of offences under the Income-tax law which have recently been replaced by a fresh set of guidelines (F No. 285/08/2014-IT(Inv.V)/147 dated 14 June 2019) issued in June 2019 which would operate over applications on or after 17th June 2019. These guidelines have both liberal and stringent provisions.
Category A offences under the guidelines are technical offences that can be compounded in up to 3 occasions. Category B offences, on the other hand, are non-technical offences that can be compounded only once. Offences not found in either of the categories are non-compoundable offences.
There are various cases where the offence would not generally be compoundable, which will go to show seriousness of the offence. It can either depend on the circumstances around the offence or the nature of the offence itself. For instance, the following circumstances would make the offence non-compoundable:
- If it has a bearing on Benami Transactions (Prohibition) Act, 1988;
- If it has a bearing on the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015;
- If it has a bearing on undisclosed foreign bank accounts or assets;
- Where the person accused has enabled others to evade tax;
- Where the person accused is involved in terrorist activity.
In the cases above, it is not the offence itself but by the situations that would make the offence non-compoundable, be it any offence, wilfully evading taxes, giving false statements, failure to comply with any provisions or failure to furnish any returns.
However, there are certain offences as well that have squarely been made non-compoundable. They are the following:
- Section 275A: This section penalises contravention of an order made under section 132(3) of the act. The order is made when it is not practicable for an officer to seize any material physically at the time of the search, and the person in immediate possession is directed not to deal with it anyway. Thus, when a person deals with the property despite such an order, he is punished with rigorous imprisonment up to 2 years in addition to an undefined fine.
- Section 275B: This section penalises failure to comply with provision of (iib) of section 132(1). This provision requires a person in possession or control of any electronic records to afford the officers in a search the necessary facilities. If not complied with, a person is punished with imprisonment of up to 2 years with an indefinite amount of fine.
- Section 276: This section penalises the concealment, removal, transfer and delivery of property with the motive of thwarting recovery of tax. This involves fraudulently dealing with the property to obstruct execution of recovery of tax. This is also punished with imprisonment of up to 2 years and an indefinite amount of fine.
Thus, the above offences are serious in the sense that they are not compoundable.
Other serious offences
However, there are other indicators as well, including the most common offences and the ones with higher quantum of punishment. Notably, recently in September 2019, the Central Board of Direct taxes issued a directive on prosecution of income tax offences. It prescribed certain thresholds for offences to avoid petty tax litigation. In the cases of not depositing TDS, wilful attempt to evade tax and failure to furnish return of income, prosecution would only be initiated if the amount involved is more than 25 lacs. These offences cover the bulk of income tax litigation and are serious in the respect that in the cases of the amount indeed exceeding 25 lacs, the sections themselves provide a significantly higher punishment than the other offences.
- Section 276B and Section 276BB: Under this section, a person that does not pay to the credit of the government the tax deducted by him at source or the tax collected by him at source shall be punished with rigorous imprisonment of 3 months to 7 years and an indefinite amount of fine. This offence is dealt with seriously since these amounts are kept with the employers in a fiduciary capacity and in fact belong to the government. The employer cant finance his business through government money and no measure of economic difficulty can, therefore, justify this lack of payment.
- Section 276C: Under this section, if a person attempts to wilfully evade any payment of tax, interest or penalty shall be punished with rigorous imprisonment of 6 months to 7 years and an indefinite amount of fine if the amount is more than 25 lacs, and 3 months to 2 years in all other cases.
- Section 276CC: Under this section, if a person fails to furnish any return of income required to be furnished under various provisions of the act, he shall be punished with rigorous imprisonment of 6 months to 7 years and indefinite amount of fine if the amount sought to be evaded is more than 25 lacs, and 3 months to 2 years in all other cases.
There are various other cases wherein a higher quantum of punishment is prescribed. For instance, under section 278, if a person furnishes a false return of income and the amount involved is more than 25 lacs, the imprisonment of 6 months to 7 years plus fine. Similarly, under section 277, display of false accounts to evade taxes invites similar punishment. Also, all second-time offences in the case of not paying the tax deducted or collected at source to the government, wilfully evading taxes, failure to file returns, submission of false returns, and display of false accounts all invite the similar magnitude of punishment.
Most of these offences having a maximum punishment of 7 years do not have “knowingly” as an ingredient and thus mens rea does not have to be proved. Thus, these offences are dealt with strictly as per the letter and culpability is presumed unless the accused can show reasonable grounds and circumstances for any inadvertence.
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