Sec 270 A: Beware of penalties imposed on understatement of income￼
Would I be penalised if I misreported my income? Read the article to find out the consequences of Sec 270A.
Paying your income taxes is a moral and statutory obligation that you shouldn’t take lightly. The importance of submitting your income tax return on time and with diligence cannot be overstated. You can always hire a chartered accountant if you’re not competent to file your returns. This will help ensure that your income is correctly reported. Further, fully disclosing all income and investments will also assist you in avoiding penalties.
The Income Tax Act of 1961 penalises taxpayers who fail to declare their income correctly and underpay their taxes. A recently introduced provision that imposes penalties on understatement and misreporting of income is Sec 270A.
To ensure you do not violate Sec 270A, let’s provide you with an understanding of each aspect.
Sec 270A(1) mentions the authority empowered to levy the penalty.
Who can impose a penalty under Sec 270A?
The following persons are authorised to levy the penalty if you have underreported your income:
- Assessing Officer
- Commissioner of Appeals
- Principal Commissioner
Sec 270A(2) mentions the scenarios of under-reported income covered under the Section.
When is your income said to be underreported?
You are said to underreport the income when the income stated in column A is greater than the income stated in column B:
|The return has been filed||Income assessed||Income processed under Sec 143(1)(a)|
|No return has been filed or return filed first time under Sec 148||Income assessed||Basic exemption limit|
|Reassessment of Income||Income reassessed||Income assessed or income previously reassessed|
|Return filed and income assessed under provisions of Minimum Alternate Tax/Alternate Minimum Tax (MAT/AMT)||Deemed income as per Sec 115JB/115JC||Deemed income processed under Sec 143(1)(a)|
|No return filed or return filed first time under Sec 148 and assessed under MAT/AMT||Deemed income as per Sec 115JB/115JC||Basic Exemption Limit|
|Reassessment of income assessed under MAT/AMT||Deemed income as per Sec 115JB/115JC||Deemed income assessed or income previously reassessed|
Moreover, if income assessed/reassessed reduces the loss or converts loss into revenue, then the same will be considered underreporting of income.
Sec 270A(3) mentions the method of underreported computing income.
How can you compute underreported income?
You can compute underreported income by using the formula below:
|The return has been filed||Assessed income – Income determined under Sec 143(1)(a)|
|No return has been filed or return filed first time under Sec 148||Assessed income – Basic Exemption Limit(For Individuals & HUF)|
Assessed Income (For Others)
|Reassessment of Income||Income reassessed – Income assessed|
|Return filed and income assessed/reassessed under provisions of Minimum Alternate Tax/Alternate Minimum Tax (MAT/AMT)||(Income assessed under general provisions – Income assessed under general provisions excluding underreported income)+(Income assessed under Sec 115JB/115JC – Income assessed under Sec 115JB/115JC excluding underreported income)|
|Assessment/Reassessment has the effect of reducing loss or converting loss into income.||Loss claimed (-) Loss assessed/reassessed.|
Sec 270A (4) & (5) mention intangible additions.
Can your income from previous years that is a source of income/investment in the current year be included in underreported income and thus penalised?
Yes. If your current year’s source of income or investments is previously assessed payment, but the same wasn’t subject to a penalty in that year, it will be regarded as an intangible addition to your current income and liable to penalty under Section 270A.
Let us understand this with the help of an example:
Assume you invested in a real estate property and lent it out on rent. You received rent in the assessment year 2018–2019. The same was not considered as an addition in 2018–2019. You invested the rental income in shares in 2021–2022.
As per the provisions of this section, the income tax authority can consider any capital gains on shares along with the rental income received in 2018–2019 as it was not previously considered as underreported income.
Therefore, you will be liable for a penalty on the rental receipts along with any capital gains on shares.
Sec 270A (6) mentions scenarios not covered under the scope:
What are the exclusions under the section?
You will not be liable to penalty under Sec 270A if the underreported income falls in the below category:
(i) The amount of income for which you provide adequate justification. This is only applicable when the Income Tax Authority is convinced that your explanation is genuine and that all pertinent information has been given to support it.
(ii) The amount of unreported income calculated using an estimation. This is applicable when the accounts provided by you are complete and precise to the satisfaction of the tax authority, but the manner used prevents the income from being correctly calculated from them.
(iii) The amount of unreported revenue calculated using an estimate. This is applicable when you independently determine a lesser amount of addition or disallowance on the matter, include it in the calculation of his income, and report all information relevant to the addition or disallowance.
(iv) Any increase made per the arm’s length price as decided by the transfer pricing officer, plus the amount of underreported income it represents. This is applicable when you have kept the records and information required by section 92D, reported the foreign transaction in accordance with Chapter X, and revealed all relevant information on the transaction.
(v) The number of unreported earnings from a search operation. This is applicable when a fine is applicable under section 271AAB about such unreported earnings.
Sec 270A(7) quantifies the penalty applicable for underreporting of income.
What is the penalty you will attract for underreporting income?
If the Income Tax Authority confirms that you have underreported your income, the penalty under Sec 270A(7) will be 50% of tax payable on underreported income.
Let us take an example to understand the penalty computation.
Assume you own a firm, ABC. The firm is liable to tax at 30% plus applicable surcharge and cess. The following are the particulars furnished by the firm for A.Y.2022-23:
|As per the return of income filed u/s 139(1)||₹ 20,00,000|
|Income determined under section 143(1)(a)||₹ 40,00,000|
|Income assessed under section 143(3)||₹ 60,00,000|
|Income reassessed under section 147||₹ 75,00,000|
Before diving into the penalty computation, let us check if the penalty applies to Firm ABC.
