Immunity from imposition of Penalty & Prosecution under the Income Tax Act – An attractive litigation resolution strategy

Provisions of law

Section 270AA of the Income Tax Act enshrined in the statute effective April 2017 enables a taxpayer to seek immunity from (a) imposition of penalty u/s 270A (in case of under reporting of income other than on account of misreporting) and (b) initiation of prosecution proceedings for wilful attempt to evade taxes (section 276C) or failure to furnish return of income in due time (section 276CC). The immunity is subject to fulfilling the prescribed condition, namely:

  • Payment of assessed tax and interest within the stipulated time; and
  • Non filing of appeal against the order of assessment.

To avail such immunity, the taxpayer is required to make an application in the specified form (Form 68) within a period of one month from the end of the month in which the order is received. Upon receipt of the waiver application, the Assessing Officer, subject to fulfilment of eligibility condition, and on expiry of period prescribed for filing an appeal, is mandated to grant immunity from imposition of penalty and initiation of prosecution proceedings. The order accepting or rejecting such application is required to be passed within a period of one month from the end of the month in which the application is received. Further no order rejecting the application can be passed without given the taxpayer an opportunity of being heard.

The immunity scheme provides the opportunity to fast-track settlement of tax dispute and serve as an attractive strategy to reduce protracted litigation. The provisions however raise interesting questions some of which have recently been subject to judicial scrutiny.

Where penalty notice does not specify – “underreporting” or “misreporting” of income

One of the basic conditions for availing immunity from penalty and prosecution is that the notice for initiating penalty should be only in respect of under reporting of income other than on account of misreporting. In Schneider Electric South East Asia (HQ) Pte. Ltd vs. ACIT International Taxation Circle 3 (1)(2), New Delhi and Ors., the Hon’ble Delhi HC examined the question whether the taxpayer would be eligible to avail the immunity provisions where the penalty notice did not specify the limb (ie. ‘underreporting’ or ‘misreporting’ of income), under which the penalty proceedings had been initiated. Taking into regard the facts, the Court observed that the notice initiating penalty did not specify the particular limb under which penalty notice was issued. The Court further observed that the mere reference to the word ‘misreporting’ by the Assessing Officer in the assessment order could not form the basis to deny immunity (from imposition of penalty and prosecution) where there was no mention as to how the ingredients of “misreporting” were satisfied. Therefore, the impugned order rejecting application for grant of immunity was manifestly arbitrary. The Court accordingly directed the tax authorities to grant immunity under section 270AA.

The ruling brings to relevance the significance of specifying the particular limb under which penalty proceedings are initiated, non-specification of which can be inferred as a case of mere ‘underreporting’. Whether non-specification of specific limb can be a ground for quashing of the penalty notice itself would also be a point to ponder drawing analogy from the jurisprudence under the erstwhile penalty regime in relation to ‘concealment of income’ or ‘furnishing inaccurate particulars.

Failure to pass order accepting or rejecting the immunity application within stipulated period

Under the immunity scheme, the order accepting or rejecting application seeking immunity is required to be passed by the Assessing Officer within a period of one month from the end of the month in which the application is received. In Nirman Overseas Private Limied v NFAC Delhi, the Hon’ble Delhi High Court examined the question whether non issuance of the order by the Assessing Officer accepting or rejecting the immunity application under Section 270AA within the statutory timeline would be regarded as non-passing of the order granting immunity to the taxpayer or otherwise. The Court observed that under the scheme, there is prohibition for availing the benefit of immunity from penalty and prosecution under Section 270AA only in case where proceedings for levy of penalty have been initiated on account of alleged ‘misreporting’ of income. Further the scheme provides for satisfaction of specified condition i.e. payment of tax demand and non-institution of appeal. Where the aforesaid conditions are satisfied, the taxpayer cannot be prejudiced by the inaction of the assessing officer in passing an order (accepting or rejecting the application) within the statutory time limit considering the settled law that no prejudice can be caused to a taxpayer on account of delay/default on the part of the tax authorities. Consequently, penalty order u/s 270A of the Act was set aside with direction to grant immunity under Section 270AA of the Act. The decision of the Court brings forth the significance of the specified timeframe for passing the order accepting/rejecting the immunity application, non-conformance of which would impliedly mean acceptance of the immunity application.

Assessment order assessing a loss and nil tax liability

One of the eligibility conditions requires the taxpayer to pay the assessed tax and interest within the stipulated time before filing the application for grant of immunity. This raises a question whether immunity waiver can be availed in cases where no tax is assessed as payable, for instance where a loss return, after adjustment of variation proposed in the order still remain a loss. The plausible view in this regard is that such cases should also be eligible for the immunity scheme as any contrary interpretation would result in discrimination.

Take for instance a situation where an X amount is proposed as adjustment in case of 2 distinct taxpayer filing a loss return which results in assessed loss in case of taxpayer 1 and a marginal positive income of say Rs. 1000 (and consequentially tax and interest liability) in case of taxpayer 2. While there is no ambiguity regarding eligibility of taxpayer 2 to avail the immunity benefits, however in case taxpayer 1 is denied similar immunity benefit, this may result in discrimination in respect of same class of taxpayer which is constitutionally impermissible.

Also examining this from the perspective of ‘Doctrine of Impossibility’, it is now widely accepted by the courts that the law does not compel a man to do anything impossible or to do something which he cannot possibly perform. In the circumstances where income is assessed at a loss and there is Nil tax demand, the condition (to pay tax and interest) cannot be fulfilled and is arguably not applicable.

It will be useful to take note that case of Nirman Overseas Private Limited (supra) and similar case of Ultimate Infratech Private Limited v NFaC Delhi & Anr. decided in favour of the taxpayers were examined against the backdrop of the facts where the taxpayer was assessed at a loss and there was Nil tax liability, though this issue was not specifically contested by the parties. 

Immunity does not impact contentions in earlier years

A pertinent question which often arises in evaluating the option of availing the immunity scheme is whether it would have any adverse consequences on the issues assented (in connection with which immunity is sought) in relation to other years. To address any apprehension of adverse consideration by the Tax Authorities, the CBDT vide Circular No. 05/2018 dated 16 August 2018, has clarified that seeking immunity from penalty and prosecution u/s 270AA of the Act will not bar the taxpayer from contesting the same issue in any earlier assessment year. It has further been clarified that the Tax Authority shall not take an adverse view in penalty proceedings for earlier assessment years under old penalty regime merely because the taxpayer has applied for immunity under the new scheme.

Closing note

Tax litigation is time consuming and involves significant costs. The immunity scheme provides an attractive opportunity to stay clear from such litigations specially in cases where the amount of tax involved is not significant or the tax position adopted is less likely to be sustainable in higher litigation. This scheme would also be beneficial for taxpayer incurring losses with limited possibility to benefit from carry forward and setoff of such loss in future years. Taxpayers should therefore evaluate the scheme in interest of mitigating litigation and buying peace of mind.

Contributed by Yatin Sharma. Yatin can be reached at