Income Tax Taxation

Penalty in Case of Misreporting of Income


Income needs to be fairly disclosed to the Government to determine actual tax liability and to discharge the general liability of tax paying resident of India. Income Tax Act, 1961 read with Income Tax Rules, 1962, people of India need to assess their actual income and liability of tax thereon which need to file in the due date specified under tax act & rules.

In this article, let discuss the issues in the levy of penalty in case of under-reporting/misreporting of Income.

First, it is necessary to know why the penalty is there in Tax act. As we know the act & rules prescribed us to do a set of the transaction under Income Tax which if you don’t carry out in time then it obviously creates Interest, penalty, and prosecution as well. Further to make it simpler, it is most urgent to know what kind of act or transaction are termed as underreporting or misreporting of income as per tax act.

Moving ahead guys, let’s have a look at Section 270A Income Tax Act, 1961 which not only describe the cases of under and misreporting of income rather the quantum of penalty as well. The Finance Act, 2016 has inserted the provision for a penalty of underreporting and misreporting of income i.e. 1st April 2017 i.e. AY 17-18 (it covers FY 2016-17), now the major concern is to look after the issues if any in case of Financial Year ended 31st March 2017.

To expedite the process now let’s understand the meaning/explanation of Income:-

Section 2 (24) of Income Tax Act, 1961 gives a definition of Income starting with “includes” which means the set of long list extends up to (I) to (xviii) of the act is Income the of person defined u/s 2(31) of Act, 1961. Income includes profits and gains, dividend, the value of any prerequisite in lieu of salary, winnings from lotteries, the sum received under key man insurance policy including the sum allocated by way of bonus on such policy, value of any benefit or perquisite and so on.

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After understanding the meaning of Income as per Act, now let’s discuss the concept of Under-Reporting and Misreporting of Income. The two major concepts i.e. “Under Reporting” and “Misreporting” of Income are separate in the eyes of the tax act and penalty level differs. However on general understanding, underreporting has the clear intention of planning to report income underrated whereas misreporting is the second instance which pushes the under-reporting of income through the clear intention of this two transaction is to no or less pay of tax to authority. Therefore under-reporting of income can be derived or out from the misreporting of income too. So let’s see the meaning of misreporting of Income in the first instance.

The act clearly states the following activities are the clear-cut cases of misreporting of Income, which is explained below:-

  1. Misrepresentation or suppression of facts;
  2. Failure to record investment in the books of account;
  3. The 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 the 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 provision of Chapter X applies. Transfer Pricing.

Summarizing the point (a) to (f), it can be concluded all those activities or transaction by person to reduce the income or increase the cost or misleading the books of account having direct nexus with either Income or profit or loss is concern of authority to catch at any cost to protect the nation from malpractices of taxpayer.

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It is noteworthy here to state that due to this kind of transaction in books of account of taxpayer obviously generate the case of under-reporting of Income to the department to avoid or escape from paying tax to the country.

I believe as of here, the meaning of income and misreporting of income are clear now let start understanding the meaning of under-reporting of income. The tax act of country read with its corresponding rules,

Clearly States following cases to be Considered as underreported Income:-

  1. Income assessed is greater than income determined in return processed u/s 143(1) (a) i.e. Intimation.
  2. Income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished.
  3. Income assessed is greater than income assessed or reassessed immediately before such reassessment.
  4. Amount of deemed total income assessed or reassessed as per Section 115JB i.e. Minimum Alternate Tax(MAT) or Section 115JC i.e. Alternate Minimum Tax(AMT) is greater than the deemed total income determined in return processed u/s 143(1)(a) i.e. Intimation.
  5. Amount of deemed total income assessed as per Section 115JB or Section 115JC is greater than the maximum amount not chargeable to tax where no return of income has been filed
  6. Amount of deemed total income reassessed as per Section 115JB i.e. MAT or Section 115JC i.e. AMT is greater than deemed total income assessed or reassessed immediately before such reassessment.
  7. Income assessed or reassessed has the effect of reducing the loss or converting such loss into income.

Summarizing the point (a) to (g), it is very clear that the entire working is based on an assessment of Income by the department of Income Tax. It means the person who had filed Income Tax Return or needs to file but has not filed the return can be assessed by Income Tax officer to assess the Income of those assets under the provision and prescribed rules under the act. The variation of returned income and assessed income open the scrutiny of assessed for a particular selected year for assessment and during the proceeding, the selected officer can award the Penalty on the defaulter.

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The Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or commissioner only can frame penalty charges under reasonable circumstances and evidence attached therewith for underreporting and misreporting of income cases during the course of any proceedings under this Act.

Understanding these things as of now, it’s a time to know the quantum of penalty imposed therein under Income Tax Act, 1961 for this transaction are:-

First underreporting or misreporting of Income attracts the penalty of the sum equal to 50% of Tax Audit payable for underreported income in addition to tax liability on such underreported income. The penalty level will be harsher if such under-reported of income is due to misreporting of income. Meaning thereby the penalty u/s 270A for underreporting & misreporting of income will be the sum equal to 200% of the amount of tax payable if underreported income is in consequence of any misreporting thereof.

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