Penalty Not to Be Imposed in Certain Cases [Section 173]

Here’s a detailed explanation of Section 173 (Penalty Not to Be Imposed in Certain Cases) under the Equalisation Levy (EL) provisions of the Finance Act, 2016:

1. Overview of Section 173

Section 173 provides safeguards against penalties under Sections 171 (failure to deduct/pay EL) and 172 (failure to furnish EL statements) if the assessee or e-commerce operator can demonstrate reasonable cause for non-compliance. Key features:

• No penaltyif the default was due to a genuine reason beyond the taxpayer’s control .
• Opportunity to be heard: The Assessing Officer (AO) must give the taxpayer a fair chance to explainbefore imposing any penalty .

2. Conditions for Avoiding Penalty

1. “Reasonable Cause” Defense

Penalties may be waived if the taxpayer proves:

• • Technical errors: System failures or procedural lapses .
  • Legal ambiguity: Confusion due to unclear provisions (e.g., determining residency status of customers) .
  • Unavoidable circumstances: Natural disasters, fraud by third parties, or other exceptional situations .

1. Procedural Requirements

• • Burden of proof: The taxpayer must submit evidence(e.g., documentation, affidavits) to justify the default .
  • AO’s discretion: The AO evaluates the explanation but cannot impose penalties arbitrarily .

3. Key Exclusions

Penalties cannot be waived for:

• Willful defaults: Deliberate non-compliance or fraud .
• Negligence: Lack of due diligence (e.g., ignoring clear deadlines) .

4. Interaction with Other Provisions

• Appeals: If a penalty is imposed despite reasonable cause, taxpayers can appeal to the CIT(A)under Section 174 .
• Rectification: Errors in penalty orders can be corrected under Section 169.

5. Practical Examples

• Case 1: An e-commerce operator fails to file Form 1 due to a cyberattack on its servers. If proven, penalties may be waived .
• Case 2: A company deducts EL but delays payment due to a bank strike. Interest applies, but penalties may be avoided .

6. Recent Updates

• The 6% levy on online adsmay be abolished from April 2025, but Section 173 remains applicable for past defaults .

Key Takeaways

1. Document defaults: Maintain records to prove reasonable cause.
2. Respond promptly: Submit explanations with evidence when notified by the AO.
3. Appeal if necessary: Use Section 174 to challenge unjust penalties.