Section 270A of the Income Tax Act gives the details about the provisions of penalties for under-reporting and misreporting of income. section 278 was inserted after section 270 of the Income Tax Act with effect from April 1st of 2017.
The purpose of introducing the section is to curb tax invasions done by taxpayers by not sharing the correct information about the income sources for a financial year. Under the provision of section 270 A, the assessee officer has the right to impose a penalty of up to 50% tax on the difference between the old and reassessed taxable income.
In this article, we will see what are the conditions under which this act is applicable and how the taxpayer can avoid penalties and ask for immunity from the Assessee officer.
What Is Section 270A of Income Tax Act?
So, section 270A states that an assessing officer or the commissioner of appellate or the principal commissioner may levy a penalty on any taxpayer under-reporting their income. The penalty will be charged in addition to the reassessed tax on any under-reported income.
Which income falls for under-reported income
The following income will be considered under-reported if it fulfills the following conditions;
- When the income determined in the ITR by the taxpayer is less than the income determined during assessment.
- When the income assessed is more than the income not chargeable to tax, no return of income has been furnished for it.
- When the income re-evaluated is more than the previous re-evaluation.
- The deemed total income assessed or reassessed as per the provisions of 115JB or 115JC is more than the tax exemption limit, without filing any return of income.
- The deemed total income assessed or reassessed as per the provisions of 115JB or 115JC is more than the tax exemption limit shown in the return filed under section 143(1) clause (a).
- The deemed total income assessed or reassessed as per the provisions of 115JB or 115JC is more than the deemed total income assessed or reassessed before the reassessment.
- The assessed or reassessed income can decrease the loss or convert the loss into income.
Conditions to Determine the Amount of Under-Reported Income
The amount of the under-reported income is determined as per sub-section (3) of section 270 A. Let’s look into the two cases described under it.
1. When the income is assessed for the first time
In case a return has been furnished,
The amount under-reported will be the difference between the assessed income and the assessed income as per section 143(1).
In case of no return being furnished,
(A) will be the income assessed, in the case of a company, local authority, or firm, and (B) will be the difference between the assessed income and the maximum amount exempted from tax which is not covered in item (A);
2. In any other case
The under-reported income will be the difference between the reassessed income amount and the assessed income amount, reassessed in the previous order.
However, when the under-reported income arises as per the provision of section 115JB or 115JC, the total under-reported income will be calculated by the formula given below-
A is the total assessed income calculated is not as per the provision of sections 115JB and 115JC;
B is the total income that would have been chargeable had the total income assessed as per the general provisions been reduced by the amount of under-reported income;
C is the total income assessed as per the provisions contained in section 115JB or section 115JC;
D is the total income that would have been chargeable had the total income assessed as per the provisions contained in section 115JB or section 115JC been reduced by the amount of under-reported income
270A Penalty Calculation Example
The penalty provisions are disclosed in sub-section 7 and 8 of section 270 A of the IT Act. It states that-
The penalty for the under-reported income calculated as per sub-section (1) will be an amount equal to 50% of the amount of tax payable on the under-reported income.
If the under-reported income is derived out of misreporting by the taxpayer, the penalty levied on the amount of tax payable on the under-reported income will be 200%.
The penalty imposed on the taxpayer will be given in writing order by the Assessing Officer, the Commissioner, the Commissioner, or the Principal Commissioner, depending on the case.
Reply to Section 270A of Income Tax Act
The reply to section 270A will be in the form of a letter drafted to clearly state the facts behind the misreported or under-reported income.
The assessee will be required to attach proper proof of the income sources addressed as the under-reported income or misreported income. The proofs can be transaction statements, receipts, etc.
Here is how you can begin drafting the reply to the order received under section 270A-
15th March 2023
The Assistant Commissioner of Income Tax – 12(2)(2),
Room No. 145, 1st Floor,
K. Road, Mumbai
Pincode- 400 020.
Reg: Your postal address PAN details:
Ref: The assessment Year 2021-22
Sub: Penalty proceedings initiated u/s. 270A of the Income Tax Act, 1961 (‘the Act’)
With reference to the above, under instructions from and on behalf of our client, we have to state as under
- In the Assessment Order under section 143(3) dated 18th December 2022, penalty proceedings under section 270A r.w.s. 274 of the Income Tax Act were initiated by the then-assessing officer for under-reporting of income. Further, a notice u/s 274 of the Act was issued to the assessee providing the opportunity to be heard and to show cause for not imposing penalty u/s 270A.2.
Continue with the facts..!!
How Do You Avoid Penalty 270A?
An assessee can avoid the penalty under section 270 A by requesting the Assessing Officer to grant immunity as per the provision of section 270AA. The assessee must provide sufficient information to convince the AO that no tax evasion was done intentionally.
The conditions for granting immunity from penalty under section 270 A is, that the assessee has paid the tax and its interest within the 30 days period of receiving the order, and there has not been any appeal filed against the assessment order.
In the cases where the unreported income is derived out of exclusive search operations, the penalty is imposed as per the provision of section 271AAB.
The assessee can also request its AO to initiate proceedings under section 276C/276CC to avoid penalties imposed under section 270A.
Can Appeal Be Filed against 270A Order?
Yes, an appeal asking the immunity under section 270AA can be filed by the assessee. However, the Assessing Officer has the complete right to accept or reject such an appeal, if there is no proof of the under-reported income not being part of tax evasion.
Also, the assessee can’t file any appeal under section 246A or ask for a reassessment under section 264, against the order filed under section 270AA.
Can Income Tax Penalty Be Waived?
The income tax penalty can be waived if the assessee gives an application to the Assessing Officer to grant him immunity. And the assessee is requesting to charge section 276C or 276 CC instead of section 270A of the IT Act.
- The assessee can make the request to waive the penalty under section 270A within 30 days of receiving the order for assessment or reassessment of taxes.
- The AO can grant immunity only in case of a minor misdemeanor, and if no appeal was filed against the assessee within one month of receiving the request.
- The assessee will be given a chance of laying his statement before the application is rejected.
Also, the principal Commissioner or the commissioner can reduce or waive the penalty imposed under section 270A by the provisions stated under section 273A (1) of the IT Act.
But, there is a catch! The assessee will have to accept any inaccuracy while disclosing the income that was made and providing the correct information voluntarily. Then, the commissioner has the right to reduce the penalty to zero percent.
Case Laws on Section 270A of Income Tax Act
There are not many case laws for section 270A. However, there has been an incidence of similar issues faced by the assessee and the AO as disclosed in this section. A few examples of such cases are shared below.
- Judgment in Dilip N. Shroff v. CIT (2007) case: the court stated that the wrong intentions of the assessee must be proven by the AO before imposing any penalty.
- Judgment in Reliance Petroproducts Pvt. Ltd. v. CIT (2010): The Supreme Court stated the same statement as above, that the wrong intentions must be first proven before charging any penalty on the assessee.
- Judgment in CIT v. Caplin Point Laboratories Ltd. (2021): The court stated that if the assessee has claimed deductions or any allowance based on the bonafide belief and the AO misinterpreted it as under-reported or misreported income. Then, no penalty will be charged to the assessee.
It’s clear that section 270A of Income Tax Act helps the income tax department to keep tabs on the escaped income. It’s a common practice by a few taxpayers to not disclose or camouflaged some part of their income. It’s also a form of tax evasion. This act allows the Assessing Officer to re-evaluate and reassess the income shown in the ITR by the assessee. Every year a huge amount of tax is collected by the IT Department in the form of penalties. Under section 270A, if found guilty a penalty of up to 200% can be levied on the amount under-reported.
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