Section 270A –Penalty on Under Reporting of Income

CA Lalit Munoyat

Research Paper on provisions for section 270A –Penalty on Under Reporting of Income

The penal provisions contained in section 271(1)(c) provided for levy of penalty for concealment of income or for furnishing inaccurate particulars of income. The amount of penalty to be levied extends from 100% minimum to 300% maximum of the tax sought soughed to be evaded.

However the implementation of this provision has been a subject matter of many litigations in as many as 3700 cases before the ITAT out of which nearly 80 cases reached the Supreme Court for final judgment.

The reasons for such a high number of cases under litigation mainly are:

1. The Recording of Satisfaction for initiation of penalty.

2. Recording of the fact whether the penalty is initiated for Concealment of income Or Furnishing of inaccurate particulars of income.

3. The penal proceedings were separate from the assessment proceedings and the AO had to observe the principles of natural justice

4. Levy of penalty on a charge different from the charge recorded in the assessment order (like penalty initiated for submitting inaccurate particulars while penalty levied for concealment of income.

Because of the above reasons, the implementation of this section posed a huge challenge to the department.

In order to rationalize and bring objectivity, certainty and clarity in the penalty provisions, the provision of section 271(1)(C) will be valid only up to the A.Y. 2016-17. From the A.Y. 2017-18 a new section 270A has been inserted in its place and penalty be levied under the newly inserted section 270A with effect from 1st April, 2017. This new section 270A provides for determination of “Under Reported Income & Misreported Income” for levy of penalty.

A New Section 270A has been inserted to provide for new regime of levy of penalty for concealment of income or furnishing inaccurate particulars of income. As per this section 270AA(2) A person shall be considered to have under-reported his income, in the following circumstances:

Section	Description
270A(2)(a)	The income assessed is greater than the income determined in the return       processed under clause (a) of sub-section (1) of section 143; Case Study -1
270A(2)(b)	The income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished; Case Study -2
270A(2)(c)	The income reassessed is greater than the income assessed or reassessed immediately before such reassessment; Case Study -3
270A(2)(d)	The amount of deemed total income assessed or reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income determined in the return processed under clause (a) of sub-section (1) of section 143; Case Study -4
270A(2)(e)	The amount of deemed total income assessed as per the provisions of section 115JB or section 115JC is greater than the maximum amount not chargeable to tax, where no return of income has been filed; Case Study -5
270A(2)(f)	The amount of deemed total income reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income assessed or reassessed immediately before such reassessment; Case Study -6
270A(2)(g)	The income assessed or reassessed has the effect of reducing the loss or converting such loss into income. Case Study -7

After having determined the cause of under reporting, the amount of under reported amount is required to be determined. This provision is contained in 270A(3)

(i)	in a case where income has been assessed for the first time (a) If return has been furnished, the difference between the amount of income assessed and the amount of income determined under clause (a) of sub-section (1) of section 143; (b) In a case where no return has been furnished,- (A)  The amount of income assessed, in the case of a company, firm or local authority; and (B)  The difference between the amount of income assessed and the maximum amount not chargeable to tax, in a case not covered in item (A);
(ii)	In any other case, the difference between the amount of income reassessed or recomputed and the amount of income assessed, reassessed or recomputed in a preceding order. Provided that where under-reported income arises out of determination of deemed total income in accordance with the provisions of section 115JB or section 115JC, the amount of total under-reported income shall be determined in accordance with the following formula- (A – B) + (C – D) A = the total income assessed as per the provisions other than the provisions contained in section 115JB or section 115JC (herein called general provisions); B = the total income that would have been chargeable had the total income assessed as per the general provisions been reduced by the amount of underreported income; C = the total income assessed as per the provisions contained in section 115JB or section 115JC; D = the total income that would have been chargeable had the total income assessed as per the provisions contained in section 115JB or section 115JC been reduced by the amount of under-reported income:
270A(6)	The under-reported income, for the purposes of this section, shall not include the following, namely:- (a) The amount of income in respect of which the assessee offers an explanation and the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered; (b) The amount of under-reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, but the method employed is such that the income cannot properly be deduced therefrom; (c) The amount of under-reported income determined on the basis of an estimate, if the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue, has included such amount in the computation of his income and has disclosed all the facts material to the addition or disallowance; (d) The amount of under-reported income represented by any addition made in conformity with the arm’s length price determined by the Transfer Pricing Officer, where the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X, and, disclosed all the material facts relating to the transaction; and (e) The amount of undisclosed income referred to in section 271AAB.
270A(10)	The tax payable in respect of the under-reported income shall be- (a)  Where No Return Of Income has been furnished and the income has been assessed for the first time, the amount of tax calculated on the under-reported income as increased by the maximum amount not chargeable to tax as if it were the total income; (b) Where 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, the amount of tax calculated on the under-reported income as if it were the total income; (c) In any other case, determined in accordance with the formula- (X-Y) 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.
270A(7)	The penalty referred to in sub-section (1) shall be a sum equal to 50% of the amount of tax payable on under-reported income.
270A(8)	Notwithstanding anything contained in sub-section (6) or sub-section (7), where under-reported income is in consequence of any Misreporting thereof by any person, the penalty referred to in sub-section (1) shall be equal to 200% of the amount of tax payable on under-reported income.
270A(10)	The cases of misreporting of income referred to in sub-section (8) shall be the following, namely:- (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 apply. In the above cases penalty @ 200% of the tax leviable on the amount of Unreported Income

