Section 270A of the Income Tax Act (now to be replaced by Section 439 of Income Tax Act, 2025 with effect from 01.04.2026) establishes provisions for penalties in cases where a taxpayer under-reports their income. It outlines various scenarios where income is considered under-reported, such as discrepancies between assessed and declared income, or misreporting of financial facts. The penalty, which can be up to 50% or 200% of the tax payable on the under-reported income, is determined based on the nature of the under-reporting—whether due to genuine mistakes or deliberate misstatements. This section aims to ensure accurate income reporting and compliance with tax regulations, promoting fairness and transparency in tax assessments.
What is Under Reporting of Income Under Section 270A ?
Under Section 270A of the Income Tax Act, under-reporting of income refers to situations where a taxpayer declares less income than what is actually assessed by tax authorities. This discrepancy can occur in several scenarios outlined by the law:
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Declared Income vs. Assessed Income: If the income assessed by tax authorities is higher than what the taxpayer declared in their income tax return, it constitutes under-reporting.
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First-time Filers or Non-filers: For individuals or entities filing returns for the first time (under Section 148), under-reporting occurs if the assessed income exceeds the maximum amount not chargeable to tax.
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Reassessments and Revisions: When income reassessed during subsequent reviews is found to be higher than previously assessed or declared income, it falls under under-reporting.
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Deemed Total Income: Under-reporting also applies when deemed total income under Section 115JB or 115JC exceeds the income determined through regular assessments or returns.
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Effect on Losses: If an assessment or reassessment reduces losses or converts them into income, the difference between the declared loss and assessed income qualifies as under-reporting.
Penalties for under-reporting income under Section 270A are substantial, ranging from 50% to 200% of the tax payable on the under-reported income. The severity of the penalty depends on whether the under-reporting was due to genuine errors or deliberate misreporting (misrepresentation, suppression of facts, false entries, etc.). The section excludes certain situations from penalties, such as cases where the taxpayer’s explanation is deemed bona fide and all relevant facts were disclosed.
What is Misreporting of Income Under Section 270A?
Misreporting of income under Section 270A of the Income Tax Act refers to deliberate or unintentional inaccuracies in reporting income by taxpayers. It encompasses various scenarios defined by the law:
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Misrepresentation or Suppression of Facts: This includes cases where a taxpayer intentionally hides or distorts financial information to lower their taxable income.
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Failure to Record Investments or Receipts: Not recording investments or receipts that affect total income, or recording false entries in financial records, falls under misreporting.
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Unsubstantiated Expenditure Claims: Claiming expenses without proper evidence or justification is considered misreporting under Section 270A.
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Effect on Losses: Misreporting also covers instances where losses declared in tax returns are reduced or converted into income through inaccurate reporting.
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Non-disclosure of International Transactions: Failure to report international transactions or specified domestic transactions, as required by Chapter X of the Income Tax Act, is also classified as misreporting.
Penalties for misreporting income under Section 270A can be severe, with the amount ranging from 50% to 200% of the tax payable on the under-reported income. The severity of the penalty depends on whether the misreporting was due to genuine errors or intentional misconduct. The section provides exemptions in cases where the taxpayer’s explanation is found to be genuine and all relevant facts were disclosed truthfully
Difference between Under-Reporting and Misreporting of Income Under Section 270A?
Under-reporting of income occurs when a taxpayer declares less income than assessed by tax authorities initially or after reassessment. Mis-reporting, however, involves intentional acts like concealing facts, false entries, or unrecorded transactions, leading to a higher penalty of 200% of tax payable. Both are distinct in their implications for tax compliance and penalties under Indian tax laws.
Examples of Under-Report and Misreport Income
In India, under-reporting and misreporting of income are serious tax offenses that can lead to penalties under the Income Tax Act. Here are some examples to understand these concepts:
Under-reporting Income:
Higher Assessment than Declared: If a taxpayer declares an income of ₹5 lakhs in their tax return, but upon assessment, it is found to be ₹8 lakhs, the difference of ₹3 lakhs is under-reported income.
Assessment Higher than Exemption Limit: If an individual or entity doesn’t file a tax return and is assessed with an income exceeding the exemption limit (₹2.5 lakhs for individuals), the entire assessed income is considered under-reported.
Reassessment Higher than Previous Assessment: When a reassessment shows an income of ₹10 lakhs compared to the previous assessment of ₹7 lakhs, the difference of ₹3 lakhs is under-reported income.
Impact of Minimum Alternate Tax (MAT): Under MAT provisions, if a company’s income assessed under MAT is ₹20 lakhs but would have been ₹15 lakhs without MAT, the ₹5 lakhs difference is under-reported income.
Misreporting Income:
Misrepresentation or Suppression of Facts: Not disclosing a second property’s rental income in tax filings.
Unsubstantiated Expenditure Claims: Claiming business expenses without proper invoices or receipts to support them.
False Entries in Books of Accounts: Recording fictitious sales to inflate expenses and reduce taxable income.
Failure to Record Income: Not recording cash receipts from sales or services rendered in the books of accounts.
Non-disclosure of International Transactions: Failing to report transactions with foreign entities as required under Chapter X of the Income Tax Act.
Understanding these examples is crucial to ensure compliance with tax laws in India. Taxpayers must accurately report their income and maintain transparent financial records to avoid penalties and legal consequences.
Penalty Under Section 270A of the Income Tax Act
If the Assessing Officer finds that someone has not accurately reported their income, penalties under Section 270A of the Income Tax Act will apply as follows:
- For underreporting income: The penalty will be 50% of the tax due on the unreported income.
- For misreporting income: The penalty will be 200% of the tax due on the misreported income.
These penalties are additional to the tax owed on any income that was not properly reported. Misreporting, where false or misleading information is intentionally provided, carries a higher penalty than underreporting due to oversight or mistake.
Calculation of Penalty Amount under Section 270A of the Income Tax Act
Mr. Rahul, a business owner, had a total income of Rs. 30 lakhs for the fiscal year 2023-24. However, during the assessment, it was discovered that he had underreported his income by Rs. 7 lakhs and falsely claimed Rs. 3 lakhs as expenses that were not admissible.
Under Section 270A of the Income Tax Act, the penalties are calculated as follows:
Underreporting of Income (Rs. 7 lakhs):
Penalty = 50% of the tax due on underreported income.
Assuming a tax rate of 30%, the penalty would be 0.5 × (Rs. 7 lakhs × 0.3) = Rs. 1,05,000.Misreporting of Income (Rs. 3 lakhs):
Penalty = 200% of the tax due on misreported income.
Assuming a tax rate of 30%, the penalty would be 2 × (Rs. 3 lakhs × 0.3) = Rs. 1,80,000.
Therefore, the total penalty imposed on Mr. Rahul under Section 270A would be Rs. 1,05,000 + Rs. 1,80,000 = Rs. 2,85,000. This is in addition to the tax payable on the underreported and misreported income.
It’s crucial to note that penalty amounts can vary based on the extent of underreporting or misreporting of income, the applicable tax rates, and the specifics of each case.
Appeal against Section 270A Penalty Order
An appeal can be filed before CIT Appeal against the 270A order passed by the Assessing officer imposing penalty. The appeal may be filed within 30 days of the passing of the order. Further, an ITAT Appeal may also be filed later against the order of CIT Appeal if the same is not in favour of the Assessee.