In Budget 2007, relief from concealment penalty is prescribed for search cases. Section 271AAA, proposed to be inserted into the statute book, provides for a penalty equal to 10 per cent of the `undisclosed income'; the harsh concealment penalty contained in Section 271 will no longer apply. The effective tax rate, including this penalty, in respect of admitted `undisclosed income' will be 45.32 per cent (which include surcharge and cess). This is applicable in respect of search initiated on or after June 1, 2007.

If the assessee admits `undisclosed income' in the course of search and pays tax with interest, he is spared from concealment penalty which is otherwise leviable at a minimum of 100 per cent of the tax and a maximum of 300 per cent of the tax.

This 10 per cent `undisclosed income' penalty provide immunity or protection from harsh concealment penalty otherwise applicable.

For characterising the income as `undisclosed' the conditions to be satisfied are: a) it has not been recorded in the books of account or other documents maintained in the normal course, before the date of search; or b) it has not been disclosed to the Chief Commissioner or Commissioner on or before the date of search.

The assessee must satisfy the following conditions for getting the relief.

In the course of search, in the statement recorded under Section 132(4), he must admit the undisclosed income and specify the manner in which such income was derived.

The assessee must substantiate the manner in which the undisclosed income was derived.

Pay tax together with interest, in respect of the undisclosed income.

The condition that the assessee must specify the manner in which such income was derived and substantiate the same will be difficult to comply with, and it may have spill-over or consequential effect on other taxpayers. In some cases, it will not be possible to substantiate the manner of earning such `undisclosed income' except the fact of owning income and assets representing such income.

Before the Bill is passed into law, if these conditions are relaxed, the taxpayers will be prompted to declare the undisclosed income and, thereby, get relief.

Yet another change for giving relief from concealment penalty is contained in Explanation 4 to Section 271. This change is retrospectively applicable from April 1, 2003.

Where the assessee fails to furnish his return of income voluntarily even though he had taxable income, he could be penalised under Section 271. Explanation 3 to Section 271 says that the return furnished after the receipt of notice under Section 148 is also liable for penalty.

The Finance Bill, 2007 proposes to give relief in computing the quantum of penalty leviable in such cases. To the extent the assessee has paid advance tax, self-assessment tax and the tax deducted or collected at source before the issue of notice under Section 148 shall be reduced from the `assessed tax' and only the balance shall be treated as `the amount of tax sought to be evaded' under Section 271.

As the amendment is proposed retrospectively, any penalty levied under Section 271 so far could be subject to rectification because of the change of law.

Also, taxpayers who have paid advance tax and self-assessment tax before the issue of notice under Section 148 will gain relief due to the proposed amendment. The change is equitable as the tax already remitted to the exchequer acts as a bar against levy of penalty to that extent of actual payment.

V. K. Subramani
(The author is an Erode-based chartered accountant.)