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The Income-tax Act, 1961, contains various provisions aimed at ensuring accurate reporting of income by taxpayers. Sections 270A, 115BBE, and 271AAC specifically address different aspects of penalizing taxpayers for misreporting or under-reporting income.

A critical question arises when dealing with income assessed under Section 115BBE: Does such income also qualify as under-reported for the purpose of imposing a penalty under Section 270A? This article explores this question with suitable examples and a rationale.

Section 270A: Penalty for Under-Reported Income:

Section 270A introduces a penalty for under-reported income. According to Section 270A(3), the amount of under-reported income is determined based on the difference between–

• the assessed total income and the basic exemption limit where return of income is not filed or filed first time in response to notice u/s 148 ,  
• assessed income and the income declared by the taxpayer where the return has been filed, or 
• in cases of reassessment, the difference between the re-assessed and previously assessed income.

Section 115BBE: Tax on Income Referred in Sections 68 to 69D:

Section 115BBE prescribes a steep tax rate of 60% on income that falls under sections 68 to 69D, which includes unexplained cash credits, investments, money, and expenditures. This section aims to curb the inflow of unaccounted money into the formal economy by imposing a higher tax rate on such undisclosed income.

Section 271AAC: Penalty on Income Assessed Under Section 115BBE:

Section 271AAC imposes an additional penalty of 10% on the tax payable under Section 115BBE on income covered under sections 68 to 69D. However, if the taxpayer includes this income in their return and pays the applicable tax before the end of the relevant previous year, no penalty is levied. Importantly, subsection (2) of Section 271AAC clarifies that no penalty under Section 270A shall be imposed on such income.

The Key Question:

Given the above provisions, the key issue is whether income assessed under Section 115BBE can also be classified as under-reported income, attracting a penalty under Section 270A.

Example 1: Income Not Declared in Return but Detected by AO

Consider a case where a taxpayer fails to declare unexplained income (e.g., unexplained cash credit under Section 68) in their income tax return. During an assessment, the Assessing Officer (AO) detects this income and assesses it under Section 115BBE. Here, the taxpayer is liable to pay a 60% tax on the assessed income, along with a 10% penalty under Section 271AAC.

In this scenario, the income falls under the ambit of Section 115BBE, and the penalty under Section 271AAC applies. As per the proviso to Section 271AAC(2), no penalty under Section 270A can be imposed on this income, since it is already covered under Section 271AAC.

Example 2: Income Declared in Return and Tax Paid

Suppose a taxpayer includes unexplained income (e.g., undisclosed investment under Section 69) in their income tax return and pays the 60% tax under Section 115BBE before the end of the relevant previous year. In this case, the taxpayer escapes the penalty under Section 271AAC due to the timely payment of tax.

Here, since the income is reported voluntarily and the tax under Section 115BBE is paid on time, this income is not considered under-reported for the purposes of Section 270A. The absence of any concealment or under-reporting negates the application of Section 270A.

Rationale:

The legislature’s intention behind introducing Section 271AAC was to create a separate penalty mechanism specifically for income assessed under Section 115BBE, primarily related to unexplained cash credits, investments, etc. The express provision in Section 271AAC(2) ensures that no penalty under Section 270A applies to such income, avoiding double jeopardy for the taxpayer.

Section 270A, on the other hand, is broader and deals with general cases of under-reporting or misreporting of income. When income is already assessed under the stringent provisions of Section 115BBE and penalized under Section 271AAC, applying Section 270A would be redundant and unjust.

Let's analyze both examples to understand how Section 115BBE and Section 270A would apply, considering the basic exemption limit of ₹2,50,000 and the return being filed for the first time in response to a notice under Section 148.

Example 1: Total Income of ₹50,50,000 including ₹50,00,000 Taxable Under Section 115BBE

• Scenario: A taxpayer's total income is determined as ₹50,50,000, which includes ₹50,00,000 of unexplained income chargeable under Section 115BBE. The return is filed for the first time in response to a notice under Section 148.

