Analysis with Examples section 270A of Income Tax -200% Penalty

By | November 14, 2016
(Last Updated On: November 14, 2016)

Analysis with Examples section 270A  of Income Tax -200% Penalty

Presently, section 271(1)(c) of Income Tax Act, inter alia provides penalty for concealment of income or furnishing of inaccurate particulars of income.

Finance Act, 2016 replaces the section 271 of Income Tax Act by section 270A and provides penalty for underreporting and misreporting of income with effect from assessment year 2017-18, that is, relevant to the previous year or financial year 2016-17.

The replacement is explained as follows in the Memorandum explaining the provisions of the Finance Bill, 2016 :

“Under the existing provisions, penalty on account of concealment of particulars of income or furnishing inaccurate particulars of income is leviable under section 271(1)(c) of the Income-tax Act. In order to rationalize and bring objectivity, certainty and clarity in the penalty provisions, it is proposed that section 271 shall not apply to and in relation to any assessment for the assessment year commencing on or after the 1st day of April, 2017 and subsequent assessment years and penalty be levied under the newly inserted section 270A with effect from 1st April, 2017. The new section 270A provides for levy of penalty in cases of under reporting and misreporting of income.

Read Post How much Taxes to be Paid if you Deposit Undisclosed Income in Bank Account

Critical  Analysis of Section 270A of Income Tax Act

  • Applicability :– It would be applicable with effect from assessment year 2017-18 implying that the penalty under the section 270A can be levied for the assessment year 2017-18 (Financial Year 2016-17) and thereafter.
  • There is no requirement of “recording of satisfaction by the authority “, for initiating the penalty u/s 270A.
  • The Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner (‘specified authority’) are empowered to order payment of penalty [Section 270A(1)];
  • The direction for penalty should be during any proceedings under the Act; Thus it could include assessment, reassessment, order giving effect to the appellate order, set aside assessment etc.
  • The section employs language “may direct” . Thus the power is discretionary [Section 270A(1)]; Thus it is not obligatory for the officer or the authority to levy the penalty. Hence, in appropriate cases, the authority may decide not to visit the person concerned with penalty.
  • The power can be exercised where a person has underreported his income [Section 270A(1)];
  • 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)];
  • Thereafter, it provides for the quantification of underreported income [Section 270A(3)]
  • It excludes certain incomes from the purview of underreported income provided the requisite explanation, disclosure of material facts, etc., are made [Section 270A(6)];
  • It also provides for the penalty in respect of intangible additions made and explained as source of investments, etc., in subsequent years and in respect of intangible additions no penalty was levied in previous years.[Section 270A(5)]; [Note :-Additions are sometimes made by the Income-tax Officers for purely technical reasons, for example, application of a presumptive rate of gross profit or of yield, or on account of estimated disallowance of certain expenses, shortfalls, wastage, etc. Thus in respect of intangible additions made prior to assessment year 2017-18, the section can apply and penalty can be levied under the section.]
  • 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.
  • 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)];
  • It provides for the circumstances in which underreported income could be regarded as misreported income [Section 270A(9)];
  • If misreporting exists, entire unreported income, without any deduction specified in sub-section (6) is treated as misreported income,
  • Six sases 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.
  • The misreported income attracts penalty @ 200% of the tax payable thereon [Section 270A(8)];
  • In respect of an addition or disallowance, a penalty cannot be imposed once again (if imposed earlier) [Section 270A(11)];
  • 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)]
  • 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 .
  • The order directing the payment of penalty, by the specified autho-rity, should be in writing [Section 270A(12)].
  • Immunity from Penalty :- Finance Act, 2016 provides for Immunity from imposition of penalty in certain circumstances through insertion of section 270AA in the Act;

Situations leading to underreporting of Income [Sub-section (2) of Section 270A]

A person can be considered to have underreported his income in the following different situations, as specified in various clauses:

ClauseSituationsIncomeGreater/Less thanIncome
(a)Return filedAssessed incomeGreater thanReturned income [which is processed under section 143(1)(a)
(b)Return not filedAssessed incomeGreater thanMaximum amount not liable to tax
(c)ReassessmentReassessed incomeGreater thanAssessed income/reassessed income (as per previous re-assessment)
(d)Assessed reassessed under section 115JB/115JC (return filed)Assessed/re-assessed Deemed total income (under section115JB/115JCGreater thanReturned deemed total in-come (under section115JB/115JC) [return is processed under section143(1)(a)]
(e)Assessed under section115JB/115JC (where no return filed)Assessed deemed total income (under section 115JB/ 115JC)Greater thanMaximum amount not liable to tax
(f)Assessee/reassessed under section 115JB/115JCAssessed/reassessed Deemed total income (under section115JB/115JCGreater thanAssessed/reassessed Deemed total income under section 115JB/115JC (as per previous assessment/ reassessment)
(g)Loss caseAssessed/reassessed lossGreater thanReturned/assessed loss
Assessed/reassessed incomeLess thanReturned/assessed loss

Quantification of underreported income [Sub-section (3) of Section 270A]

To identify the amount of underreported income, is the first step in the process. The difference between the assessed income and intimation income is treated as underreported income.

