Penalty for underreporting and misreporting of income

Under the Income-tax Act, penalties are levied for various defaults committed by the taxpayer. Some of the penalties are mandatory and a few are at the discretion of the tax authorities. This Article is related to penalty for underreporting and misreporting of income.

Many times a taxpayer may try to reduce his tax liability by underreporting or misreporting of income. In such a case, by virtue of Section 270A, the taxpayer will be held liable for penalty.

The rate of penalty shall be fifty per cent of the tax payable on under-reported income.

However, in a case where under-reporting of income results from misreporting of income, the taxpayer shall be liable for penalty at the rate of two hundred per cent of the tax payable on such misreported income.

Underreporting of income —A person shall be considered to have under-reported his income in the following cases:

Misreporting of Income

The following cases will be considered as misreporting of income:

1. Misrepresentation or suppression of facts;

2. Failure to record investments in the books of account;

3. Claim of expenditure not substantiated by any evidence;

4. Recording of any false entry in the books of account;

5. Failure to record any receipt in books of account having a bearing on total income; and

6. 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.

If a closely held company issues its shares at a price higher than its fair market value (FMV) then it shall be liable to pay tax on difference between the FMV and issue price of the shares as per Section 56(2)(viib)of the Income-tax Act. Such tax is called as ‘Angel Tax’ in common parlance. However, the Department for Promotion of Industry and Internal Trade (DPIIT) has issued a Notification No. 127(E), dated 19-02-2019 whereby an eligible start-up shall be exempted from levy of Angel tax if it satisfies the conditions mentioned in such notification.

With a view to ensure compliance to the conditions specified in the notification, the Finance (No. 2) Act, 2019 reiterates that in case of failure to comply with the conditions specified in the notification, the consideration received from issue of shares as exceeding the fair market value of such shares, shall be deemed to be income of the company chargeable to tax for the previous year in which such failure takes place. Further, it shall be deemed that the company has misreported the said income and, consequently, a penalty of an amount equal to 200% of tax payable on the underreported income (i.e., difference between issue price and fair market value of shares) shall be levied as per Section 270A.

Provisions of Section 56(2)(viib) are not applicable from Assessment Year 2025-26.

Computation of under-reported Income

The amount of under-reported income shall be computed as under:

1. Where income is assessed for the first time and return of income was furnished by the assessee, the difference between the amount of income assessed and the amount of income determined after processing of return under Section 143(1) shall be considered as underreported income.

2. Where income is assessed for the first time and no return of income was furnished by the assessee or return was furnished by the assessee for the first time under section 148, the difference between the amount of income assessed and the basic exemption limit applicable in case of the assessee shall be considered as underreported income.

3. Where income is not assessed for the first time, the difference between the amount of income reassessed or recomputed and the amount of income assessed, reassessed or recomputed in a preceding order shall be considered as underreported income.

4. If an assessment or reassessment has the effect of reducing the loss declared in the return or converting that loss into income, the amount of under-reported income shall be the difference between the loss claimed and the income or loss, as the case may be, assessed or reassessed.

5. Where income assessed as per the provisions of Minimum Alternate Tax (MAT) or Alternate Minimum Tax (AMT), underreported income shall be computed as per the following formulae:

(A — B) + (C — D) where,

A = the total income assessed as per the provisions other than the provisions contained in section 115JB or section 115JC (herein called general provisions);

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.

If the amount of under-reported income on any issue is considered both under the provisions contained in section 115JB or section 115JC and under general provisions, such amount shall not be reduced from total income assessed while determining the amount under item D.

Relevant Judgment in favor of assesse

No penalty under Section 270A is leviable on the addition of leave encashment [2023] 199 TAXLOK.COM (IT) 021 (ITAT-SURAT)

The explanation of the assessee for not offering the interest on income tax refund while filing its return of income is bona fide, and thus, the non-declaration of interest on income tax refund cannot be said to be under-reporting of income by the assessee within the meaning of Section 270A of the Act. Accordingly, we direct the AO to delete the penalty levied under Section 270A of the Act in the present case. [2023] 200 TAXLOK.COM (IT) 080 (ITAT-MUMBAI)

In the penalty order there was no mention about which limb of Section 270A is attracted and how ingredients of Section 270A(9) are satisfied and in absence of such particulars the mere reference to the word “misreporting” makes the impugned penalty order manifestly arbitrary. [2024] 203 TAXLOK.COM (IT) 288 (ITAT-JAIPUR)

Tribunal have no hesitation to cancel the levy of penalty u/s 270A of the Act in the facts and circumstances of the instant case as the penalty notice is very vague and hence becomes fatal to the proceedings. Accordingly the assessee would be entitled for relief on this technical aspect. [2024] 204 TAXLOK.COM (IT) 282 (ITAT-DELHI)

The assessee was penalized under Section 270A for misreporting income by claiming excess depreciation due to an error in the opening written down value (WDV). The Tribunal upheld the deletion of the penalty, ruling that the error was bona fide, and there was no misrepresentation or suppression of facts. [2024] 205 TAXLOK.COM (IT) 480 (ITAT-DELHI)

The Tribunal quashed the penalty of Rs. 8,16,895 levied under Section 270A of the Income Tax Act for underreporting of income. The assessee was found to have acted in good faith, as full tax deductions had been made by the employer, and the relevant details were disclosed through Form 16. The penalty was deemed inappropriate given the lack of intent to underreport. [2024] 205 TAXLOK.COM (IT) 592 (ITAT-BANGALORE)

The ITAT ruled that the penalty under Section 270A of the Income Tax Act for under-reporting income was unwarranted, as the omission of interest on income tax refund in the original return was a bona fide error. The tribunal emphasized that inadvertent mistakes without intent to misreport do not attract penalty and directed the deletion of the penalty imposed by the Assessing Officer and upheld by the CIT(A). [2024] 207 TAXLOK.COM (IT) 185 (ITAT-PUNE)