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What is Under-reporting and Mis-reporting of Income?

Last Update Date : October 04, 2018

under-reporting and mis-reporting of income

At the time of filing Income Tax Return, one must remember the saying, “A stitch in times saves nine” as a timely effort will prevent more work later. Any task related to your Income Tax must be handled diligently. You should always pay your Income Tax on time, declare your income correctly and file your returns accurately. Making a mistake at any of these tasks can put you into trouble. One such mistake could be not reporting your income correctly. Income Tax Act has severe penal provisions to punish those found guilty of under-reporting or mis-reporting of income. In this guide, we will talk about all such provisions in detail.

What is Under-reporting of Income?

The definition of Under-reporting of Income is vast as per Section 270A the Income tax act. In simple words as the name suggests it means the recording of Income comparatively lesser than the actual income. Under-reporting of Income includes and excludes many provisions and sections stated below:

When Income is Assessed under the Normal Provisions of the Act

  1. Income assessed > Income determined in return processed under 143(1)(a) i.e. intimation
  2. Income assessed > Maximum amount not chargeable to tax, where no return is filed
  3. Income reassessed >Income assessed or reassessed immediately before such reassessment

When Income is Assessed under Section 115JB (Minimum Alternate Tax) or Section 115JC (Alternate Minimum Tax) of the Act

  1. Deemed total income assessed or reassessed > Deemed total income determined in return processed under 143(1)(a)
  2. Deemed total income assessed > Maximum amount not chargeable to tax, where no return is filed
  3. Deemed total income reassessed >Deemed total income assessed or reassessed immediately before such reassessment

When Losses are Calculated as per the Provisions of the Act

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

Exclusions

  • Where the assessee offers an explanation and the I-T authority is satisfied with that explanation and all the material facts have been revealed;
  • The under-reported income is determined on the basis of an estimate, though the books of account are correct and complete to the satisfaction of the IT authority, the income cannot be properly assumed due to the method of accounting employed by the taxpayer;
  • Where the assessee himself has estimated a lower amount of addition or disallowance in the computation of income and disclosed all facts material to the addition or disallowance;
  • The undisclosed income is detected on account of the search operation, and the penalty is leviable under 270AA.
  • In case the assessee has maintained information and documents as explained under section 92D, declared the international transaction under Chapter X (Special Provisions relating to avoidance of tax) and, disclosed all the material facts related to the transaction.

Computation of Under-reported Income

calculation of under-reported income

 

Under-reported income arising out of Section 115JB / 115JC will be (A-B) +(C-D),
Where A = the total income assessed as per the general provisions of the Act.
B = Total income that would have been chargeable and assessed as per the general provisions of the Act but reduced by the amount of underreported income.
C = the total income assessed as per the provisions of Section 115JB or Section 115JC.
D = the total income that would have been chargeable and assessed as per the provisions of Section 115JB or Section115JC but reduced by the amount of under-reported income.
Let’s say
Total income assessed as per general provisions (A) – Rs. 15,00,000
Total income that would have been chargeable and assessed as per the general provisions of the Act but reduced by the amount of underreported income (B) – Rs. 8,00,000
The total income assessed as per the provisions of section 115JB or section 115JC (C) – Rs. 5,00,000
The total income that would have been chargeable and assessed as per the provisions of Section 115JB or Section115JC but reduced by the amount of under-reported income (D) – Rs. 4,00,000
Therefore, (A-B) + (C-D) = Rs. 8,00,000

What is Mis-reporting of Income?

Mis-reporting of income as per Section 270A of Income Tax Act generally occurs in the circumstances stated below:

  • Mis-representation or suppression of facts;
  • Non-recording of investment in the books of accounts;
  • Claim of expenditure not substantiated by evidence
  • Recording of false entry in books of accounts
  • Failure to record any receipt in books of accounts
  • Failure to record any international transactions or specified domestic transaction under chapter X

Penalty under Section 270A

Section 270A was introduced by the Finance Act 2016, with a desire to rationalise penal provisions and bring objectivity, certainty and clarity in them. Before this, Section 271(1)(c) was in force until FY 2016-17 which explained that levy of penalty is subject to the discretion of the Income Tax officer which can range from 100% to 300% of the amount of tax evaded. Section 270A explains the meaning of under-reporting and mis-reporting of income also prescribes the penalty levied on them. The quantum of penalty is described below:

  1. When the under-reporting is not because of mis-reporting, the penalty would be 50 % of tax payable on the under-reported income.
  2. When the under-reporting of income is because of mis-reporting, the penalty would be 200% of the tax payable on the under-reported income.

