PROSPERR.IO

There's a particular kind of frustration I used to see regularly during my years at the Department. Not the frustration of catching someone who'd hidden income that came with its own professional satisfaction, honestly. No, the frustration I'm talking about was watching a penalty get levied on someone who, by any fair reading of the law, didn't owe one.

It happened often enough with Section 270A that I felt compelled to write about it. The scenario goes like this. A taxpayer never filed a return. Maybe they genuinely didn't think their income crossed the threshold. Maybe they were careless. Either way, the Department issues a notice under Section 148: the reassessment notice and they file for the first time in response.

The assessed income comes in at, say, ₹2 lakh. The basic exemption limit is ₹2.5 lakh. No tax is payable. That much is obvious. Then the penalty order arrives. The Assessing Officer, citing clause (a) of sub-section (10) of Section 270A, has added the basic exemption limit of ₹2.5 lakh to the ₹2 lakh assessed income arrived at a fictional ₹4.5 lakh total calculated tax on that, and levied a 50% penalty on it. The taxpayer, understandably, has no idea what just happened.

What happened is that the officer misread the provision. And it's a misreading I've seen more than once.

Let's Back Up — What Section 270A Is Actually Doing

Section 270A was introduced in 2016, replacing the old Section 271 penalty regime for income under-reporting and misreporting. The intent was to make penalties more systematic, less discretionary, and harder to escape through prolonged litigation.

Under sub-section (1), the Assessing Officer has the power to direct a taxpayer to pay a penalty if the taxpayer has under-reported income. The penalty rate is 50% of the tax payable on the under-reported income in ordinary cases, going up to 200% where there's misreporting which covers deliberate falsification, suppression of facts, bogus entries in books of account, and similar conduct.

Those headline numbers are well known. What's less understood is how the "tax payable on under-reported income" actually gets calculated particularly in the specific situation where no return was ever filed, or where a return was filed for the first time only after a Section 148 notice was issued.

That calculation is governed by clause (a) of sub-section (10) of Section 270A. And it's the source of most of the confusion.

The Clause That Gets Misread

Here is what clause (a) of sub-section (10) says, in effect.

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 shall be calculated by treating that income as increased by the maximum amount not chargeable to tax that is, the basic exemption limit as if the combined total were the total income.

Read that slowly. The clause says: take the under-reported income, add the basic exemption limit to it, and compute the tax on that sum as if it were the total income.

Why does the law say this? Because without this adjustment, a taxpayer with, say, ₹50,000 in under-reported income would pay tax at a rate applicable to ₹50,000 standing alone which is zero, since it's below the slab. The addition of the exemption limit pushes that ₹50,000 into a taxable bracket so that the tax payable and therefore the penalty base can actually be computed.

It's a computational mechanism. A way to determine what tax rate to apply. That's all it is.

What It Is Not And Where Officers Go Wrong

Here's the misreading that creates the unjust penalty situation I described at the opening.

Some Assessing Officers interpret the clause differently. They read it as saying: add the basic exemption limit to the total assessed income not to the under-reported income and compute tax on that inflated figure.

Under that reading, a person with total assessed income of ₹2 lakh gets treated as if their income were ₹4.5 lakh (₹2 lakh + ₹2.5 lakh exemption limit). Tax gets calculated on ₹4.5 lakh. A penalty of 50% of that tax is imposed.

This is wrong. And it's wrong at a more fundamental level than just the arithmetic.

Sub-section (2) of Section 270A defines when under-reported income exists in the first place. In the context of a case where no return was filed or a return was filed for the first time under Section 148, under-reported income is defined as income assessed that is greater than the maximum amount not chargeable to tax.

Let that sink in. If the assessed income doesn't exceed the basic exemption limit if it's ₹2 lakh against a ₹2.5 lakh threshold there is no under-reported income. The very precondition for the penalty hasn't been met.

You cannot levy a penalty under sub-section (1) for under-reporting income if sub-section (2) has not been satisfied first. The penalty provision doesn't activate. Sub-section (10) which governs the calculation of tax for penalty purposes simply never comes into play.

Walking Through the Two Scenarios

Let me be concrete about this, because the distinction is easier to see with numbers.

The first situation. A taxpayer receives a notice under Section 148. Files a return for the first time in response. Total assessed income is ₹2 lakh. Basic exemption limit is ₹2.5 lakh.

Assessed income (₹2 lakh) is not greater than the basic exemption limit (₹2.5 lakh). Under sub-section (2), there is no under-reported income. Sub-section (1) the penalty provision doesn't apply. No penalty. Full stop.

