In order to curb tax evasion and black money, many steps were taken by the government and the income-tax department in the last few years. In its drive, the tax department has initiated prosecution against those suspected of tax evasion. According to a Central Board of Direct Taxes (CBDT) press release, dated 12 January 2018, there is a “sharp increase in prosecution of tax evaders by Income Tax Department." The release further stated that “48 persons were convicted for various offences during the current (financial) year (up to the end of November 2017) as compared to 13 convictions for the corresponding period in the immediately preceding year, marking an increase of 269%." Apart from facing prosecution, which could lead to imprisonment, there are also various circumstances in which an income-tax assessee may have to pay hefty penalties. Here are some such provisions of the tax laws.
Penalties—even imprisonment—can be invoked due to ignorance or laziness, as well as wilful actions leading to evasion of tax or any income-tax-related obligation. In some cases, you may have to face both penalty and jail. “Under the provisions of the income-tax Act, the tax department is authorized to impose penalties either when the assessee defaults on payment of taxes or when she underreports or misreports income while filing of the return of income," said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP, a Delhi-based chartered accountancy firm. The penalties can range from Rs100 to a maximum of 300% of the tax sought to be evaded, in addition to the tax payable. And, “when criminal offence is established, a jail term between 3 months and 7 years may be given to the offender," said Shailesh Kumar, director, direct taxation, Nangia & Co LLP. Here are some cases where penalties and jail term can be imposed.
Late payment of tax: The income-tax department has prescribed timelines for paying advance tax, and self-assessment tax. If you fail to pay these taxes on time, an assessing officer can impose penalties as per her discretion, though not exceeding the tax in arrears.
Late filing of tax return: According to section 139(1) of the Income-tax Act, 1961, an assessee should file her tax return by due date, which is usually 31 July of the assessment year. Under section 139(4), you can file the return within 1 year after the relevant assessment year gets over. After that, you cannot file your return for that year. In case a taxpayer fails to file a return within the period described above, “a penalty of Rs5,000 will be imposed if the return is filed post due date but on or before 31 December of assessment year, and Rs10,000 in any other case," said Maheshwari.
However, wilful default in filing a return can also lead to imprisonment, which shall not be less than 6 months and which may extend to 7 years; with fine where the tax sought to be evaded exceeds Rs25 lakh. In other cases, imprisonment can be of minimum 3 months or maximum 2 years, with fine.
Not producing books of account: It is the assessee’s responsibility to maintain and furnish documents to authorized persons for inspection on demand. If assessees fail to provide such documents, under section 132(1)(iib) of the Act, they “shall be punishable with imprisonment, which may extend to 2 years and shall also be liable to fine in accordance with section 275B," said Maheshwari.
Income from undisclosed sources: Not only is it mandatory to disclose all incomes, one also need to disclose their source. As per section 271AAC of the Act, an assessing officer may direct the taxpayer to pay a penalty at the rate of 10% of the tax payable.
The officer can also impose penalties if there is any addition of income due to: unexplained cash credits, unexplained investments, unexplained money, amount of investments not fully disclosed in books, unexplained expenditure, or amount borrowed or repaid on hundi (an informal financial instrument).
Receipt of more than Rs2 lakh in cash: As per section 269ST of the Act, a person shall not receive an amount of Rs2 lakh or more in cash in aggregate from a person in one day, or in respect of a single transaction or in respect of transactions relating to one event or occasion from one person. In case a person does so, she shall be liable to pay penalty equal to the amount of such receipt.
Wilful evasion of tax: “As per newly inserted Section 270A (which has replaced section 271 of the income-tax Act), if an individual is found to have underreported her income, a penalty equal to 50% of income tax payable may be levied. However, in cases of “misreporting of income," penalty equal to 200% of the income tax payable may be levied," said Kumar. Further, Section 276C of the of the Act stipulates punishment for wilful attempts to evade tax, penalty or interest or underreporting of income. In such cases, a person may be punished with imprisonment of 6 months to 7 years; with fine where the tax sought to be evaded exceeds Rs25 lakh. In cases where evaded tax amount is less than Rs25 lakh, the imprisonment period would be a minimum 3 months and maximum 2 years, with fine.
There are various other income tax provisions under which a person may have to pay penalties or face imprisonment. Besides that, there could be other problems that one has to face if income tax return and other obligations are not met on time. For instance, without tax returns, it will be difficult to get a loan or buy life insurance. Typically, lending institutions and insurance companies ask for last 3 years’ tax returns to sanction a loan or offer higher sum assured for insurance. So, it is prudent to stick to tax-related timelines for paying taxes and filing the returns.