Introduction:

The Income Tax Act of 1961 stands as a comprehensive statute dictating the taxation of income accrued by individuals and entities within India. Notably, Section 270A emerges as a pivotal component, addressing penalties concerning the underreporting and misreporting of income.

In this blog post, we aim to explore the key provisions mentioned in section 270A, providing practical examples to highlight their implications, hence aiding your understanding.

Section 270A:

Section 270A stands as a key provision in the Income Tax Act, which deals with penalties for under-reporting or incorrect reporting of income. Aimed at preventing tax evasion, this preamble emphasized compliance and honesty in reporting income.

Section 270A of the Income Tax Act introduced by the Finance Act, 2017 empowers the Assessing Officer (AO) to impose penalties on persons who have wrongly declared their income in their Income Tax Returns ( ITRs)

Provisions of Section 270A:

• Section 270A levies penalty for incorrect and under-reporting of income for tax purposes. The Assessing Officer (AO), Principal Commissioner, or Commissioner is empowered to issue written directions, compelling persons who properly declare their income to pay penalties in addition to taxes.
• If income is incorrectly reported, a penalty equal to 200% of the tax due on the under-reported income applies. Manipulation of data, unsubstantiated claims of tax deductions, missing records in books of accounts, other discrepancies and false entries are examples of incorrect income reporting
• Section 270A provides penalties for wrongful declaration of income and under-declaration of income for tax purposes. The Assessing Officer (AO), Principal Commissioner, or Commissioner is empowered to issue written directions, making it mandatory for persons who do not properly declare their income to pay a penalty in addition to the tax.
• The assessees have the right to appeal to their Assessing Officer (AO) for exemption from this penalty. To qualify, they must provide a satisfactory explanation for underreporting or misreporting their income. The AO has discretion to impose or reduce the penalty under Section 270A.

Misreporting of Income:

• Misreporting of income includes providing false or misleading information about the type, source, or amount of income. This may include making false income statements, making illegitimate claims for benefits or deductions, or providing misleading information about income sources.
• Misrepresenting the type or source of income entails instances like categorizing business income as stock returns or vice versa.
• Claiming expenditure without supporting proof or evidence.
• Failing to report international or specific domestic transactions as mandated by the Income Tax Act.
• Providing inaccurate or incomplete information relating to the measurement of income, such as deductions for expenses or taxes.
• Neglecting to document any received funds in the accounting records that impact the total income.

Under Reporting of Income:

• Underreporting income transpires when an individual declares an amount lesser than their true earnings. This can stem from various causes, including inadequate record-keeping or factual errors in income calculation.
• The following actions are deemed as instances of underreporting income according to the Income-tax Act:
• A Return of Income has been filed, and the Income Tax (IT) department has assessed an income higher than the one disclosed in the ITR.
• If the income surpasses the income declared or computed under special tax sections (such as 115JB or 115JC), it will be regarded as computed by the IT department.
• No income tax return has been filed, yet the income assessed by the IT department exceeds the Basic Exemption limit.
• Failure to credit or disclose any income, or any portion thereof, in the books of accounts or income tax returns.
• A person would be deemed to have underreported income if the assessed or reassessed income results in the reduction of a loss or the transformation of said loss into income.

Exceptions to Underreporting :

• Section 270A of the Income Tax Act stipulates several exceptions for calculating underreported income. They are as follows:
• If you provide an explanation supported by material facts for your undisclosed income, and if the relevant officer finds it satisfactory.
• If you have calculated an under-reported amount for an excess/discrepancy and all material relevant facts have been disclosed, the system will not apply to under-reported income derived from the calculation.
• Underreporting of income may occur due to adherence to an arm’s length price established by a Transfer Pricing Officer. Nonetheless, you are required to uphold information and documents under section 92D and disclose all pertinent material facts concerning the transaction.
• It will exclude underreported income based on an estimate, provided that the accounts are accurate and the Assessing Officer does not raise any objections.

Penalty Under Section 270A:

• If the Assessing Officer confirms that a person has underreported or misreported their income, and a penalty under Section 270A of the Income Tax Act is to be imposed, the penalty will be charged as follows:
• For misreporting of income, the penalty will be equal to 200% of the tax due on the misreported income.
• The penalty for under-reporting will be equal to 50% of the tax due on the under-reported income.
• It’s crucial to note that the penalty under Section 270A will be imposed in addition to the tax due on underreported or misreported income.

Conclusion:

In summary, Section 270A of the Income Tax Act, 1961, plays a vital role in ensuring accurate income reporting by taxpayers and penalizing those who fail to comply. The section outlines penalties for underreporting and misreporting income, with the severity of penalties determined by the gravity of the offense. Understanding the key provisions of Section 270A is essential for taxpayers to evade penalties and maintain compliance with the Income Tax Act.