Tax Calculation:

• Basic Exemption Limit: ₹2,50,000
• Income under Normal Provisions: ₹50,50,000 - ₹50,00,000 = ₹50,000
• Income Tax under Normal Provisions: Nil (since ₹50,000 is below the exemption limit)
• Income Tax under Section 115BBE (60% on ₹50,00,000): ₹30,00,000
• Surcharge (25% on Tax under 115BBE): ₹7,50,000
• Cess (4% on Total Tax): ₹1,50,000
• Total Tax Payable: ₹30,00,000 + ₹7,50,000 + ₹1,50,000 = ₹39,00,000

Penalty Consideration:

Since the income of ₹50,00,000 is entirely taxable under Section 115BBE, a 10% penalty under Section 271AAC would apply, amounting to ₹3,00,000 (10% of ₹30,00,000).

No penalty under Section 270A: As per Section 271AAC(2), since the income is entirely under Section 115BBE, no penalty under Section 270A will be imposed.

Example 2: Total Income of ₹50,50,000 Including ₹30,00,000 Chargeable Under Section 115BBE

Scenario: A taxpayer's total income is determined as ₹50,50,000, which includes ₹30,00,000 of unexplained income chargeable under Section 115BBE. The return is filed for the first time in response to a notice under Section 148.

Tax Calculation:

• Basic Exemption Limit: ₹2,50,000
• Income under Normal Provisions: ₹50,50,000 - ₹30,00,000 = ₹20,50,000
• Income Tax on Normal Income:
• ₹2,50,000 to ₹5,00,000: ₹12,500 (5% on ₹2,50,000)
• ₹5,00,000 to ₹10,00,000: ₹1,00,000 (20% on ₹5,00,000)
• Above ₹10,00,000: ₹2,10,000 (30% on ₹7,00,000)
• Total Tax on Normal Income: ₹12,500 + ₹1,00,000 + ₹2,10,000 = ₹3,22,500
• Income Tax under Section 115BBE (60% on ₹30,00,000): ₹18,00,000
• Surcharge (25% on Tax under 115BBE): ₹4,50,000
• Cess (4% on Total Tax): ₹1,02,900 (on ₹25,72,500)
• Total Tax Payable: ₹3,22,500 + ₹18,00,000 + ₹4,50,000 + ₹1,02,900 = ₹26,75,400

Penalty Consideration:

• Penalty under Section 271AAC: A 10% penalty on the tax calculated under Section 115BBE (₹18,00,000) would apply, resulting in ₹1,80,000.
• Penalty under Section 270A:
• The normal income of ₹20,50,000 is subject to normal taxation, and there could be a difference between this assessed income and any previously declared income.
• If the taxpayer had declared a lower income (or no income) in the past, the difference could be considered under-reported income under Section 270A, leading to an additional penalty.
• The penalty under Section 270A would be 50% of the tax on the under-reported income (in this case, on ₹20,50,000 minus any previously declared amount).
• In Example 1, since the entire income falls under Section 115BBE, only Section 271AAC applies, and no penalty under Section 270A is imposed.
• In Example 2, while a part of the income is taxed under Section 115BBE, the remaining income is subject to normal provisions, potentially attracting a penalty under Section 270A for under-reporting the normal income. The unexplained income would still attract a penalty under Section 271AAC.
• These examples illustrate the distinct treatment of income under Sections 115BBE and 270A, ensuring that income already taxed under the stringent provisions of Section 115BBE is not penalized twice

Conclusion:

In summary, income taxed under Section 115BBE does not qualify as under-reported income for the purpose of imposing a penalty under Section 270A. The specific penalty provision under Section 271AAC governs such income, ensuring that no additional penalty under Section 270A is imposed. This interpretation aligns with the legislative intent to avoid multiple penalties on the same income and promotes fairness in the tax system.

This analysis clarifies that the scope of Section 270A does not extend to income covered under Section 115BBE, thanks to the protective shield provided by Section 271AAC(2). As a result, taxpayers can be assured that they will not face double penalties on income already subjected to the higher tax rates under Section 115BBE

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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.