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Section 270A of Income Tax Act: A Comprehensive Overview of Penalties


Section 270A of Income Tax Act: A Comprehensive Overview of Penalties


The Income Tax Department has released a notice advising salaried people to accurately disclose their income on their tax returns. 270A came to light as a result of this warning penalty for underreporting or misreporting income under Section. In addition, the department has significantly altered the income details on the ITR Form 1 (Sahaj) for FY 17–18. The ITR will now provide a detailed breakdown of your residential property income and salary rather than the entire amount. 

 

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These two actions unequivocally demonstrate the department's goal to stop taxpayers from engaging in tax evasion tactics. It is now crucial that you are aware of the penalties under Section 270A of the Act. A person will be subject to a penalty under Section 270A of the Act if they underreport their income or overstate their deductions when completing their ITR. Let's examine the specifics of Section 270A, such as the terminology used in this section and how much of a penalty is required.


What is Section 270A of the Income Tax Act?

According to Section 270A of the Income Tax Act, if an individual underreports or misreports their income, an assessing officer (AO), a commissioner (appeals), a principal commissioner, or a commissioner may order them to pay a penalty. There could be a penalty of 50% to 200%. Introduced in the 2016 budget, this item took effect in financial years 16 and 17.


Understanding Under-Reporting of Income

The specifics of each case will determine whether income was underreported. Thus, there are several situations in which under-reporting may happen.  The income is deemed underreported if the income in Column A of the following table is greater than the income shown in Column B.



Understanding Under-Reporting of Income


Furthermore, it will be deemed underreporting of income if the assessed or evaluated income minimises the loss or turns the loss into revenue. The technique of underreported computing income is mentioned in Section 270A(3). 


Calculation of Underreported Income under Section 270A

The amount of under-reported income in various situations is calculated as follows:


For First-Time Tax Assessment

  • If the assessee submitted an ITR, the difference between the assessed amount and total income was calculated in accordance with Section 143(1a). 

  • The difference between the maximum tax-exempt income and the assessed income has not been provided on the return. 

  • Total assessed income for businesses, corporations, or local governments.


For Others

  • In cases where assessment or reassessment reduces losses, the difference between the total revenue assessed or reassessed and the losses claimed.

  • For income that has been underreported due to considered income under Section 115JB or Section 115JC — (A – B) + (C – D) In this case, taxable income (B) is less than the amount of underreported income (A), which is the total income assessed under general provisions. D is the entire chargeable income less the total underreported income, and C is the total income assessed under Sections 115JB or 115JC. 

  • In all other cases, the difference between the income that was previously calculated and the income that was assessed, reassessed, or recomputed.


Misreporting of Income

Besides underreporting of income, misreporting is another reason taxpayers can get into trouble. Here are the situations regarded as misreporting:

  • Misrepresentation or suppression of information

  • Failure to record receipt in books

  • Recording of false entries in the books

  • Failure to record investments in the books

  • Failure to report international transactions (or deemed international transactions)

  • Claim of expenditure without any evidence


Penalty under Section 270A of the Income Tax Act, 1961

If income is underreported as a result of income misreporting, a penalty equal to 200% of the tax owing on the underreported income will be assessed. On the other hand, 50% of the tax owed on underreported income will be penalised if income is underreported for any other reason.


Examples of Penalty Imposed under Section 270A

Example 1 – Underreporting of Income

Mr A works as a salaried employee and receives a salary of Rs 50,000 monthly. In addition, he receives Rs. 20,000 in rental income each month, which he fails to report on his tax return. When the assessing officer finds this, the rental income is assessed at Rs. 2.4 lakhs annually. In his initial tax return, Mr. A had stated a total income of Rs. 6 lakhs. Mr. A in this instance underreported his income by 2.4 lakhs rupees. Assuming a 30% tax rate, the new income will result in tax obligations of Rs. 70,800. 50% of the tax due on the underreported income, or Rs. 35,400, will be the penalty for underreporting income. Interest on the tax may also be assessed by the assessing officer. 


Example 2 – Misreporting of Income

Mr. B is a businessman with a one crore rupee turnover. He makes inflated claims for deductions totaling Rs. 20 lakhs in his tax return, which are not backed up by appropriate paperwork. The income is assessed at Rs. 1.2 crores by the assessing officer, who rejects these deductions. In his initial tax return, Mr. B had stated a total income of Rs. 80 lakhs.


Who can Impose a Penalty Under Section 270A

If you have underreported your income, the following individuals are entitled to assess the penalty: 

  • Commissioner of Appeals

  • Assessing Officer

  • Commissioner 

  • Principal Commissioner Sec

270A(2) lists the situations in which underreported income is addressed by the Section. 


