Monday, March 18, 2024

Understanding Penalties Under the Income Tax Act: Common Defaults and Consequences

Guide to Penalties under the Income Tax Act: Navigating Under-Reporting and Misreporting of Income

The Income Tax Act of India is designed to collect taxes from individuals and entities in a systematic manner. However, instances of non-compliance, such as under-reporting or misreporting of income, can lead to penalties. Understanding these penalties is crucial for taxpayers to ensure compliance and avoid unnecessary fines. This article provides a comprehensive overview of the penalties under the Income Tax Act, with a focus on the penalties for under-reporting and misreporting of income as outlined in Section 270A.

Key Penalties under the Income Tax Act

The Income Tax Department imposes various penalties for defaults, which include, but are not limited to, the following:

  • Failure to Furnish Returns, Statements, or Reports: Penalties range from Rs. 10,000 for failure to furnish statements or reports to up to Rs. 1,00,000 for more serious offences, such as failure to furnish TDS/TCS statements.

  • Non-compliance with Tax Deduction at Source (TDS) or Tax Collected at Source (TCS) Requirements: Involves fines from Rs. 10,000 to Rs. 1,00,000.

  • Non-compliance Related to Cash Transactions: Includes penalties equal to the amount of the transaction for receiving amounts in violation of Section 269ST, and Rs. 5,000 per day for failure to provide electronic payment facilities by businesses with turnover greater than Rs. 50 Crore.

  • Providing Incorrect Information in Reports or Certificates by Professionals: Attracts a fine of Rs. 10,000 for each incorrect report or certificate.

Penalties for Under-Reporting and Misreporting of Income (Section 270A)

Section 270A of the Income Tax Act introduces specific penalties for under-reporting and misreporting of income, aiming to address and penalize inaccuracies in income reporting:

  1. Under-Reported Income: The Assessing Officer or the Commissioner (Appeals) may direct that any person who has under-reported income is liable to pay a penalty in addition to tax, if any, on the under-reported income. This includes cases where no return of income has been furnished and the income has been assessed for the first time.

  2. Misreporting of Income: Misreporting refers to deliberate attempts to evade tax, such as misrepresentation or suppression of facts, failure to record investments in the books of account, claim of expenditure not substantiated by evidence, recording of any false entry, failure to record any receipt in books of account, and failure to report any international transaction or specified domestic transaction. The penalty for misreporting is significantly higher, reflecting the serious nature of these offences.

  3. Penalty Calculations: The tax payable in respect of the under-reported income is calculated based on whether a return of income has been furnished, the determination of total income in loss cases, and a specified formula for other cases. This ensures that the penalty is proportionate to the severity of the under-reporting.

Overview of Penalties under the Income Tax Act

The Income Tax Department imposes penalties for various defaults. Below is a summary of key penalties, including the newly added details on penalties for under-reporting and misreporting of income under Section 270A.

SectionNature of DefaultPenalty Imposed
271AAB(1A)If search initiated on/after 15.12.2016, undisclosed income admitted during search30% to 60% of undisclosed income
271AACIncome includes specific references (e.g., Section 68, 69)10% of tax payable under section 115BBE
271AADFalse or omitted entry in books to evade taxSum equal to false/omitted entry
271HFailure to furnish TDS/TCS statements or incorrect informationRs. 10,000 to Rs. 1,00,000
271DAReceipt of sum in contravention of Section 269STSum equal to the amount of receipt
269SU, 271DBFailure to provide electronic payment facilities if turnover > Rs. 50 CroreRs. 5,000 per day of failure
271JIncorrect information in reports or certificates by professionalsRs. 10,000 for each incorrect report/certificate
270A(1)Under-Reported IncomePenalty in addition to tax on under-reported income
270AMisreporting of Income (e.g., suppression of facts, false entries)Higher penalties for misreporting
270A(4)Under-reported income with no penalty in preceding yearIncludes certain amounts for preceding years
270A(10)Tax payable on under-reported incomeCalculated based on specific conditions


The penalties under the Income Tax Act, particularly those for under-reporting and misreporting of income, underscore the importance of accurate and honest income reporting. Taxpayers should maintain meticulous records and seek professional advice when necessary to navigate the complexities of tax laws and ensure compliance. By understanding these penalties, taxpayers can avoid significant fines and contribute to a fair and efficient tax system