Section 270A of Income Tax Act 1961 : Penalty for under-reporting and misreporting of income

Related Guide

Section 270A of the Income Tax Act 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:

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.
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.
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.
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.
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:

Misrepresentation or Suppression of Facts: This includes cases where a taxpayer intentionally hides or distorts financial information to lower their taxable income.
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.
Unsubstantiated Expenditure Claims: Claiming expenses without proper evidence or justification is considered misreporting under Section 270A.
Effect on Losses: Misreporting also covers instances where losses declared in tax returns are reduced or converted into income through inaccurate reporting.
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.

Complete Legal text of section 270A of Income Tax Act

(1) The Assessing Officer or²⁸[the Joint Commissioner (Appeals) or] the Commissioner (Appeals) or the Principal Commissioner or Commissioner may, during the course of any proceedings under this Act, direct that any person who has under-reported his income shall be liable to pay a penalty in addition to tax, if any, on the under-reported income.

(2) A person shall be considered to have under-reported his income, if—

(a) the income assessed is greater than the income determined in the return processed under clause (a) of sub-section (1) of section 143;

(b) the income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished or where return has been furnished for the first time under section 148;

(d) the amount of deemed total income assessed or reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income determined in the return processed under clause (a) of sub-section (1) of section 143;

(e) the amount of deemed total income assessed as per the provisions of section 115JB or section 115JC is greater than the maximum amount not chargeable to tax, where no return of income has been furnished or where return has been furnished for the first time under section 148;

(f) the amount of deemed total income reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income assessed or reassessed immediately before such reassessment;

(g) the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.

(3) The amount of under-reported income shall be,—

(i) in a case where income has been assessed for the first time,—

(a) if return has been furnished, the difference between the amount of income assessed and the amount of income determined under clause (a) of sub-section (1) of section 143;

(b) in a case where no return of income has been furnished or where return has been furnished for the first time under section 148,—

(A) the amount of income assessed, in the case of a company, firm or local authority; and

(B) the difference between the amount of income assessed and the maximum amount not chargeable to tax, in a case not covered in item (A);

(ii) in any other case, the difference between the amount of income reassessed or recomputed and the amount of income assessed, reassessed or recomputed in a preceding order:

Provided that where under-reported income arises out of determination of deemed total income in accordance with the provisions of section 115JB or section 115JC, the amount of total under-reported income shall be determined in accordance with the following formula—

(A — B) + (C — D)

where,

A = the total income assessed as per the provisions other than the provisions contained in section 115JB or section 115JC (herein called general provisions);

B = the total income that would have been chargeable had the total income assessed as per the general provisions been reduced by the amount of under-reported income;

C = the total income assessed as per the provisions contained in section 115JB or section 115JC;

D = the total income that would have been chargeable had the total income assessed as per the provisions contained in section 115JB or section 115JC been reduced by the amount of under-reported income:

Provided further that where the amount of under-reported income on any issue is considered both under the provisions contained in section 115JB or section 115JC and under general provisions, such amount shall not be reduced from total income assessed while determining the amount under item D.

Explanation.—For the purposes of this section,—

(a) “preceding order” means an order immediately preceding the order during the course of which the penalty under sub-section (1) has been initiated;

(b) in a case where an assessment or reassessment has the effect of reducing the loss declared in the return or converting that loss into income, the amount of under-reported income shall be the difference between the loss claimed and the income or loss, as the case may be, assessed or reassessed.

(4) Subject to the provisions of sub-section (6), where the source of any receipt, deposit or investment in any assessment year is claimed to be an amount added to income or deducted while computing loss, as the case may be, in the assessment of such person in any year prior to the assessment year in which such receipt, deposit or investment appears (hereinafter referred to as “preceding year”) and no penalty was levied for such preceding year, then, the under-reported income shall include such amount as is sufficient to cover such receipt, deposit or investment.

(5) The amount referred to in sub-section (4) shall be deemed to be amount of income under-reported for the preceding year in the following order—

(a) the preceding year immediately before the year in which the receipt, deposit or investment appears, being the first preceding year; and

(b) where the amount added or deducted in the first preceding year is not sufficient to cover the receipt, deposit or investment, the year immediately preceding the first preceding year and so on.

(6) The under-reported income, for the purposes of this section, shall not include the following, namely:—

(a) the amount of income in respect of which the assessee offers an explanation and the Assessing Officer or^29-30[the Joint Commissioner (Appeals) or] the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered;

(b) the amount of under-reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the Assessing Officer or^29-30[the Joint Commissioner (Appeals) or] the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, but the method employed is such that the income cannot properly be deduced therefrom;

(c) the amount of under-reported income determined on the basis of an estimate, if the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue, has included such amount in the computation of his income and has disclosed all the facts material to the addition or disallowance;

(d) the amount of under-reported income represented by any addition made in conformity with the arm’s length price determined by the Transfer Pricing Officer, where the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X, and, disclosed all the material facts relating to the transaction; and

(e) the amount of undisclosed income referred to in section 271AAB.

(7) The penalty referred to in sub-section (1) shall be a sum equal to fifty per cent of the amount of tax payable on under-reported income.

(8) Notwithstanding anything contained in sub-section (6) or sub-section (7), where under-reported income is in consequence of any misreporting thereof by any person, the penalty referred to in sub-section (1) shall be equal to two hundred per cent of the amount of tax payable on under-reported income.

(9) The cases of misreporting of income referred to in sub-section (8) shall be the following, namely:—

(a) misrepresentation or suppression of facts;

(b) failure to record investments in the books of account;

(d) recording of any false entry in the books of account;

(e) failure to record any receipt in books of account having a bearing on total income; and

(f) failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.

(10) The tax payable in respect of the under-reported income shall be—

(a) where no return of income has been furnished or where return has been furnished for the first time under section 148 and the income has been assessed for the first time, the amount of tax calculated on the under-reported income as increased by the maximum amount not chargeable to tax as if it were the total income;

(b) where the total income determined under clause (a) of sub-section (1) of section 143 or assessed, reassessed or recomputed in a preceding order is a loss, the amount of tax calculated on the under-reported income as if it were the total income;

(X–Y)

where,

X = the amount of tax calculated on the under-reported income as increased by the total income determined under clause (a) of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order as if it were the total income; and

Y = the amount of tax calculated on the total income determined under clause (a) of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order.

(11) No addition or disallowance of an amount shall form the basis for imposition of penalty, if such addition or disallowance has formed the basis of imposition of penalty in the case of the person for the same or any other assessment year.

(12) The penalty referred to in sub-section (1) shall be imposed, by an order in writing, by the Assessing Officer,³¹[the Joint Commissioner (Appeals) or] the Commissioner (Appeals), the Commissioner or the Principal Commissioner, as the case may be.