Under-reporting income or inflating deductions/exemptions in income tax return can attract heavy penalties ranging from 50% to 200% of tax evaded, say experts. An advisory issued by the income tax department has warned salaried tax payers against trying to evade tax by indulging in these malpractices and pointed out that these would attract penalties as per law.

The advisory follows several cases of salaried employees of well-known companies filing income tax returns showing incorrect income and/or deductions to claim tax refunds that came to light in Bengaluru recently. It was reported that such tax evasion had been aided and in fact suggested by tax intermediaries who played a major role in the filing of the fraudulent returns.

The violators will be penalized under section 270A of the Act followed by prosecution as well. As per Section 270A, if income is under-reported on account of misreporting of income then penalty shall be leviable at the rate of 200% of tax payable on under-reported income.

In fact, these cases may also have triggered the changes made in the income tax return form 1 (the basic and simplest return form to be used for return filing) which now seeks many more details of salary and house property income than before. ITR-1 or Sahaj was changed for filing FY17-18 returns and now asks for specific details of salary.

It asks for a tax payer’s salary details in separate fields (i.e breakup of salary) such as allowances that are not exempt, value of perquisites, profit in lieu of salary and deductions claimed under section 16. Earlier, Sahaj did not ask for such details of salary, only a total salary amount was to be disclosed. The new Sahaj form also asks the return filer to provide, where applicable, income from property such as gross rent received/ receivable/ letable value; tax paid to local authorities; annual value; interest payable on borrowed capital; and income chargeable under the head house property. Clearly, the tax department is asking for detailed disclosures now in order to catch under/misreporting of income by salaried tax payers.

As per the amended section 270A of the Income Tax Act, in case of misreporting of income the income tax officer can levy a penalty of 200 per cent of the amount of tax payable on under-reported income.

Cases of misreporting of income include: –

(a) misrepresentation or suppression of facts;

(b) failure to record investments in the books of account;

(c) claim of expenditure not substantiated by any evidence;

(d) recording of any false entry in the books of account;

(e) failure to record any receipt in books of account having a bearing on total income; and

(f) 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 of the Income Tax Act apply.

The tax payable in respect of under-reported income where

(i) the total income determined under clause (a) of sub-section (1) of section 143 or assessed, reassessed or recomputed in a preceding order is a loss, is equal to the amount of tax calculated on the under-reported income as if it were the total income;

(ii) in any other case determined in accordance with the formula- (X-Y)

where,

X = the amount of tax calculated on the under-reported income as increased by the total income determined under clause (a) of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order as if it were the total income; and

Y = the amount of tax calculated on the total income determined under clause (a) of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order.

(iii) Where no return . of income has been submitted then the tax payable on the underreported income is calculated differently.

In case the income tax officer judges the case to be one of concealment of income then a penalty of up to 3 times of the tax payable could be levied.

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One response to “How income tax department can penalise you for under-reporting, misreporting income”

  1. Benu says:

    Very informative and well explained

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