The misinterpretation that adds ₹2.5 lakh to ₹2 lakh and then calculates a penalty on the resulting fictional ₹4.5 lakh is legally insupportable. The basic exemption addition in clause (a) of sub-section (10) is for computing tax on under-reported income that has already been established as existing; it is not a tool for conjuring under-reported income where none exists.

The second situation. Different taxpayers, different numbers. Total assessed income after reassessment is ₹10 lakh. Of that, ₹3 lakh represents income that was not originally declared the under-reported portion.

Here, the assessed income clearly exceeds the basic exemption limit. Under-reported income exists. Sub-section (1) applies. A penalty is warranted.

Now clause (a) of sub-section (10) becomes relevant for computing the penalty base. The tax payable on the under-reported income is computed using the applicable tax slabs on the full ₹10 lakh, and the penalty is 50% of the portion of that tax attributable to the ₹3 lakh under-reported income. In a misreporting case, the same 200%.

That is the correct and intended operation of the provision.

Why This Matters More Than It Might Seem

You might think: penalty cases involving people with income below the exemption limit how common can that really be?

More common than you'd expect. And the profile of people this affects tends to be ordinary: small traders, seasonal workers, daily-wage earners, elderly individuals with modest savings interest that pushed their total over a reporting trigger. People who didn't file because they didn't think they needed to, not because they were hiding anything.

When a penalty gets incorrectly levied on someone in this category, the amount even if it's a few thousand rupees can feel disproportionate to someone living on limited income. And the process of challenging it is itself a burden. Hiring a consultant, appearing before appellate forums, waiting months for resolution.

More fundamentally, it's simply wrong. A penalty is a consequence of legal non-compliance. If the law doesn't establish a violation and sub-section (2) in this scenario doesn't then there's nothing to penalise.

The intent of the law is not ambiguous here. Parliament designed these provisions so that penalty flows from an established tax liability arising from under-reported income. Where there's no tax liability because total income is below the exemption threshold, the chain breaks. Liability doesn't exist, and neither should the penalty.

What Should a Taxpayer Do If They've Received This Kind of Penalty?

If you've received a penalty order under Section 270A in a situation where your assessed income was below the basic exemption limit, you have grounds to challenge it.

The first step is to read the penalty order carefully. Identify whether the officer has computed the penalty by adding the basic exemption limit to your total assessed income the incorrect approach or by applying it only to the under-reported income for tax computation purposes.

If it's the former, that's the ground for your appeal. The Appellate Commissioner has jurisdiction to hear this, and there's a reasonable argument to be made, one grounded directly in the statutory language of sub-section (2) and the logical prerequisite structure of the provision.

Engage a tax consultant or chartered accountant who's familiar with penalty proceedings. This isn't an area where self-representation tends to work well, not because the argument is complex it actually isn't but because the process requires proper form, adherence to deadlines, and presentation of the right statutory citations.

Document everything. Keep the original notice, your filed return, the assessment order, and the penalty order. The appeal will need all of these.

The Broader Takeaway About Section 270A

Section 270A, when correctly applied, is a firm provision. If you have genuinely under-reported income that exceeds the exemption threshold, income that you failed to declare the penalties are real and meaningful. Fifty percent is not a trivial addition. Two hundred percent in misreporting cases can be devastating.

The provision was designed to have teeth. It replaced Section 271, which was notorious for its leakage officers had enormous discretion in whether to levy a penalty, and that discretion created its own set of problems. Section 270A tightened things considerably.

But tightened doesn't mean unlimited. The provision still has internal structure, internal conditions, and internal logic. Sub-section (2) defines when under-reported income exists. Sub-section (1) allows penalties only when it does. Sub-section (10) governs the calculation once those conditions are established.

Reading clause (a) of sub-section (10) in isolation without anchoring it in the definitional framework of sub-section (2) - produces an outcome that punishes people for a violation the law itself doesn't recognise. That's not what Parliament intended. It's not what the statute says. And it's worth pushing back on firmly when it happens.

Thirty-one years in the Department taught me that most tax disputes aren't really about dishonesty. They're about confusion sometimes on the taxpayer's side, sometimes, as this one illustrates, on the officer's side. The law is detailed enough that even experienced practitioners get it wrong occasionally.

What I've tried to do here is lay this particular provision out clearly enough that you know what the correct position is and can recognise when the wrong one is being applied to you.

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Disclaimer: This article is based on the author's personal understanding of the Income Tax Act, 1961, relevant provisions, and judicial precedents. It is for general informational purposes only and does not constitute professional legal or tax advice. Please consult a qualified tax practitioner for guidance on your specific situation.