Income Tax

Misreporting and Under-reporting of Income: Legal Provisions

Taxpayers must be cognizant of the repercussions of underreporting income or overstating deductions and exemptions when completing an income tax return. According to the pertinent parts of the Income Tax Act, the Income Tax Department is authorized to impose fines on those who participate in such practices. Underreporting income is a deliberate attempt to provide incorrect or incomplete information about the total income generated throughout a given tax year. The Income Tax Department takes these offences severely and has measures to deal with them. The Income Tax Department tries to discourage people from engaging in tax evasion or fraudulent activities by enforcing fines. Penalties are a tool for enforcing adherence to tax rules, promoting justice in the tax system, and defending the rights of law-abiding taxpayers. They also serve as a deterrence to stop others from committing similar deception.

What is Misreporting of Income?

Giving inaccurate or misleading information about the amount, kind, or sources of money is income misreporting. This might involve falsifying financial documents, exaggerating costs, or understating revenue to avoid paying taxes. Misreporting can also entail carrying out cash-based transactions that are willfully left off of official records, escaping the need to disclose revenue.

Instances of Misreporting of Income

What is Underreporting of Income?

Underreporting of income refers to the deliberate reporting of less money than what has been generated. This may entail leaving out particular revenue sources, neglecting to disclose earnings from cash-based transactions, or purposely submitting false financial statements to conceal the actual earnings.

Any individual who underreports their income throughout the proceedings can be penalized under the terms of the Income Tax Act¹ by the Assessing Officer (AO), the Commissioner (Appeals), the Principal Commissioner, or the Commissioner. In addition to any taxes that might be owed on the underreported income, this penalty is applied. If the Assessing Officer determines that the taxpayer has underreported their income, penalty actions may be started. The Commissioner (Appeals), who makes the decision, also has the authority to start an additional penalty case if they think it’s required.

Instances of Underreporting of Income

The following are some of the instances of underreported income as per the Act:

• Where the income assessed is more than the income determined in the ITR processed under Section 143(1) (a). Therefore when the ITR is processed under the aforementioned section with an upward revision of income, it is not taken as under-reported income. However, once the ITR is processed when the income assessed is more than the income determined under the section, it will be treated as underreporting.
• If the assessee hasn’t filed ITR and the income assessed is more than the maximum amount not taxable, it is treated as under-reported income. Moreover, if the ITR is furnished under section 148 for the first time and the income admitted is greater than the maximum amount not taxable, it will be treated as under-reported income.
• If the income reassessed is more than the income assessed or reassessed immediately before such reassessment, it shall be treated as underreported income.
• The amount of deemed total income assessed/reassessed according to Section 115JB or Section 115JC when it is more than the deemed total income determined under Section 143(1) (a).
• If the amount of deemed total income reassessed according to Section 115JB or Section 115JC is more than deemed total income assessed or reassessed before the reassessment.

Difference between Underreporting and Misreporting

• Nature

While underreporting of income entails ignoring or just partially declaring the real income obtained, misreporting of income refers to knowingly submitting inaccurate or misleading information regarding income.

• Intent

While underreporting may result from ignorance, negligence, or a failure to understand the reporting requirements, misreporting suggests an intentional act of submitting inaccurate data to deceive or manipulate.

• Scope of Inaccuracy

Misreporting sometimes entails falsifying income projections or inflating deductions to reduce tax payments significantly. On the other hand, underreporting entails an inadequate or partial income statement with/without any manipulation.

• Penalties

When opposed to underreporting, penalties for misreporting are typically more severe. While underreporting can result in penalties that are usually 50% of the tax due, income reporting errors can result in larger fines of up to 200% of the tax due.

• Legal Treatment

Misreporting is often considered a more severe offense and may occasionally be subject to criminal prosecution. Tax authorities usually handle underreporting as a civil tax concern and levy penalties and fines.

• Detection

Misreporting might be harder to spot since it includes deliberate manipulation and the fabrication of misleading records. Although less severe, underreporting can make it difficult for tax officials to spot differences between reported and real income.

Penalties

If income is underreported, the penalty is 50% of the tax due; if income is misreported, the penalty is 200%. Tax authorities can levy fines on taxpayers who fail to correctly disclose their income under Section 270A. If the taxpayer pays the requisite tax and interest within the time frame of the notice of demand, the assessing officer may waive penalties under Section 270AA. The provision establishes a due date for filing Form 68 to request immunity from penalties and a due date by which the assessing officer must decide whether to grant immunity. It’s crucial to remember that this clause does not apply when underreported income results from inaccurate reporting.

Conclusion

When the ITR is processed under Section 143(1) (a) and if there is enhancement of income, no penalty is leviable. Still, after the assessment is made, then any upward revision of income or reduction of loss will lead to penal consequences. However, under-reporting of income due to misreporting may be a heavy burden on taxpayers.

FAQs

Read our article:How does Income Tax Department trace your High Value Transactions?

1. https://incometaxindia.gov.in/pages/acts/income-tax-act.aspx