Penalty on misreporting and under reporting u/s 270A of the Income tax act w.e.f. A.Y. 2017-18 cases

Section 270A was introduced by Budget 2016, which was made effective for cases relating to AY 2017-18 in place of section 271(1)(c). Therefore for any addition made in A.Y. 2017-18 and afterwards penalty would not be charged u/s 271(1)(c) but instead would be charged u/s 270A of the Income tax act.

The main objective to bring this section mentioned in memorandum was “In order to rationalize and bring objectivity, certainty and clarity in the penalty provisions.”

There are two types of penalty covered under this section:

1. Penalty for Under-reporting of Income.

2. Penalty for Mis-reporting of Income.

Section 270A states that: The Assessing Officer 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.

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

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

2. 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];

3. the income reassessed is greater than the income assessed or reassessed immediately before such reassessment;

4. 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;

5. 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];

6. 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;

7. the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.

Thus, most of all the cases where there is any addition in your income or reduction of your loss would be covered as under reported income.

However, there are few cases which shall not be covered as under-reoprting:

(a) the amount of income in respect of which the assessee offers an explanation and the Assessing Officer 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 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.

Now, there are few additional conditions for charging penalty as misreported income from under-reported income. Therefore for each income to be called as misreported it should first be under-reported. 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.

Penalty u/s 270A are as under:

For Underreporting of Income: 50% of the amount of tax payable on under-reported income.

For Misreporting of Income: 200% of the amount of tax payable on mis-reported income.

The major difference point between penalty u/s 271(1)(c) and 270A which will benefit the assessee are as under:

1. In section 271(1)(c) it was at the discretion of AO to charge penalty between 100% to 300% of tax. Now under 270A he can either charge 50% penalty or 200% and thus the minimum penalty has also reduced.

2. Clause b of sub section 6 of section 270A is a major relief to many assessee’s as it has made clear that no penalty shall be charged on addition made on estimated basis. Before this many additions were made by estimating profit ratio of assessee and then assessee was even asked to pay penalty on same, however now that would not happen.

3. AO also needs to mention whether the penalty is for under-reported income or mis-reported income. Also, AO will always try to make all addition under mis-reported income but you have to check whether conditions u/s 270A(9) are being fulfilled or not.

Thus, in December 2020 due date for assessment of AY 2017-18 was completed and hence now many of you might have received penalty u/s 270A so this will be a great read for you.

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