A move to check arbitrary decisions by the tax authorities may result in a huge fine for minor transgressions or mistakes while reporting tax, experts fear.

In this year's budget fine-print, the finance ministry has inserted a "new Section 270A (which) provides for levy of penalty in cases of under-reporting and misreporting of income".

The penalty has been fixed at 50 per cent of tax payable for under-reporting and could be 200 per cent for misreporting. It replaces earlier rules that led to a penalty of 100-300 per cent for such transgressions.

However, tax experts point out that there is no clarity on what constitutes under-reporting and misreporting. This can lead to situations where taxpayers may have to pay a huge penalty for making a small mistake.

A genuine mistake such as missing out on reporting a minor income or interest can be treated as under-reporting, if not misreporting, and fined at a penal rate.

Aseem Chawla, partner with MPC Legal, Solicitors & Advocates, said, "The move to replace existing penalty provisions with a new code may turn out to be regressive when analysed from the perspective of having requisite checks and balances in a penal regime defined in a tax statute."

The problem arises because the proposed new penal provision rests on the premise that every time there is a difference between income returned and assessed, it implies a case of under-reporting. Moreover, "the burden is upon the taxpayer to prove that this does not constitute under-reporting", which becomes troublesome, Chawla said.

"The proposed regime is placing the cart before the horse and unsettles one of the canons of natural justice, i.e. innocent till proven guilty. The shifting of burden upon taxpayer, ab initio, itself would result in some unintended consequences," he added.

Besides, the thin line between under-reporting and misreporting is not clearly demarcated. In such circumstances, revenue authorities could always play safe and impose a penalty of 200 per cent even in genuine cases where a person forgets to report an income.

Misreporting of income has been specified as misrepresentation or suppression of facts; non-recording of investments in books of account; claiming expenditure not substantiated by evidence; recording of false entry in books of account; failure to record any receipt in books of account having a bearing on total income; failure to report any international transaction or deemed international transaction.

According to tax analysts, all the specified clauses, except false entry, can also be the cause for underreporting.

Income tax practitioners maintain that it is not clear whether the assessing officer, commissioner (appeals) or the principal commissioner will initiate the penalty proceedings. It is also unclear whether such penalties can be challenged before other tax authorities or need to be taken up before the tax tribunals.

CBDT move

Ending uncertainty over tax treatment, the Central Board of Direct Taxes (CBDT) has said that benefits under the India-UK double taxation avoidance agreement (DTAA) will be applicable to partnership firms in the UK as well as India, reports PTI.

Apprehensions that the term "person" in the DTAA does not specifically include partnership were brought to the notice of the CBDT and clarity was sought on whether the provisions of the treaty are applicable to a partnership.

In a circular, the CBDT said the provision of the DTAA would be "applicable to a partnership i.e. a resident of either India or the UK, to the extent that the income derived by such partnership, estate or trust is subject to tax in that state as the income of the resident either in its own hand or in the hands of its partner or beneficiaries".