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August 29, 2020

Penalty for misreporting or under reporting Income under Income Tax Act

by Mahesh Mara in Compliance Law, Income Tax

Penalty for misreporting or under reporting Income from April 2020 under Section 270A of Income Tax Act, 1961

Section 270A is related penalty levied where the assessee under reports the Income. Section 270A enables the assessing officer, Commissioner of appeals or the Principal Commissioner to direct levy of penalty at the time of proceedings under the Income Tax Act, where a person under reports his income then penalty shall be imposed in writing by the authority.

Meaning of under reported income or underreported income in case where source of receipt or deposit or investment is linked to earlier year:

Underreported income means income that assessee doesn’t report in the return if income in order to avoid taxes.

In a case where the source of any receipt, deposit or investment appearing in the current 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 earlier assessment year and no penalty was levied for such preceding year, under reported income shall include such amount as is sufficient to cover such receipt, deposit or investment.

The new section 271AAD having been made effective from 1.4.2020 is applicable for and from which assessment year viz. from A.Y. 2020-21, or is applicable in respect of the default committed on or after 1.4.2020 i.e. from A.Y. 2021-22.

Misreporting or underreporting under Section 270A of Income Tax Act, 1961

Various cases of Misreporting:

The various cases of misreporting are as under:

  1. Misrepresentation or suppression of facts.
  2. Failure to record investment in books of account.
  3. Claim of expenditure not substantiated by an evidence.
  4. Recording of any false entry in books of account.
  5. Failure to record any receipt in books of account having a bearing on total income; and

Failure to report any international transaction or deemed international transaction or specified domestic transaction under chapter X of the Income Tax Act.

Various cases of under reporting of income:

As per section 270A a person shall be considered to have under reported his income if:

  1. Where the return of Income has been filed and the Income assessed is more than the Income determined in the return processed u/s 143(1)
  2. Where no return has been filed by the assessee and the assessed income is more than the basic exemption limit
  3. Where reassessment is done by the assessing officer and the Income assessed is more than the income assessed or reassessed immediately before such reassessment
  4. Where return of income has been filed and assessment or reassessment is made on the basis of MAT/AMT provisions and the amount of deemed total income assessed or reassessed as per the provisions of section 115JB or 115JC is more than the deemed total income determined in the return processed under section 143(1)
  5. Where no return of income is filed or where return has been furnished for the first time u/s 148 and assessment or reassessment is made on the basis of MAT/ AMT provisions and the amount of deemed total income assessed as per the provisions of section 115JB or 115JC is more than the basic exemption limit, in case of an assessee being an individual, HUF, AOP, BOI in respect of whom the provisions of AMT are applicable.
  6. Where reassessment as per the provision of section 115JB or 115JC was conducted and the amount of deemed total income reassessed as per the provisions of sections 115JB or 115JC is more than the deemed total income assessed or reassessed immediately before such reassessment.

Cases not included within the scope of under reported Income:

Sr. noCasesCondition
1The amount of income in respect of which the assessee offers an explanationThe assessing officer/ CIT/ Commissioner is satisfied that the explanation is bonafide and all the material facts have been disclosed to substantiate the explanation
2The amount of underreported income determined on the basis of an estimateIf the accounts are correct and complete to the satisfaction of the IT authority but the method employed is such that the income cannot properly deducted from therefrom
3The amount of under reported income determined on the basis of an estimateIf the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue and has included such amount in the computation of his income and disclosed all the facts material to the addition or disallowance
4The amount of underreported income represented by any addition made in conformity with the arm’s length price determined by the transfer pricing officerWhere 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.
5The amount of undisclosed income on account of a search operationWhere penalty is leviable under section 271AAB in respect of such undisclosed income

Quantum of penalty for underreporting Income:

Sr. noSectionCasesPenalty
1270A (7)Under reporting of income50% of tax payable on under reporting
2270A (8)Where under reporting of income results from misreporting of income by any person200% of tax payable on such under reported income

How to calculate underreported income?

 As per section 270A under reported under various circumstances can be calculated as follows:

1. Where return is furnished and assessment is made for the first time?

Assessed Income (-) Income determined under section 143(1)(a)

2. Where no return has been furnished or where return has been furnished for the first-time u/s 148 and the assessment is made for the first time.

PersonUnder reported Income
Company, firm or local authorityAssessed income
Individual or HUFAssessed Income (-) Basic exemption limit

3. Where Income is not assessed for the first time?

Income assessed or recomputed (-) Income assessed or reassessed or recomputed in the order immediately preceding the order during the course of which penalty u/s 270A has been initiated

4. Where an assessment or reassessment has the effect of reducing the loss declared in the return or converting that loss into income

The loss claimed (-) The Income or loss, as the case may be, assessed or reassessed

5. Where under reported income arises out of determination of deemed total income in accordance with the provisions of section 115JB (MAT) or section 115JC(AMT).

(A – B) + (C – D)

Where,

A = Total income assessed as per the general provisions i.e. provisions other than the provisions contained in section 115JB or section 115JC;

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.

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