• Penalties :The Income Tax Department can impose penalties on taxpayers who fail to comply with the Income Tax Act. The penalties can range from a few thousand rupees to several lakhs of rupees, depending on the nature of the non-compliance.
• Interest :Taxpayers who fail to pay their taxes on time are liable to pay interest on the outstanding tax amount. The interest rate is charged at a monthly rate of 1%.
• Prosecution : In serious cases of non-compliance, such as tax evasion, the Income Tax Department can prosecute taxpayers in a court of law. If convicted, taxpayers can be sentenced to imprisonment for up to 7 years.

In addition to the above consequences, non-compliance with the Income Tax Act can also have a number of other negative consequences, such as:

• Damage to reputation : A conviction for tax evasion can damage a taxpayer’s reputation and make it difficult for them to do business.
• Difficulty getting loans : Banks and other financial institutions may be reluctant to lend money to taxpayers who have a history of non-compliance with the Income Tax Act.
• Difficulty getting visas :Tax evaders may have difficulty getting visas to travel to other countries.

It is important to note that the Income Tax Department has a number of powers to enforce compliance with the Income Tax Act. These powers include the power to:

• Conduct searches and seizures
• Issue summonses
• Impound bank accounts
• Attach and sell property

The Income Tax Department also has a number of information-gathering powers. For example, the Income Tax Department can require banks and other financial institutions to provide information about their customers’ accounts.

EXAMPLE

State: Maharashtra

Facts:

• A parent company, X Ltd., transfers a capital asset to its wholly-owned subsidiary company, Y Ltd., on 1st April, 2023.
• The transfer is exempt from capital gains tax under Section 47(iv) of the Income-tax Act, 1961.
• On 1st April, 2024, Y Ltd. converts the capital asset into stock-in-trade of its business.

Consequences:

• The exemption under Section 47(iv) is withdrawn and X Ltd. is liable to pay capital gains tax on the transfer of the capital asset.
• The capital gains tax is calculated on the difference between the fair market value of the capital asset on the date of transfer and the cost of acquisition of the capital asset in the hands of X Ltd.
• The capital gains tax is assessed at the rate applicable to the taxpayer’s income slab.

Specific example:

• X Ltd. is a company incorporated in Maharashtra.
• On 1st April, 2023, X Ltd. transfers a capital asset, a building, to its wholly-owned subsidiary company, Y Ltd.
• The fair market value of the building on the date of transfer is Rs.100 crore.
• The cost of acquisition of the building in the hands of X Ltd. is Rs.50 crore.
• On 1st April, 2024, Y Ltd. converts the building into stock-in-trade of its business.

Consequences:

• The exemption under Section 47(iv) is withdrawn and X Ltd. is liable to pay capital gains tax on the transfer of the building.
• The capital gains tax is calculated on the difference between the fair market value of the building on the date of transfer and the cost of acquisition of the capital asset in the hands of X Ltd., i.e., Rs.100 crore – Rs.50 crore = Rs.50 crore.
• X Ltd. is assessed to capital gains tax of Rs.50 core at the rate of 20%, i.e., Rs.10 crore.

FAQ QUESTIONS

• What are the consequences of not filing an income tax return?

If you fail to file an income tax return within the due date, you will be liable to pay a late filing fee. The fee is Rs.5,000 if your total income does not exceed Rs.5 lakh, and Rs.10,000 if your total income exceeds Rs.5 lakh. In addition, you may be liable to pay interest on the tax that is due.

If you fail to file an income tax return for several years, the Income Tax Department may assess your income on the basis of best judgment. This means that the department will estimate your income based on the information that is available to it, such as your bank statements and investment records. The estimated income may be higher than your actual income, which could lead to you paying more tax than you owe.

• What are the consequences of not paying income tax?

If you fail to pay your income tax on time, you will be liable to pay interest on the outstanding tax. The interest rate is compounded monthly, so the interest can quickly add up.

If you continue to fail to pay your income tax, the Income Tax Department may take a number of actions against you, including:

*Seizing your property and assets

* Freezing your bank accounts

* Preventing you from traveling abroad

* Filing a criminal complaint against you

• What are the consequences of evading income tax?

If you evade income tax by deliberately concealing your income or filing false returns, you could be liable to pay a penalty of up to 200% of the tax that is due. You may also be liable to imprisonment for up to 7 years.

It is important to note that the consequences of not filing or paying income tax can be severe. It is always best to file your income tax return on time and pay your taxes in full.

Other frequently asked questions about consequences under income tax

• What are the consequences of filing an incorrect income tax return?

If you file an incorrect income tax return, you may be liable to pay a penalty of up to 10% of the tax that is due. You may also be liable to pay interest on the outstanding tax.

• What are the consequences of failing to deduct tax at source (TDS)?

If you fail to deduct tax at source from payments that you make to others, you may be liable to pay a penalty of up to 10% of the tax that was not deducted.

• What are the consequences of failing to pay advance tax?

If you fail to pay advance tax, you will be liable to pay interest on the outstanding tax. The interest rate is compounded monthly, so the interest can quickly add up.