Income-tax penalty. Deduction claimed for cess, surcharge to be treated as under-reported income, to attract penalty

The Finance Ministry has proposed that deduction claimed for cess and surcharge under Income Tax Act will be treated as “under-reported” income. Experts who examined the provision said this will invite penalty at the rate of 50 per cent.

These proposals are through a new clause as part of the official amendments to the Finance Bill 2022. Finance Minister Nirmala Sitharaman will move the official amendments when Finance Bill 2022 on Friday after which it will be taken up for consideration and passage in Parliament. The amendment, uploaded on the portal for MPs, have been perused thoroughly by BusinessLine.

One such amendment is related with proposal to insert a new clause to amend section 155 of the Income Tax Act. The clause says:”When any deduction in respect of any surcharge of cess, which is not allowable as deduction under section 40, has been claimed and allowed in the case of an assessee in any previous year, such claim shall be deemed to be under-reported income of the assessee.” 

‘Under-reported’ income

According to Chartered Account Ved Jain, once declared as “under-reported”, the total income will be recomputed and then assesses will have to pay tax along with interest and penalty.

However, the proposed clause provides for not being tagged as “under-reported” if an assesse makes an application to the assessing officer for re-computation of the total income without allowing the claim for deduction of surcharge or cess.

Sandeep Sehgal, Tax Partner with AKM Global, said through this amendment, the IT department has put the onus on the taxpayer to self-compute the income and to disallow the cess/surcharge, if any claimed by them. “The taxpayer shall be required to pay the tax and interest on the amount of the reversal. If not complied, the tax department would consider it a fit case for levying penalty at 50 per cent of the amount of the tax benefit so claimed,” he said.

This new amendment has been proposed to prescribe conditions for defining under-reported income. In the Finance Bill, it is quite clear that the provision relating to tax including cess and surcharge will come into effect retrospectively.

“The amendment will take effect retrospectively from April 1, 2005 and will accordingly apply in relation to the assessment year 2005-06 and subsequent assessment years,” says the Finance Bill. Sandeep Jhunjhjnwala, Partner with Nangia Andersen LLP, said the new proposed clause defines under-reported income in case of cess and surcharge claimed as deduction.

“It seems that pending claims in appeals may not be subject to penalty as they have not been allowed to the taxpayers yet. The amendment also provides an opportunity to taxpayers to seek non-levy of any penalty by making a claim to the assessing officer requesting for recomputation of total income without allowing surcharge or cess as an expenditure. The form and timeline for making such a claim will be prescribed in due course of time,” he said.