Penalties for Under Reporting & Misreporting [Section 270A]

Under the Income-tax act there might be various type of defaults or frauds etc and consequently, there is also various type of Penalties.

There is also some case when the defaulter might be prosecuted (send to jail). Out of various penalties, one most important and most levied penalty is “Penalties for Under-Reporting & Misreporting”.

This penalty is levied when there is any act by which the Assessee has actually reduced or attempted to reduce his tax liability through some of the wrong methods or evasions.

Today we are gonna see this most levied penalty in details yet in very simple language. So, let’s get started:

1. What is Under-Reporting of Income?

The income is said to be underreported when: 

(A) In case of Normal Incomes:

(i) the income shown by the assessee in his income tax return is proved (in assessment) to be less than what it actually should be; [means: the case of the assessee has been opened and it is found by AO that he had shown less income in his return filed.]

(ii) the income of the assessee was exceeding the maximum exemption limit (i.e. taxable) but the assessee did not file the income tax return.

(iii) the income of the assessee has been reassessed and in such reassessment, it is found that income is more than the previous assessment.

(B) In case of income as per MAT/AMT Provisions [For Companies & Specified Persons ONLY]

All the 3 cases mentioned above for the normal type of incomes shall be applied here as well. i.e.

(i) deemed total income as per MAT/AMT provisions shown in return is less and later on, it is found in the assessment (case opening) that MAT/AMT deemed total income was more.

(ii) No return was filed even if deemed total income as per MAT/AMT was exceeding the maximum Exemption limit.

(iii) the deemed total income in reassessment as per MAT/AMT provisions was more than deemed total income as shown in the earlier assessment.

2. What is Misreporting of Income?

Any of the below-mentioned cases would be considered as Misreporting of Incomes:

(a) Misrepresentation or Suppression of Facts;

(b) Failure to record Investments in books;

(c) Claiming Fake Expense (i.e. without any bill/false bill etc.);

(d) False entries in Books of Accounts;

(e) Failure to record income; (e.g. doing transactions in cash and no recording thereof);

(f) Failure to record any international transactions/specified domestic transaction as per Section 92D.

Important Note- Misreporting of income is NOT DIFFERENT from Under-Reporting of  income. The facts is when any reduction in income is done by way of any of the above 6 reasons then such reduction in income is called Misreporting of income and penalty becomes 200% of tax payable.

While if the reduction in income is due to ANY OTHER REASON then it shall be considered as Under-Reporting of income. And therefore all the provisions which applies for under-reporting of income is absolutely applicable on misreporting of income as well.

IN SHORT, WHEN ANY UNDER-REPORTING OF INCOME IS BECAUSE OF ANY OF THE ABOVE 6 REASONS THEN IT BECOMES MISREPORTING OF INCOME.  

3. What would be the amount of Under-Reporting/ Misreporting?

In all the above cases the amount of under-reporting would be the difference what was shown earlier and what is the real income as per assessment/reassessment.

4. Certain Additions not to be considered as Under-Reporting and Misreporting: [i.e. Exclusions]

There might be certain cases due to which income of assessees has been increased but there was no such intention of the assessee to defraud the tax authorities.

These type of cases are not considered as Under Reporting OR Misreporting of Income. These are as follows:

(i) Bonafide Explanation: When the A.O. is satisfied with the explanation given by the assessee in respect of such income and AO consider that it is Bonafide and the assessee has disclosed all material facts.

(ii) Intangible Additions: When the A.O. has estimated the amount of Under-Reported income on the basis of books of accounts of the assessee (the tax authority must be satisfied with such books of accounts) but the method used to calculate under-reported income is such that proper determination cannot be done.

For Example; A contractor filed the return of income as Rs. 100 cr. gross receipts and shows only Rs. 2 crores Returned income. While the general industry rate suggests a 20% profit. The A.O. now add Rs. 18 crores to the income of assessee without rejecting the books of accounts. Now, this addition is called “Intangible Additions” and no penalty for under-reporting or misreporting would be levied on it.

(iii) Assessee’s claim reduced/disallowance increased: When the Assessee shows any claim or disallowance in books are per the income tax act but the A.O. reduced such claim (e.g. expense reduced) OR increased the disallowance then such reduction/increase would not be considered as under-reporting or misreporting.

(iv) Transfer Price AdjustmentsWhen any addition in assessee’s income is made due to variation in Arm’s Length Price calculated by assessee and calculated by Transfer Price Officer (TPO) then such increase in income would not be considered as under-reporting or misreporting provided the assessee has maintained all required books etc as per section 92D and disclosed all material facts.

(v) Undisclosed Incomes which are covered u/s 271AABSection 271AAB specifies the penalties leviable in case of search and seizure (i.e. Raid). Although, that is a case of under-reporting or misreporting still as there is a specific section dealing with such cases it has been excluded from Section 270A.

5. How much Penalty is levied for Under-Reporting of Income?

The penalty for under-reporting of income shall be 50% of the amount of Tax Payable on such under-reported incomes.

6. How much Penalty is levied for Misreporting of Income?

Where the income has been shown less by way of misreporting of facts etc. then the penalty for such misreporting of income would be 200% of the amount of Tax Payable on such misreported incomes.

Note: Assessee can request to A.O. u/s 270AA for immunity from the penalty for under-reporting of income. But in the case of Misreporting of income; No such immunity shall be given.

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