Section 270A of the Income Tax Act: Penalties For Misreporting Or Underreporting Taxable Income
Section 271(1c), which imposed a penalty on concealing information or furnishing incorrect tax returns, was one of the most litigated provisions of the Income Tax Act. This is because tax authorities would sometimes levy penalties even when there was no prima facie case against taxpayers.
Thus, the Finance Act, 2016 introduced a new Section 270A to substitute the old regulation, which took effect on April 1 2017. The following sections will cover everything about Section 270A of the Income Tax Act. Read along to know about its provisions, applications, and more details.
Provisions of Section 270A of the IT Act
Section 270A imposes a penalty for misreporting and underreporting income for taxation purposes. The AO (Assessing Officer), Principal Commissioner or Commissioner can direct any person who has underreported income to pay the penalty in addition to tax through a written application.
Penalty under Section 270A for underreported income is 50% of tax payable on the income you did not report. Unreported incomes include the amount not processed during tax assessment or the amount greater than the maximum tax exemption limit.
A penalty amounting to 200% of tax payable on under-reported income is applicable for misreporting income. Misrepresenting data, claiming tax deductions without evidence, lack of records in books of accounts, false entries, etc., fall under misreporting of income.
Assessees have the option to write to their AO seeking immunity from this penalty. They will have to provide a satisfactory reason for under-reporting or misreporting their income. The AO, at his/her discretion, can consider not imposing a penalty or reducing it u/s 270A.
What Is the Meaning of Underreporting Income?
Underreporting of income happens when an assessee’s income stated in his/her Income Tax Returns (ITR) is lower than the actual income. If you fail to report income from capital gains, interest incomes, etc., it will count as underreporting of income.
Here are the various situations that count as underreporting of income under Section 270A of the Income Tax Act.
- Your assessed income is more than the return processed under Section 143(1) clause A.
- The assessed income is more than the maximum amount that is not chargeable to income tax, provided that you have not filed an ITR.
- Income after reassessment is greater than income assessed before.
- If the amount of total income that the Income Tax Department assesses u/s 115JB or Section 115JC is more than the income determined in the processed returns u/s 143 (1a).
- Upon reassessment, losses reduce or convert into income.
- If you have not filed ITR and the total assessed income u/s 115JB or Section 115JC is greater than the maximum amount not chargeable to income tax.
What Is Misreporting of Income under Section 270A?
The 9th sub-section of Section 270A of the Income Tax Act defines misreporting of income as these situations:
- If assessees misrepresent or suppress relevant facts
- Failing to provide any evidence about claims of expenditure
- Any false entry present in books of accounts
- For failing to record investments in books of accounts
- Absence of reports of any international transactions and specified domestic transactions.
- Absence of any record of receipts in books of accounts that may affect your total income
Calculation of Underreported Income u/s 270A
The amount of under-reported income in different situations is given as follows:
- For first-time tax assessment
- In case the assessee has filed ITR- Difference between the assessed amount and total income determined u/s 143(1a)
- The return has not been furnished — Difference between the assessed income and the maximum tax-exempt income.
- For companies, firms, or local authorities — Total assessed income
- For others
- Where assessment/reassessment results in a reduction of losses — Difference between the total assessed/reassessed income and losses claimed
- For underreported income arising out of deemed income u/s 115JB or Section 115JC — (A – B) + (C – D) Here, A is the total income assessed under general provisions, and B is taxable income reduced by the amount of underreported income. C is the total income assessed u/s 115JB or 115JC, while D is the total chargeable income reduced by the total underreported income.
- For any other case — The difference between the assessed/reassessed/recomputed income and income determined in a preceding order.
Exceptions to Underreporting of Income u/s 270A
Sub-section 6 of Section 270A of the Income Tax Act lays a few exceptions for the computation of underreported income. These are as follows:
- The amount of undisclosed income as referred by the provisions of Section 271AAB
- If you offer an explanation with material facts for your undisclosed income and the concerned officer finds it satisfactory.
- It will not include underreported income based on an estimate. This is provided that the accounts are correct and the AO does not have any problem with them.
- It will not apply to underreported income based on an estimate if you have estimated a lower amount of addition/disallowance and disclosed all material facts about it.
- The underreporting of income happens due to conformity with an arm’s length price set by a Transfer Pricing Officer. However, you will have to maintain information and documents u/s 92D and disclose all material facts related to the transaction.
Final Word
Section 270A of the Income Tax Act sets the rules and rates of penalty for misreporting or underreporting your taxable income. You will want to make sure that all details furnished in an ITR are 100% correct to ensure you do not incur any penalty.
FAQs on Section 270A of the Income Tax Act
Ans: In the previous Section, penalty orders did not specifically state the grounds for penalties. As per principles of natural justice, they had the right to know if it was for concealment of income or furnishing incorrect particulars of income. In contrast, the new Section 270A clearly mentions the cause of penalties.
Ans: Assessing Officers need to make sure that they clearly specify the charges while recording satisfaction for penalty under Section 270A. They need to state which clause or sub-clause of 270A the penalty falls under. This needs to be present in the penalty order, assessment order, and satisfaction for initiation of penalty documents.
Ans: Section 270AA of the IT Act allows AOs to grant immunity to taxpayers from penalty u/s 270A and prosecution proceedings u/s 276C and Section 276CC. Assessees can write to the AO within one month from receiving the order if there are no orders rejecting their application.
Ans: These are the conditions for getting immunity u/s 270AA:
Tax and interest as per the order of assessment/reassessment u/s 143 or 147 were paid within the due date.
You do not apply for an appeal against such an assessment order.
You have one month from the end of the month in which you receive a notice to make an application.
Ans: Under Section 115JB, a company has to pay a Minimum Alternate Tax (MAT) if its tax liability is less than 18.5% of its book profits plus surcharge and cess. Section 115JC states the provisions of Alternative Minimum Tax (AMT). Under this Section, non-corporate taxpayers with a total adjusted income of Rs. 20 lakh need to pay taxes at a rate of 18.05%.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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