Penalty For Under-Reporting Or Misreporting Income

Section 270A of the Income Tax Act imposes a penalty for under-reporting or misreporting income. The section is operational beginning with the assessment year 2017-2018. The section outlines the various provisions in the event of income under-reporting or misreporting. The Assessing Officer/Commissioner (Appeals)/Principal Commissioner/Commissioner has the exclusive authority to issue fines.

Meaning Of Under-Reporting Income 

Income Under-reporting occurs when the income recorded by the assessee while submitting returns is less than the actual income. Under-reporting could arise if the assessee neglected to file the return for certain specific incomes, such as interest, capital gains, and so on. The assessee’s error could be due to either ignorance of such incomes or neglect in filing a tax return.

Under-Reporting vs. Misreporting

Misreporting of income occurs under the following conditions:

  • Facts are misrepresented or suppressed.
  • Inadequate recording of investments in the books of account
  • Claims of expenditure that are not backed by evidence
  • Making a note of any erroneous entries in the books of account
  • Failure to record any receipt in books of account, which has an impact on total revenue
  • Failure to record any international transaction / any presumed international transaction / any of the listed domestic transactions

Penalty For Under-Reporting Or Misreporting Income

  • In the event of under-reporting income, a penalty of up to 50% of the tax payable may be imposed. Misreporting income could result in a charging penalty of up to 200 percent of the tax owed on the misreported income. 
  • However, an assessee may request to the Assessing Officer (AO) for immunity from penalty imposition, in which case he or she must explain why the specific under-reported or misrepresented income was not disclosed. 
  • If their response is adequate, the AO may decide not to penalize the assessee. It is also possible that the AO will lessen the assessee’s penalty. 
  • In the event of a penalty levy, any penalty order imposed by the relevant authorities must be conveyed. The assessee should be communicated in writing. 
  • Concerned authorities can include any of the following individuals:
  • The Assessing Officer
  • The Commissioner (Appeals)
  • The Commissioner
  • The Principal Commissioner

Cases Of Under-Reported Income 

A person is regarded to have under-reported his income if any of the following conditions are met: –– 

  • the income assessed is larger than the maximum amount not payable to tax, and no income return is filed; 
  • The assessed income exceeds the income calculated during processing under section 143(1)(a), where the return is filed. 
  • The assessed income is greater than the income assessed or reassessed immediately before the reassessment;
  • The income assessed is greater than the income assessed immediately before such
  • The amount of deemed total income assessed or reassessed under section 115JB/115JC is greater than the amount of deemed total income determined in the return processed under section 143(1)(a); 
  • Where no income return has been filed, the amount of considered total income assessed under section 115JB/115JC is larger than the maximum amount not payable to tax. 

Under-Reported Income Tax Is Due [Section 270A(10)]

  • Where no return of income has been given and the income has been assessed for the first time, The tax estimated on unreported income is raised by the highest number not taxable to tax as if it were net profit.
  • Where the total income determined under section 143(1)(a) or assessed, reassessed, or recomputed in a preceding order is a loss, The amount of tax calculated on under-reported income is enhanced by the highest amount not subject to tax.
  • X – the amount of tax calculated on the under-reported income multiplied by the total income established under section 143(1)(a) or total income assessed, reassessed, or updated accordingly in the same order as the total revenue assessed, reassessed, or recomputed in the same order as the total income.
  • And Y – the amount of tax calculated on the total income determined under section 143(1)(a) or total income assessed, reassessed, or recomputed in a preceding order as if it.
  • In other words, it will be a tax on entire income, including under-reported income – a tax on total income as established by section 143(1)(a), 143(3), or 147, as applicable.