Levy of interest and penalty incertain cases.

298(1)

Where the return of total income as required under a notice under section 294(1)(a), is not furnished within the period specified in such notice, or is not furnished, then,—

• (a) the assessee shall be liable to pay simple interest at the rate of 1.5% of the tax on undisclosed income determined under clause (c) of said sub section;
• (b) the interest in clause (a) shall be paid for every month or part of a month comprised in the period commencing on the day immediately following the expiry of the time specified in said notice, and ending on the date of completion of assessment under clause (c) of said sub-section.

298(2)

The Assessing Officer or the Commissioner (Appeals) in the course of any proceedings under this Chapter, may direct that the person shall pay by way of penalty a sum which shall be equal to 50% of tax so leviable in respect of the undisclosed income determined by the Assessing Officer under section 294(1)(c).

298(3)

The order imposing penalty under this section or section 444(1) or 450 or 451 or 452 shall not be made for the block period in respect of a person, if—

• (a) such person has furnished a return under section 294(1)(a);
• (b) the tax payable on the basis of such return has been paid or, if the assets seized consist of money, the assessee offers the money so seized to be adjusted against the tax payable;
• (c) evidence of tax paid is furnished along with the return; and (d) an appeal is not filed against the assessment of that part of income which is shown in the return.

298(4)

The provisions of the sub-section (3) shall not apply where the undisclosed income determined by the Assessing Officer is in excess of the income shown in the return and in such cases the penalty shall be imposed on that portion of undisclosed income determined, which is in excess of income shown in the return.

298(5)

The order imposing a penalty under sub-section (2) shall not be made—

• (a) unless an assessee has been given a reasonable opportunity of being heard;
• (b) by the Deputy Commissioner or Assistant Commissioner or the Deputy Director or Assistant Director, where penalty exceeds two lakh rupees except with the previous approval of the Additional Commissioner or the Additional Director or the Joint Commissioner or the Joint Director;
• (c) in a case where the assessment is the subject-matter of an appeal under section 357 or 362,— (i) after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed; or (ii) six months from the end of the financial year in which the order of the Commissioner (Appeals) or the Appellate Tribunal is received by the jurisdictional Principal Commissioner or Commissioner, whichever period expires later;
• (d) in a case where the assessment is the subject-matter of revision under section 377, after the expiry of six months from the end of the financial year in which such order of revision is passed;
• (e) in any case other than those mentioned in clause (c) and clause (d), after the expiry of the financial year in which the proceedings, in the course of which notice for the imposition of penalty has been issued, are completed, or six months from the end of the financial year in which notice for imposition of penalty is issued, whichever period expires later.

298(6)

In computing the period of limitation under this section, the following period shall be excluded––

• (a) the time taken in giving an opportunity to the assessee to be reheard under section 244(2);
• (b) the period commencing on the date on which stay on proceeding under sub-section (2) was granted by an order or injunction of any court and ending on the date on which certified copy of the order vacating the stay was received by jurisdictional Principal Commissioner or Commissioner.

298(7)

Where immediately after the exclusion of the period referred to in sub-section (6), the remaining period of limitation referred to in sub-section (5) available to the Assessing Officer for making an order under sub-section (2) of this section is less than sixty days, such remaining period shall be extended to sixty days and the aforesaid period of limitation shall be deemed to be extended accordingly.

298(8)

If after exclusion of the period referred to in sub-section (7), the remaining period of limitation for making of an order for imposition of penalty expires before the end of a month, such remaining period shall be extended to the end of such month.

298(9)

An income-tax authority on making an order under sub-section (2) imposing a penalty, unless he is himself an Assessing Officer, shall forthwith send a copy of such order to the Assessing Officer.

Explanation

Section Summary:

Section 298 of the new income tax law deals with the levy of interest and penalties in cases where taxpayers fail to comply with specific requirements, such as not filing a return of total income as required under a notice issued under Section 294(1)(a). The section outlines the conditions under which interest and penalties are imposed, the calculation of such charges, and the procedural safeguards for taxpayers.

Key Changes:

1. Interest on Undisclosed Income: If a taxpayer fails to file a return within the specified period, they are liable to pay simple interest at 1.5% per month on the tax related to undisclosed income.
2. Penalty for Undisclosed Income: A penalty equal to 50% of the tax on undisclosed income can be imposed by the Assessing Officer or Commissioner (Appeals).
3. Exemptions from Penalty: No penalty will be imposed if the taxpayer files the return, pays the tax due, and does not appeal against the assessment of the income shown in the return.
4. Limitation Periods for Penalty Orders: Specific timelines are provided for issuing penalty orders, with extensions allowed in certain cases (e.g., court stays, rehearing opportunities).
5. Procedural Safeguards: Taxpayers must be given a reasonable opportunity to be heard before a penalty is imposed, and higher penalties (exceeding ₹2 lakh) require prior approval from senior tax authorities.

Practical Implications:

1. For Taxpayers:

   • Failure to file returns or disclose income accurately can lead to significant financial burdens due to interest and penalties.
   • Taxpayers must ensure timely filing of returns and payment of taxes to avoid penalties.
   • If a penalty is imposed, taxpayers have the right to be heard and can challenge the penalty if procedural safeguards are not followed.

2. For Businesses:

   • Businesses must maintain accurate records and ensure compliance with filing deadlines to avoid penalties.
   • Undisclosed income, if detected, can lead to substantial penalties, impacting cash flow and financial planning.

3. For Tax Authorities:

   • The section provides a structured framework for imposing penalties and interest, ensuring consistency in enforcement.
   • Authorities must adhere to strict timelines and procedural requirements when issuing penalty orders.

Critical Concepts:

1. Undisclosed Income: Income that has not been reported in the tax return but is identified by the tax authorities during assessment.
2. Simple Interest: Interest calculated at a fixed rate (1.5% per month) on the tax amount related to undisclosed income.
3. Block Period: A specific period for which undisclosed income is assessed, typically relevant in cases of search and seizure.
4. Limitation Period: The time within which a penalty order must be issued. This period can be extended in certain circumstances, such as court stays or rehearing opportunities.

Compliance Steps:

1. File Returns on Time: Ensure that returns are filed within the period specified in the notice under Section 294(1)(a).
2. Pay Taxes Due: Pay the tax liability as per the return filed or adjust seized assets (e.g., cash) against the tax payable.
3. Maintain Documentation: Keep records of tax payments and filed returns to provide evidence if required.
4. Respond to Notices: If a penalty notice is issued, respond promptly and provide necessary explanations or evidence to avoid penalties.
5. Monitor Limitation Periods: Be aware of the timelines for penalty orders and ensure compliance with procedural requirements.

Examples:

1. Scenario 1: A taxpayer receives a notice under Section 294(1)(a) to file a return by March 31, 2024. They fail to file the return by the deadline. The Assessing Officer determines undisclosed income of ₹10 lakh, with a tax liability of ₹3 lakh. The taxpayer will be liable to pay:

   • Interest: 1.5% of ₹3 lakh = ₹4,500 per month, starting from April 1, 2024, until the date of assessment.
   • Penalty: 50% of ₹3 lakh = ₹1.5 lakh.

2. Scenario 2: A taxpayer files a return showing income of ₹5 lakh but the Assessing Officer determines undisclosed income of ₹8 lakh. The taxpayer has paid the tax on ₹5 lakh and does not appeal the assessment. No penalty will be imposed on the ₹5 lakh, but a penalty of 50% of the tax on the additional ₹3 lakh will apply.

This section emphasizes the importance of timely compliance and accurate disclosure of income to avoid financial penalties and interest charges.