The penalties for under-reporting and misreporting of income

Let's read about what is considered under-reporting or misreporting of income and how much penalties they attract

The last date for filing your income tax returns for the financial year 2016-17 is just a few days away: 31 July 2017. While filing your return, you are supposed to disclose all your incomes under all the income tax heads, irrespective of the amount of income or whether the income is considered tax-exempt or taxable. You may have to pay penalties if you under-report or misreport your income while filing your income tax returns. Let’s read about what is considered under-reporting or misreporting of income and how much penalties they attract.

According to the Finance Bill 2016, a new section 270A was inserted in the Income-tax Act, 1961, and will be effective from assessment year 2017-18. The Act now provides that an assessing officer (AO), a commissioner (appeals), a principal commissioner or a commissioner may direct that any person who has under-reported or misreported income shall be liable to pay penalty in addition to the tax, if any, on such income.

There are various circumstances under which a person can be considered as having under-reported the income. For instance, if someone does not file a return, but her income was taxable (i.e., more than Rs2.5 lakh for individuals, Rs3 lakh for senior citizens and Rs5 lakh for very senior citizens), then it will be considered as a case of under-reporting. Another scenario is when the return is filed but upon assessment the department finds that the income of the assessee is more than what was declared in the return. 

This could happen if the assessee failed to take into consideration certain incomes such as interest income and capitals gains.

This happens in case of misrepresentation or suppression of facts, and includes: failure to record investments in the books of account, claims of expenditure not substantiated by any evidence, recording of any false entry in the books of account, failure to record any receipt in books of account having a bearing on total income, failure to report any international transaction or any transaction deemed to be an international transaction or any of the specified domestic transactions.

Under section 270A, under-reporting of income can attract a penalty of up to 50% of the tax payable on under-reported income. On the other hand, in case of misreporting, the penalty can be as high as 200% of the tax payable on the misreported income. 

For instance, if you are in 30% tax bracket and under-report an income of Rs1 lakh in your returns, upon assessment, the assessing officer can impose a penalty of up to about Rs15,000 (50% of the tax on under-reported income, i.e., Rs30,000). If the misreported income is Rs1 lakh, the penalty can be up to 200% of the tax on unreported income. Remember, penalty is over and above the tax you have to pay.

However, an assessee may apply to the AO for immunity from imposition of penalty under section 270A. For this, she would have to explain why she under-reported or misrepresented her income. If satisfied with the explanation, the AO may not penalise the assessee or reduce the penalty.