Critical Analysis of the new Section 270A of Income Tax Act for levy of penalty

1) There is no requirement of “recording of satisfaction by the authority“, for initiating the penalty u/s 270A.

2) The direction for penalty should beduring any proceedings under the Act; thus it could include assessment, reassessment, order giving effect to the appellate order, set aside assessment etc.

3) The power of penalty is discretionary [Section 270A (1)] The section employs language “may direct”.

4) The power can be exercised where a person has underreported his income [Section 270A(1)]

5) It provides for the circumstances in which it can be said that the person has underreported his income (having regard to the returned income and assessed or reassessed income) [Section 270A(2)]

6) Thereafter, it provides for the quantification of underreported income [Section 270A(3)]

7) It excludes certain incomes from the purview of underreported income provided the requisite explanation, disclosure of material facts, etc., are made [Section 270A(6)].

8) In computing the tax payable on underreported income (or, misreported income) no credit is allowed or allowable for any withholding tax or tax paid in advance in respect of the underreported income.

9) The quantum of penalty is 50% of the amount of tax payable on the underreported income. For the purpose, the tax payable on underreported income should be calculated, having regard to facts as specified in sub-section (10) [Section 270A(7) & (10)];

10) It provides for the circumstances in which underreported income could be regarded as misreported income [Section 270A(9)]

11) If misreporting exists, entire unreported income, without any deduction specified in sub-section (6) is treated as misreported income,

12) Six cases of  Misrepresentation of Income are specified :-

(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 apply.

13) The misreported income attracts penalty @ 200% of the tax payable thereon [Section 270A(8)];

14) It is provided that the unreported income should not include certain specified amount of income under the specified circumstances, like, bona fide explanation; estimation; undisclosed income liable to penalty under section 271AAB etc. [ section 270A(6)]

15) Where a return is furnished, the difference between assessed income (being greater) and income as per intimation would be considered as under-reported income. The difference between the returned income and intimation income, if any, would not be considered as under-reported income.

16) Immunity from Penalty :-Finance Act, 2016 provides for Immunity from imposition of penalty in certain circumstances through insertion of section 270AA in the Act;

17) Disclaimer: The contents of this document are solely for academic & informational purposes. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. The author does not accept any liabilities for any loss or damage of  any  kind  arising  out  of  any  inaccurate  or  incomplete  information  in  this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied (except for personal, non-commercial use) without express written permission of the Author.

18) Case Studies : 1 to 7  

Case Study-1

Under Reported Income- – Sec 271A (2)(a)

(a) The income assessed is greater than the income determined in the return processed U/s 143(1)(a)

(A) The amount of under reported income will be determined as under

URI = Assessed Income (-) Processed Income u/s 143(3)(1)

(B) The tax on under reported income will be

Tax On (URI + Total income assessed )

(-) minus

Tax On (Total Income assessed)

(C) Penalty on under reported income

50% on the tax on under reported income – In case of underreporting

200% on the tax on under reported income – In case of Mis-Reporting

1	Income as per Return									5.00
	(+) Permitted adjustments u/s 143(1)(a)									1.00
2	Income processed u/s 143(1)(a)									6.00
	Add:
	(a) Disallowance of bonafide Expenses									1.00
	(b) Bogus Purchases									3.00
	(c) Bogus Salary claimed									2.00
3	Income assessed u/s 143(3)									12.00
4	Under reported income							(3-2)		6.00
5	(a) Under Reported =2(a)								1.00	0.30
	(b) Misreported Income- Bogus Claims=  (2b+2c)								5.00	1.50
6	Tax on under reported Income								6.00	1.80
7	Penalty on under reported income 5(a) = 50% of the tax								50%	0.15
	Penalty on Misreported income 5(b)= 200% of the tax								200%	3.00
8	Total Penalty u/s 270A									3.15

