PROSPERR.IO

Introduction:

Section 270A of the Income Tax Act, 1961, introduces the concept of penalties for under-reporting and misreporting of income. Specifically, sub-section (10) of this section provides guidelines for calculating the tax payable on under-reported income. However, there has been instances where assessing officers, in cases involving individuals with total income below the basic exemption limit, impose penalties under Section 270A by misinterpreting the provisions in cases where ITR is not filed or filed first time in response to notice under section 148.

This article seeks to clarify the correct interpretation of clause (a) of sub-section (10) of Section 270A, supported by relevant examples.

Understanding Clause (a) of Sub-Section (10) of Section 270A:

As per clause (a) of sub-section (10) of Section 270A "The tax payable in respect of the under-reported income” in a case “where no return of income has been furnished or where return has been furnished for the first time under section 148 and the income has been assessed for the first time” shall be “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."

The key phrase here is "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." This clause thus provides that, in cases where no return was filed, or where the return was filed for the first time under Section 148, the tax payable on the under-reported income should be computed on the total income arrived by adding the basic exemption limit to the under-reported income.

Common Misinterpretation:

Some assessing officers interpret the above clause to mean that a penalty should be imposed even when the total assessed income, including the under-reported income, is below the basic exemption limit. They argue that the basic exemption limit has to be added to the assessed total income to compute the tax payable for the purpose of imposing penalty and consequently a penalty is to be imposed, even when the total income is below basic exemption limit. This interpretation is flawed and leads to incorrect penalty impositions.

Correct Interpretation with Examples:

To clarify, the correct interpretation is that the penalty under Section 270A applies only when the under-reported income leads to a tax liability. If, after including the under-reported income, the total assessed income still falls below the basic exemption limit, no tax is payable, and therefore, no penalty should be imposed.

Example 1: Individual with Assessed Income Below Basic Exemption Limit:

• Scenario: An individual receives a notice under Section 148 and files a return. The total assessed income, including under-reported income, is ₹2,00,000. The basic exemption limit is ₹2,50,000.
• Analysis: Sub-section (2) of Section 270A defines what constitutes "under-reported income." According to this provision, a person is considered to have under-reported their income if, the income assessed is greater than the maximum amount not chargeable to tax where no return of income has been furnished, or where the return has been furnished for the first time under Section 148. Since the total assessed income (₹2,00,000) is less than the basic exemption limit (₹2,50,000), the assessed income is not greater than the maximum amount not chargeable to tax, there is no "under-reported income".

The provision of Sub-Section (1) of Section 270A allows the Assessing Officer to levy a penalty for under-reporting of income. However, since there is no under-reported income in this scenario, sub-section (1) of Section 270A does not apply. No penalty can be imposed under Section 270A in this situation because the individual's total assessed income does not exceed the basic exemption limit, and therefore, no tax is payable.

Example 2: Individual with Assessed Income Above Basic Exemption Limit:

• Scenario: An individual’s total assessed income after reassessment is ₹10,00,000, which includes under-reported income of ₹3,00,000. The basic exemption limit is ₹2,50,000.
• Analysis: Here, the under-reported income pushes the total assessed income above the basic exemption limit. The tax payable on total income ₹10,00,000 would be computed as per the applicable tax slabs. A penalty under Section 270A shall be computed in case of under-reporting of income at the rate of 50% of such tax or in the case of mis-reporting 200% of such tax.

Conclusion:

The correct application of clause (a) of sub-section (10) of Section 270A hinges on whether the under-reported income results in a taxable total income. If the total income (including under-reported income), does not exceed the basic exemption limit, no tax is payable, and consequently, no penalty should be imposed. Misinterpretation of this provision can lead to undue penalties on taxpayers whose income falls below the taxable threshold, which goes against the intent of the law. Assessing officers should carefully evaluate each case to ensure that penalties are only imposed where there is a legitimate tax liability due to under-reporting of income.

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Disclaimer:

The information provided in this article is for general informational purposes only and does not constitute professional advice. The Author recommends consulting with a qualified tax advisor or legal professional to obtain specific advice related to your individual circumstances. Tax laws and regulations are subject to change, and the application of these laws can vary based on individual situations.

The author is not responsible for any errors or omissions, or for the results obtained from the use of this information. In no event will we be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from loss of data or profits arising out of, or in connection with, the use of this article.