Exceptions to Section 270A

If any of the following applies to the underreported income, you will not be subject to a penalty under Section 270A: 

  • The amount of money you make and how well you justify it: This applies only if the Income Tax Authority is persuaded that your explanation is accurate and that all relevant data has been provided to back it up. 

  • The estimated amount of revenue not declared: This applies if the tax authorities are satisfied with the accuracy and completeness of the accounts you have submitted, but the way they have been used makes it impossible to accurately compute the revenue from them. 

  • The estimated total amount of unreported revenue: This applies if you independently assess a lower addition or disallowance on the issue, factor it into your estimation of his income, and disclose all pertinent data regarding the addition or disallowance. 

  • Any increase in line with the transfer pricing officer's determination of the arm's length price, plus the amount of underreported revenue it reflects: This is applicable if you have disclosed all pertinent information about the transaction, reported the foreign transaction in compliance with Chapter X, and maintained the documents and data required by section 92D.

  • The quantity of earnings from a search activity that are not disclosed: This is relevant in cases where section 271AAB's fine for these unreported profits are applicable. 

The amount of the penalty for underreporting income is specified in Sec. 270A(7).


Conclusion

To avoid a penalty under Section 270A, you must declare all of your income when filing your returns under the appropriate headings. You will be assessed this penalty if you fail to declare your income accurately or completely. Recall that the penalty must be paid in addition to the taxes. Thus, become a tax-compliant citizen by filing an accurate and timely return.


FAQ

Q1. What are some key points of Section 270 A?

You must understand the following key points to fully comprehend Section 270 A: 

  • Income underreporting and misreporting are punishable under Section 270A. 

  • Half of the tax on unreported income is the penalty for underreporting. 

  • 200% of the tax reported on the income that was misreported is the penalty for misreporting. 

  • If you meet the requirements outlined in Sec. 270AA, you may be granted immunity from Sec. 270A. 


Q2.What is Section 270A (9) of the Income Tax Act, 1961?

The Income Tax Act's Section 270A lays forth penalties for both under- and misreporting, and its Subsection 270AA (9) classifies instances of income misreporting.


Q3. How can I avoid a penalty under Section 270A?

Taxpayers can avoid penalties under Section 270A by making sure that they accurately record their income and include complete and accurate information in their tax filings. Additionally, they must have up-to-date records to back up their claims and deductions.


Q4. What is the time limit for Section 270A?

According to Section 270AA, Subsection (4), the assessing officer must issue an order within one month of the end of the month in which the application under Subsection (1) is received, either accepting or rejecting the assessee's request for immunity from penalty under Section 270A.


Q5. What are Sections 270 and 271 of the IT Act?

The previous penalty provisions under Section 271 of the Income Tax Act were superseded by Section 270A, which was enacted in the Finance Act of 2016. Ensuring correct income reporting by taxpayers and penalising those who do not is the main goal of Section 270A.


Q6. Is Sec 270A better than Sec 271(1c)?

Yes. The grounds for fines under Sec. 271(1c) were not made clear in penalty orders. Ethical standards state that taxpayers are entitled to know if the information was provided falsely or to hide income. In contrast, the new Section 270A explicitly states why sanctions are imposed.


Q7. How do underreporting and misreporting of income differ under Section 270A?

When the income returned by the taxpayer is less than the income assessed or reassessed by the assessing officer, underreporting of income takes place. Underreporting income, overclaiming deductions, overstating depreciation, hiding money, or providing false information about income are all examples of misreporting income. 


Q8. What are the consequences of violating Section 270A, and how can taxpayers avoid penalties?

Consequences of violating Section 270A can include monetary fines and penalties imposed by the tax authorities. Taxpayers can avoid penalties by ensuring compliance with tax regulations, maintaining accurate records, and timely filing of returns.


Q9. Can taxpayers appeal or mitigate penalties imposed under Section 270A, and what is the process for doing so?

Yes, taxpayers have the right to appeal against penalties imposed under Section 270A. They can file an appeal with the appropriate appellate authority within the specified time frame, providing necessary evidence and justifications to support their case. The appellate authority will review the appeal and make a decision based on the merits of the case.


Q10. Can the assessing officer impose interest on the tax payable under Section 270A?

Yes, the assessing officer can levy interest on the tax payable under Section 270A of the Income Tax Act.


Q11. Can income from previous years be included in underreported income and penalised if it is a source of income/investment in the current year? 

Yes. If the source of income or investments for your current year was previously evaluated payment and was not penalised in that year, it will be considered an intangible increase to your current income and will be subject to a penalty under Section 270A. 



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