Case Study-2:

The income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished;

The amount of under reported income will be determined as under

URI= { Income assessed} (-) {Basic Exemptin Limit}

The tax on under reported income will be

Tax on {URI + Basic Exemption Limit}

Penalty on under reported icome

50% on the tax on under reported income – In case of under reporting

200% on the tax on under reported income – In case of Mis-Reporting

Income Tax Return Not Filed				Company, Firm etc	Individual, HUF etc
1	Income assessed u/s 143(3)			5.00	5.00
2	(-)  Basic Exemption Limit			–	2.50
3	Underreported Income		(1-2)	5.00	2.50
4	Underreported Incom (For Tax purpose)		(3+2)	5.00	5.00
5	(a) Tax on under reported Income  (4)=30% For Companies			1.50	–
	(b) Tax on under reported Income  (4)=At Slab Rates			–	0.13
6	Tax on under reported income			1.50	0.13
7	Penalty U/s 270A=50% of the tax on under reported tax			0.75	0.07

Case Study-3

Under Reported Income- On Reassessment of Income Sec 271A(2)(c)

(c) The income reassessed is greater than the income assessed or reassessed immediately before such reassessment

The amount of under reported income will be determined as under

URI = {Income reassessed} (-) {Income assessed in a preceding order}

The tax on under reported income will be

Tax = Tax On {(URI) (+) (the Reassessed total income)} (-) Tax On {the preceding assessed total income

Penalty on under reported income

50% on the tax on under reported income – In case of under reporting

200% on the tax on under reported income – In case of Mis-Reporting

Under Reporting on Reassessment			Company, Firm etc-Income	Individual, Firm etc-Income
1	Income assessed u/s 143(3)		5.00	5.00
2	(+) Bogus Purchases		3.00	3.00
	(+) Undisclosed Investment		2.00	2.00
3	Income reassessed u/s 147		10.00	10.00
4	Underreported Income	(3-1)	5.00	5.00
5	Underreported Income (For Tax purpose)	(4+3)	15.00	15.00
6	(a) Tax on under reported Income  (5)=30% For Companies		4.50	–
	(b) Tax on under reported Income  (5)=Slab Rate		–	2.63
7	Tax on income assessed u/s 147 on (3)		3.00	1.13
8	Tax on Under reported income		1.50	1.50
9	Since the under reported income arises due to misreporting of income, Penalty will be equal to 200% of the tax		3.00	3.00

Case Study-4

Under Reported Income- On MAT Income Sec 271A(2)(d)

(d) the amount of deemed total income assessed or reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income determined in the return processed under clause (a) of sub-section (1) of section 143;

The amount of under reported will be determined as under

URI =

Deemed total income assessed u/s 115JB or section 115JC

(-) minus

Deemed total income u/s 143(1)(a)

The tax on under reported income will be

Tax =

Tax On { (URI (+) (Deemed Total Income Assessed)}

(-) minus

Tax On (Deemed Total Income Assessed)

Penalty on under reported icome

50% on the tax on under reported income – In case of under reporting

200% on the tax on under reported income – In case of Mis-Reporting

Under Reporting in caase of MAT			Sec 115JB/ JC
1	Deemed Total Income processed u/s 143(1)(a)		20.00
	(+) Provision of Income Tax		2.00
	(+) Provision of Deferred Tax		1.00
2	Deemed Total Income  Assessed U/S 115JB		23.00
3	Underreported Income	(3-2)	3.00
4	Underreported Income (For Tax purposes)	(4+3)	26.00
	(a) Tax on under reported income on (3)		4.81
	(b) Tax on assessed income u/s 115JB on (2)		4.26
5	Tax on under reported income	5(a)-5(b)	0.55
6	Since the under reported income arises due to addition of disallowble expenses , Penalty will be equal to 50% of the tax		0.28

–

Provided that where under-reported income arises out of determination of deemed total income in accordance with the provisions of section 115JB or section 115JC, the amount of total under-reported income shall be determined in accordance with the following formula			Normal Provisions	Sec 115JB  Book Profit MAT
1	Deemed Income processed u/s 143(1)(a)		10.00	20.00
	(+)  Bogus purchases		3.00	–
	(+) Add: Provision of Income Tax			2.00
	(+) Add: Provision of Deferred Tax			3.00
2	Deemed Total Income  Assessed U/S 115JB			25.00
3	Underreported Income	(2-1)	(10.00)	5.00
4	Underreported Income {For Tax Purposes}	(3+2)	(10.00)	30.00
5	Tax on Under Reported Income (30%) & (18.5%)       On (4)		(3.00)	5.55
6	Tax on Assessed  Income (30%) & (18.5%)               On (2)		–	4.63
7	Tax on Under Reported Income	(5-6)	(3.00)	0.92
8	Penalty @200% & 50% of the Tax (On both the amounts)		(6.00)	0.46
9	Total Penalty Leviable		(5.54)
In this case under reporting happened under both the provisions, so both will be added. Under Normal provisions, the under reporting is due to to misrepresentation which is liable to penalty @ 200% while under the MAT provision, the under reporting is not due to misrepresentation therefore penalty will be levied @ 50% of the tax.