The different situations, as contemplated by the sub-section, are explained and illustrated:

(i) In case where income has been assessed for the first time

ClauseCircumstancesIncome u/s 143(1)(a) (A)Income Assessed (B)Under reported income (C= A-B)
(a)Return has been furnished5,00,0007,00,0002,00,000
Clause `CircumstancesIncome Assessed (A)Maximum Amount not charge-able to Tax (B)Under reported income C= A-B
(b)No return has been furnished

(i) In case of Company/Firm or Local Authority

(ii) Any other case

7,00,000

7,00,000

N.A

2,50,000

7,00,000

5,50,000

(ii) In case where income has not been assessed for the first time

CircumstancesIncome Assessed/ Reassessed or Recomputed in earlier Order (A)Income Reassessed/ Recomputed (B)Under reported income (C=B-A)
Reassessment/ Recomputation7,00,00010,00,0003,00,000

In case under-reported income arises on account of determination of deemed total income u/s 115JB/115JC.

It requires aggregation of under-reported income as per normal provisions as well as deemed total income (under section 115JB/115JC).

(i)Under Reported Income (As per section 115JB/115JC, as returned/assessed)
Assessed income under section 115JB12,00,000
Intimation income as per section 115JB10,00,000
Under Reported Income (‘URI’) 2,00,000
(ii)Total under reported income = (A-B) + (C-D)
ParticularsAmount (Rs.)
Total income assessed as per general provision(A)10,00,000
Income assessed under general provision reduced by URI(B)8,00,000
Total income assessed as per u/s 115JB/115JC(C)12,00,000
Income assessed u/s 115JB/115JC reduced by URI(D)10,00,000
Total Under- reported income(A-B)+(C-D)4,00,000

Determination of under-reported income in case of losses

The amount of under-reported income will be difference between:—

amount of losses assessed/re-assessed/re-computed (if it results into reduced losses); and
the amount of losses determined/assessed/re-assessed/re-computed in the preceding assessment order

Illustration1: First assessment

Loss assessed(A)(Rs. 5,00,000)
Loss determined u/s 143(1)(a)(B)(Rs. 8,00,000)
Amount of under-reported income(B) – (A) = (C)Rs. 3,00,000

Illustration 2 : Second and subsequent assessments

Loss assessed(A)(Rs. 3,00,000)
Loss determined in earlier order(B)(Rs. 5,00,000)
Amount of under-reported income(B)-(A)=(C)Rs. 2,00,000

Key Points 

  • If, in the assessment, there are additions as well as reductions, the net amount would be considered as under-reported income exigible to penalty;

Amount of penalty in respect of under-reported income [Sub-sections (7) and (10) of Section 270A ]

The penalty in respect of under-reported income is: 50% of the tax payable on under-reported income.

The penalty in respect of  misreported income is @ 200% of the tax payable thereon on under-reported income.

Tax  Payable  in respect of the underreported income should, in different circumstances, be calculated as follows:

1.Return of income not furnished and assessed for the first time, tax on: assessed income plus maximum amount not chargeable to tax
[to illustrate, in case of an individual, the assessed income is, say, Rs. 500,000, tax needs to be calculated on Rs. 750,000 (Rs. 500,000 + Rs. 250,000, that is, maximum amount not chargeable to tax in the case of individual)];
2.Where total income (as per intimation) or assessed/reassessed/recomputed total income is a loss, tax on: underreported income as if it were total income
[to illustrate, as per intimation, total income is loss of Rs. 100,000 and underreported income is Rs. 400,000, tax on Rs. 400,000]; and
3.In all other cases, the tax payable would be: tax on underreported income plus total income as per intimation or as assessed or reassessed or recomputed in preceding order minus tax on total income as per intimation or as assessed or reassessed or recomputed in preceding order
[to illustrate, total income as per intimation is Rs. 500,000; under-reported income is Rs. 300,000, then, tax on Rs. 800,000 minus tax on Rs. 500,000].

The tax would be calculated on under Reported Income at the applicable rate.

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.

No 1 Example under Section 270A : Return of income not furnished and income is assessed for the first time:

An individual, aged 50 years, does not furnish his return of income for assessment year 2017-18 and total income assessed Rs. 6,00,000 then the penalty will be calculated as under:

Total income assessed (A)6,00,000
Threshold limit (B)2,50,000
Under reported income (A) – (B) = (C)3,50,000
Tax payable on (B) + (C)6,00,000
Tax payable on above:45,000
Up to Rs. 2,50,000Nil
Rs. 2,50,001 to Rs. 5,00,000 @10%25,000
Rs. 5,00,001 to Rs. 6,00,000 @20%20,000
Penalty u/s 270A(7) (50% of the amount of tax payable)22,500

No 2 Example under Section 270A : Where total income (as per intimation) or assessed/reassessed/ recomputed total income is a loss

An individual, aged 50 years, filed his return of income for assessment year 2017-18;

• income is assessed determining loss of Rs. 5,00,000 due to underreported income of Rs. 10,00,000;

then the penalty will be calculated as under:

Total income assessed (A)(5,00,000)
Under reported income (B)10,00,000
Tax payable on (B):1,25,000
Up to Rs. 2,50,000Nil
Rs. 2,50,001 to Rs. 5,00,000 @10%25,000
Rs. 5,00,001 to Rs. 10,00,000 @20%1,00,000
Penalty u/s 270A(7) (50% of the amount of tax payable)62,500

No credit for tax is paid in advance

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.

section 270A

 

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