FACELESS PENALTY SCHEME, 2021

Under the overarching banner of ‘Transparent Taxation – Honoring the Honest’, the Central Government had introduced Faceless Assessment Scheme 2019, Faceless Appeal Scheme 2020 and the Taxpayer’s Charter. Moving forward, the Parliament had inserted sub-section 2A to Section 274 of the Income Tax Act, 1961 (‘Act’). This amendment empowered the Central Government for framing a scheme for e-penalty proceedings. Pursuant to this amendment, the Central Board of Direct Taxes (‘CBDT’) has announced the Faceless Penalty Scheme 2021 (‘Scheme’) effective from 12 January 2021.

Section 274 of the Income Tax Act provides for the procedure, for imposing penalty (for underreporting or mis-reporting of income u/s 270A) under Chapter XXI of the Act. In response to a show cause notice issued by the Assessing Officer (AO), assessee or his authorized representative was still required to visit the office of the Assessing Officer. With the advent of the Faceless Assessment Scheme, 2019 and in order to ensure that the reforms initiated by the Department to eliminate human interface from the system reaches the next level, it was imperative to launch a Faceless Penalty Scheme on the lines of Faceless Assessment Scheme, 2019.

Therefore, the Finance Act 2020 has inserted an enabling provision in the form of a new sub-section (2A) in section 274 of the Act so as to provide that the Central Government may notify an e-scheme for the purposes of imposing penalty so as to impart greater efficiency, transparency and accountability by—

  • eliminating the interface between the Assessing Officer and the assessee in the course of proceedings to the extent technologically feasible;
  • optimizing utilization of the resources through economies of scale and functional specialization;
  • introducing a mechanism for imposing of penalty with dynamic jurisdiction in which penalty shall be imposed by one or more income-tax authorities

Launch of Faceless Penalty Scheme, 2021:

In exercise of the powers conferred by sub-section (2A) of section 274 of the Income-tax Act, 1961, the Central Government has notified the Faceless Penalty Scheme 2021, vide its gazette Notification No. S.O. 117 (E), dated 12.1.2021 and for the purposes of giving effect to the Faceless Penalty Scheme, 2021, the Central Government vide its Gazette Notification No. S.O. 118 (E) dated 12.1.2021, has issued Directions for the Implementation of the Faceless Penalty Scheme, 2021.

The New Faceless Penalty Proceedings Hierarchy:

For the purpose of conducting of the penalty proceedings in a faceless manner, the CBDT is setting up:

  1. National Faceless Penalty Centreto facilitate the conduct of faceless penalty proceedings in a centralized manner and vest it with the jurisdiction to impose penalty in accordance with the provisions of this Scheme;
  2. Regional Faceless Penalty Centers,as it may deem necessary, to facilitate the conduct of faceless penalty proceedings, which shall be vested with the jurisdiction to impose penalty in accordance with the provisions of this Scheme;
  3. Penalty Units, as it may deem necessary, to facilitate the conduct of faceless penalty proceedings, to perform the function of drafting penalty orders, which includes identification of points or issues for imposition of penalty under the Act, seeking information or clarification on points or issues so identified, providing opportunity of being heard to the assessee or any other person, analysis of the material furnished by the assessee or any other person, and such other functions as may be required for the purposes of imposing penalty;
  4. Penalty Review Units, as it may deem necessary, to facilitate the conduct of faceless penalty proceedings, to perform the functions of review of draft penalty order, which includes checking whether the relevant material evidence has been brought on record, whether the relevant points of fact and law have been duly incorporated in the draft order, whether the issues on which penalty is to be imposed have been discussed in the draft order, whether the applicable judicial decisions have been considered and dealt with in the draft order, checking arithmetical correctness of computation of penalty, if any, and such other functions as may be required for the purposes of review, and specify their respective jurisdiction.

Salient Features of the Scheme:

  • Authentication and Delivery of Electronic Record:Electronic records can be authenticated by an assessee by electronic verification code or by digital signature. All electronic communications will be made by the department by sending the authenticated copy to the assessee registered email address, or Mobile App, or on the registered electronic filing account on the portal (‘Registered Account’). The assessee will receive an alert of such communication by way of SMS, or an update on his/her email address or mobile app.
  • No Physical interface between the assessee and revenue authorities:An assessee will not be required to appear before any income tax authority. He/she will file the response against any communication through the Registered Account electronically. However, an assessee may apply for personal hearing to the Chief Commissioner / Director General of the relevant RFPC. If approved, the hearing would be conducted by video conferencing.
  • Team Based Proceedings:NFPC will act as a focal point of contact for all the parties of the proceedings. PRU will review the draft penalty order prepared by the PU.
  • Appellate Proceedings:An appeal against the order of NFPC can be made before the Commissioner (Appeals) having jurisdiction over the jurisdictional income tax authority or before the National Faceless Appeal Centre.
  • Dynamic Jurisdiction for Penalty Proceedings:The cases for penalty proceedings may be allotted to any PU under any RFPC by an automated allocation system. The case of an assessee can be undertaken from any part in India. For instance, an assessee in city A of State B may be assessed by a PU in city C of State D.

Handy Practical Considerations in Faceless Penalty Regime:

  1. Currently there is one common response window for the faceless assessments, faceless appeals and the faceless penalty proceedings. In future, separate windows may be provided.
  2. Only the scanned files in pdf format are to be uploaded as attachments. The resolution of the pdf file should be kept at 300dpi. The multiple pages in one submission should be uploaded as one pdf file only.
  3. Currently the Video Conferencing (VC) functionalities are in the process of being built and soon the VC links will be available in the e-proceedings window of the e-filing portal.
  4. UDINs are not required for e-filing of assessments and appeal submissions in the faceless regime.
  5. The formats of State-wise Vakalatnamas with applicable stamp duty, will also be available shortly in the e-filing porta

Conclusion:

The Scheme is expected to reduce the chances of error in penalty order and discretion of tax officer in the penalty proceedings. Risk management Strategy and automated examination tool have not been defined in the Scheme. We would have to wait for CBDT’s clarification to get a better understanding. The circumstances in which the assessee may be granted a right to personal hearing via video conferencing has neither been provided in the Scheme nor has been notified by the CBDT separately. Therefore, a suitable clarification is awaited. The lack of reasonable opportunity of being heard may be considered as violation of principles of natural justice and may become an issue of litigation.

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