According to Section 270A (2), Firm ABC is determined to have underreported its income since:
- The income reassessed under Section 147 is greater than the income reassessed under Section 143, and
- The income reassessed under Section 143 is greater than that under Section 143.
As a result, a penalty is imposed under Section 270A for underreporting income.
Computation of Penalty under Sec 270A(7)
|Particulars||Amount (₹)||Amount (₹)|
|Assessment under section 143(3) Under-reported income: Total income assessed under section 143(3) (-) Total income determined u/s 143(1)(a)|| |
|Tax payable on under-reported income: Tax on under-reported income of ₹ 20 lakhs plus tax on total income of ₹40 lakhs determined u/s 143(1)(a) [30% of ₹60 lakhs + HEC@4%]|
|Less: Tax on the total income determined u/s 143(1)(a) [30% of ₹40 lakhs +HEC@4%]|
|Penalty leviable@50% of tax payable||₹296,000|
|Reassessment under section 147 Under-reported income: Total income reassessed under section 147(-) Total income assessed under section 143(3)|
|Tax payable on under-reported income:Tax on under-reported income of ₹15 lakhs plus tax on total income of ₹60 lakhs assessed u/s 143(3) [30% of ₹75 lakh +HEC@4%]|
|Less: Tax on total income assessed u/s 143(3) [30%of ₹60 lakh + HEC@4%]|
|Penalty leviable@50% of tax payable||₹234,000|
|Total Penalty under Sec270A(7)||₹530,000|
Sec 270A(9) mentions cases covered under misreporting of income.
Which cases are considered to misreport income and thereby attract a higher penalty?
If any of the following apply to you, you will be subject to a higher penalty under the terms of this section:
(i) Misrepresentation or suppression of facts;
(ii) Failure to record investments in the books of account;
(iii) Claim of an expense that any evidence cannot support;
(iv) Recording of any false entry in the books of account;
(v) Failure to record any receipt in the books of account that impacts total income; and (vi) Failure to report any international transaction, deemed international or specified domestic transaction under Chapter X.
Sec 270A(8) states the penalty applicable to cases of misreporting of income.
What will be your penalty if you misreport your income?
If the Income Tax Authority confirms that you have misreported your income, the penalty under Sec 270A(8) will be 200% of tax payable on underreported income.
Let us continue the above example to understand the penalty computation under Sec 270A(8).
Assume your firm, ABC, has misreported income to the extent of ₹80,00,000. The firm is liable to tax at 30 % plus applicable surcharge and cess.
Computation of penalty under Sec 270A(8)
|Particulars||Amount (₹)||Amount (₹)|
|Amount of misreported incomeTax on misreported income (₹80 lakhs at 30% plus 4% HEC)||₹80,00,000|
|Penalty as per Sec 270A(8)(200% of tax on misrepresented income)(200% of ₹ 24.96 lakhs)||₹49,92,000|
Sec 270A(11) mentions about no repetition clause.
Will you be subjected to a penalty under Sec 270A if your additional income has already been subject to a penalty earlier?
No. Section 270(11) assures that no repeating penalty is imposed in the case of additions already charged to the penalty.
Immunity from Penalty under Sec 270A
As per Sec270AA, if you meet the following requirements, you may submit an application to the Assessing Officer for immunity from the imposition of penalties under Section 270A and the commencement of proceedings under Section 276C or Section 276CC:
- The tax and interest due in accordance with the order of assessment or reassessment under Subsection (3) of Section 143 or Section 147, as the case may be, has been paid within the period specified in such notice of demand; and
- No appeal has been filed against such order mentioned above.
The Assessing officer shall accept or reject your application for immunity within one month from the end of the month the application was received.
However, it is essential to note that in cases where a penalty under Sec 270A has been initiated/levied by the Commissioner (Appeals) or the Principal Commissioner or Commissioner, you will not be able to make an application under this section.
The new measures are unquestionably more effective than the prior penalty mechanism in attaining the intended goals.
Frequently Asked Questions
Is Sec 270A better than Sec 271(1c)?
Yes. In Sec 271(1c), the grounds for fines were not expressly stated in penalty orders. According to ethical norms, taxpayers have the right to know if it was for income concealing or supplying inaccurate income details. The new Section 270A, in contrast, makes the reason for penalties explicit.
What is Sec 115JB/115JC?
A firm must pay a Minimum Alternate Tax (MAT) in accordance with Sec 115JB if its tax due is less than 18.5% of its book profits plus surcharge and cess. As per Sec 115JC, non-corporate taxpayers must pay taxes at a rate of 18.05% if their total adjusted income exceeds ₹20 lakhs.
Can under-reported income be exempted in transfer pricing cases?
In the circumstances involving transfer pricing, the under-reported income can only be exempted if:
You have prepared all documentation by Section 92D of the Act.
You have declared all international transactions.
You have provided all relevant information about such transactions.
What are some key points of Section 270 A?
The following points are critical to your understanding of Section 270 A:
Penalty under Sec 270A is applicable in underreporting and misreporting of income.
The penalty for underreporting is 50% of the tax on underreported income.
The penalty for misreporting is 200% of the tax reported on misreported income.
You can gain immunity from Sec 270A if you fulfil the conditions specified under Sec270AA.