Case Study-5

Under Reported Income- Return Not Filed On MAT Income Sec 271(2)(e)

(e) the amount of deemed total income assessed as per the provisions of section 115JB or section 115JC is greater than the maximum amount not chargeable to tax, where no return of income has been filed;

The amount of under reported will be determined as under

URI =

The amount of deemed total income assessed or reassessed under section 115JB or section 115JC

(-) minus

The Basic Exemption Limit

The tax on under reported income will be

Tax on

{ (URI (+) (Basic Exemption Limit }

Penalty on under reported income

50% on the tax on under reported income – In case of under reporting

200% on the tax on under reported income – In case of Mis-Reporting

MAT where no return of income has been filed				Sec 115JB	Sec 115JC
1	Book Profit			10.00	15.00
	(+)  Undisclosed Book Profit			5.00	4.00
	(-) Basic Exemption Limit			–	2.50
2	Deemed Total Income u/s 115JB/JC			15.00	16.50
3	Underreported Income			5.00	1.50
4	Underreported Income {For Tax Purposes}			5.00	4.00
5	Tax on under repoprted income= (4 ) @ 18.5%)			0.93	0.74
6	Tax on Deemed Total Income =  ( 2 ) @ 18.5%)			2.70	2.97
7	Tax on under reported income		(5-6)	(1.77)	(2.23)
8	Penalty @ 200% on (7)			(3.54)	(4.46)

Case Study-6

Under Reported Income- On Reassessment of MAT Income Sec 271(2)(f)

(f) the amount of deemed total income Reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income assessed or reassessed immediately before such reassessment-Reassessed u/s 147

The amount of under reported will be determined as under

URI =

The Deemed Total Income Reassessed

(-) minus

The Deemed Total Income Previously Assessed

Tax on URI =

{ (URI (+) (the Reassessed Deemed Total Income)}

(-) minus

Tax on the previously Deemed Assessed Total Income

Penalty on under reported icome

50% on the tax on under reported income – In case of under reporting

200% on the tax on under reported income – In case of Mis-Reporting

Under Reporting on MAT Reassessment			Company, Firm etc-Income	Individual, Firm etc-Income
			Sec 115JB	Sec 115 JC
1	Deemed Total Income – Assessed		10.00	15.00
	(+) Provision for DDT		1.00	–
	(+) Expenses disallowed		3.00	3.00
	(-) Amount of Revaluation Reserve (if Credired)		1.00	–
2	Deemed Total Income – Reassessed		13.00	18.00
3	Underreported Income		3.00	3.00
4	Underreported Income for Tax purposes		16.00	21.00
5	Tax on under reported income @18.5% as Reassessed On (4)		2.96	3.89
6	Tax on under reported income @18.5% as Assessed On (1)		2.41	3.33
7	Tax on under-reported income	(5-6)	0.55	0.56
8	Penalty @ 50% on under reported income		0.28	0.28

Case Study-7

(g) the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.

The amount of under reported income will be determined as under

1) The Difference between the loss determined u/s 143(1)(a)  and the Assessed Loss whereby the amount of Loss is reduced.

2) The Difference between the loss determined u/s 143(1)(a) and the Assessed Loss where by the amount of Loss is converted in to Income

The tax on under reported income will be

Tax on URI as if the URI is the Total Income

Penalty on under reported income

50% on the tax on under reported income – In case of under reporting

200% on the tax on under reported income – In case of Mis-Reporting

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

1	Loss as per Return				(5.00)
	(+) Expenses disallowable as per Tax Audit Report				0.50
2	Income processed u/s 143(1)(a)				(4.50)
3	(+) Hawala Purchases				3.00
	(+) Undisclosed Income				5.00
4	Income u/s 143(3)				8.00
5	Underreported Income- to be treated as Total income				12.50
6	Tax on under reported income				3.75
7	Penalty U/s 270A=200% of the tax on under reported tax – being Mis Reported Income				7.50

Compiled by: CA LALIT MUNOYAT, B.Com.(Hons.),CS,FCA, DISA, @ munoyat@gmail.com # 98201 93508