Note: Quantum of penalty under Section 270A is not subject to the discretion of income tax officer and is a fixed percentage (50% or 200%)

Let’s say an individual below 60 years of age filed his return of income for the assessment year 2018-19; income is assessed determining loss of Rs. 7,00,000 due to under-reported income of Rs. 15,00,000, considering that none of the additions or disallowances made in the assessment the penalty would be calculated as:

(A): Income assessed as per Section 143(3) – (Rs. 7,00,000)
(B): Under-reported income – Rs. 10,00,000

Tax payable on (B) at normal slab rates – Rs. 1,12,500
Penalty liable will be 50% of Rs. 1,12,500 i.e. Rs. 56,250

Note:

  • Imposition of penalty under Section 270A will apply to cases pertaining to AY 2017-18 onwards
  • However, provisions of Section 271(1)(c) was applicable to all cases up to AY 2016-17

Immunity from Penalty under Section 270AA

Section 270AA generally provides the immunity from imposition of a penalty which is subject to the fulfilment of two conditions stated below:

  1. The tax and interest payable as per the order of assessment or re-assessment is paid within the period specified in such notice of demand and
  2. No appeal against the aforesaid order is filed by the assessee.

Important things to know:

  • An application must be sent within one month from the end of the month in which the aforesaid order is received by him.
  • Later, the assessing officer (AO) shall grant him immunity or reject the application within one month from the end of the month in which the application is received.
  • In case the application has been accepted by the AO, no appeal under Section 246A and no application for revision under Section 264 can be made against the order of assessment or reassessment. However, if the application has been rejected, then right to appeal shall be restored to the assessee.
  • It should be noted that: No application for immunity shall be rejected unless an opportunity of being heard is given to the applicant assessee but the same is not applicable in case of mis-reporting of Income.
  • In case the order is passed within one month from the end of the month in which the application was received, the same will be considered as final and cannot be revised or revisited.
  • In should be noted that in case of levy of penalty any order by the concerned authority must be in writing. The concerned authority can be:
    • The Assessing Officer
    • The Commissioner (appeals)
    • The Commissioner
    • The Principal Commissioner

Can Under-reporting or Mis-reporting of Income fetch you a Tax Notice?

The answer is yes. Under-reporting and mis-reporting of income can make you pay a hefty amount of money as penalties as per section 270A. The income tax filing is very diligent exercise to do as you should be alert enough to provide all the details correctly and adhere to all the various provisions which are allowed and disallowed. Here are few ways to keep in mind in order to avoid getting a tax notice under this section:

  • First and the foremost do not hide or fail to disclose any income, at times it can lead to under-reporting of income
  • Secondly maintain a proper note of the investments, expenditure, avoid false entry in the books of accounts
  • Keep a record of international transactions as well as domestic transactions
  • Give your PAN number for high value transaction
  • Do not conceal your income

Frequently Asked Questions

1. What happens if one does not comply with income tax notice?

Ans: In case a taxpayer fails to comply with the notice issued by income tax department under Section 142(1) or 143(2) then the assessing officer can issue a notice, either asking to file the return of income or to furnish in writing all the details of assets and liabilities.

2. What happens if a wrong PAN number is quoted?

Ans: If the PAN quoted is incorrect a penalty of Rs. 10,000 will be levied.

Thus, the taxpayer must be vigilant while filing Income tax return and disclose all the incomes under respective heads. Otherwise, you have to pay penalty under section 270A as explained above for under-reporting or mis-reporting of income along with the applicable taxes. In order to avoid such situations file your taxes with the help of personal tax experts conveniently at H&R Block.

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