Penalty for Under-reporting and Misreporting of Income
Amount of Penalty
• Under-reporting of income: 50% of tax payable on under-reported income.
• Misreporting of income: 200% of tax payable on misreported income.
Penalty orders are passed by the Assessing Officer, Joint Commissioner (Appeals), Commissioner (Appeals), Principal Commissioner, or Commissioner.
The burden of proof for misreporting lies with the assessing officer. Penalty cannot be levied twice on the same addition or disallowance.
Definition of Under-reporting of Income
Under-reporting arises in cases such as:
• Assessed income exceeds returned income (after return processing under Section 143(1)(a)).
• Income assessed without filing a return exceeds the maximum exemption limit.
• Income reassessed, where return is filed for the first time in reassessment, exceeds the maximum exemption limit.
• Income reassessed is higher than the earlier assessment.
• Loss reported in return is reduced or converted to income on reassessment.
• Special rules apply when income is assessed under MAT/AMT provisions.
Calculation of Tax Payable on Under-reported Income
The tax on under-reported income is computed as the difference between the tax on total income, including under-reporting, and the tax on income as previously assessed or returned.
What is not considered as Under-reporting?
• Income for which a bona fide explanation is accepted.
• Income determined on estimates with correct and complete accounts.
• Additions or disallowances agreed by the assessee and included in the return.
• Transfer pricing additions where proper documentation is maintained.
• Undisclosed income under search cases (covered by other penalties).
• Unexplained income taxable under Sections 68 to 69D (subject to separate penalty under Section 271AAC).
Definition of Misreporting of Income
Misreporting includes:
• Misrepresentation or suppression of facts.
• Failure to record investments or receipts in books.
• Claiming unsupported expenditure.
• Recording false entries in books.
• Failure to report international or specified domestic transactions.
Immunity from Penalty
• Immunity from penalty may be granted on application filed electronically in Form 68 within 1 month from the end of the month in which the assessment/reassessment order is received, subject to payment of tax as per the notice of demand and no appeal has been filed.
• The Assessing Officer shall pass the order granting or rejecting immunity after expiry of the appeal period, within 3 months from receipt of the application. No rejection order can be passed without giving the assessee an opportunity to be heard.