Penalty for failure to furnish information or document under section 506.

458

If any Indian concern which is required to furnish any information or document under section 506, fails to do so, the prescribed income-tax authority under the said section, may direct that such Indian concern shall pay by way of penalty, a sum of—

• (a) 2% of the value of the transaction in respect of which such failure has taken place, if such transaction had the effect of directly or indirectly transferring the right of management or control in relation to the Indian concern;
• (b) five lakh rupees, in any other case.

Explanation

Section Summary:

Section 458 of the Income Tax Act imposes penalties on Indian concerns (business entities or organizations) that fail to furnish required information or documents under Section 506. The penalty is levied by the prescribed income-tax authority and varies depending on the nature of the transaction involved.

Key Changes:

This section introduces a structured penalty framework for non-compliance with Section 506, which mandates the submission of specific information or documents. The penalty is calculated based on the type of transaction:

1. 2% of the transaction value if the transaction involves transferring management or control rights of the Indian concern.
2. Fixed penalty of ₹5 lakh in all other cases.

This is a new provision aimed at ensuring compliance with disclosure requirements, particularly in transactions involving significant changes in management or control.

Practical Implications:

• For Indian Concerns: Businesses must ensure timely and accurate submission of information or documents as required under Section 506. Failure to comply could result in significant financial penalties.
• For Transactions Involving Management/Control Transfer: Entities involved in transactions that transfer management or control rights must be especially cautious, as the penalty is tied to the transaction value, which could be substantial.
• For Tax Authorities: This provision strengthens enforcement mechanisms, enabling authorities to penalize non-compliance effectively.

Critical Concepts:

• Indian Concern: Refers to any business entity, organization, or enterprise operating in India.
• Transaction Value: The monetary value of the transaction in question, which serves as the basis for calculating the penalty in cases involving management or control transfer.
• Section 506: This section mandates the submission of specific information or documents by Indian concerns, particularly in cases involving international transactions or significant corporate changes.

Compliance Steps:

1. Identify Reporting Obligations: Determine if the transaction falls under the scope of Section 506 and requires disclosure.
2. Maintain Documentation: Ensure all relevant information and documents are prepared and readily available for submission.
3. Timely Submission: Submit the required information or documents within the stipulated timeframe to avoid penalties.
4. Monitor Transactions: For transactions involving management or control transfer, calculate the potential penalty (2% of transaction value) to assess financial risks.

Examples:

1. Management Transfer Scenario: An Indian company, XYZ Ltd., enters into a transaction with a foreign entity that results in the transfer of management control. The transaction value is ₹10 crore. If XYZ Ltd. fails to furnish the required information under Section 506, it could face a penalty of 2% of ₹10 crore, i.e., ₹20 lakh.
2. General Non-Compliance Scenario: ABC Pvt. Ltd. fails to submit documents related to a routine transaction (not involving management or control transfer) as required under Section 506. The company would face a fixed penalty of ₹5 lakh.

This section emphasizes the importance of compliance with disclosure requirements, particularly in high-stakes transactions, and introduces financial consequences for non-compliance.