[2021]

128 taxmann.com 18 (Article)

[2021] 128 taxmann.com 18 (Article)

Date of Publishing: July 1, 2021

Comprehending the scope of under-reporting and

misreporting of income

V.K. SUBRAMANI
CA

The Finance Act, 2016 introduced section 270A applicable from the
assessment year 2017-18 onwards and it is a disconnect / departure
from section 271(1)(c) which was in vogue for more than 5 decades.
Previously, the reasons such as concealment of income / furnishing
inaccurate particulars of income were subjected to penal
consequences. The deliberate act of furnishing of inaccurate
particulars of income only being liable for penalty got omitted
much earlier and except for a few court decisions holding that
"mens rea" as a fundamental requirement for slapping penalty, the
penal consequence for concealment of income significantly hinged on
the Explanation 1 to section 271.

Both the tax administration and tax counsels were tired of interpreting
the very same legal provisions or the scope of legal provisions in the
backdrop of various court decisions justifying levy of penalty or
providing relief from penalty. The Finance Act, 2016 therefore provided
some change from the earlier legal requirements for levy of penalty
relating to concealment of income chargeable to tax. However, how
draconian these provisions would be, was not visualized fully when it
was in literal form in the statute book. When inexorable tax
assessments got completed the taxpayers have to fret and lament how
harsh these legal provisions are by putting huge financial burden on
their purse.

This write up takes a snapshot of the legal provisions per se and how it
could be damaging in certain real-life situations.

1. Under-reporting of income: The Assessing Officer or the

Commissioner (Appeals) or the Principal Commissioner or the
Commissioner may during the course of any proceedings under the
Act, direct that any person who has under-reported his income shall be
liable to pay penalty in addition to tax, if any, on the under-reported
income.

Thus, the Assessing Officer during the course of assessment can

initiate proceedings for levy of penalty. The Commissioner (Appeals)
when adjudicating the matter can initiate penalty proceedings afresh
for levy of penalty. Where the Commissioner (Appeals) deviates from
the proceedings (i.e. alters the base for penalty) initiated by the
Assessing Officer then the Commissioner (Appeals) is the competent
authority to initiate penal proceedings. Also, where the Commissioner
(Appeals) enhances the assessment he can initiate consequent
proceedings for levy of penalty due to such enhancement and since his
order of enhancement supplants the assessment order of the Assessing
Officer, he is the competent person to initiate penal proceedings. The
Commissioner can initiate proceedings for levy of penalty under section
270A when he invokes section 263 i.e. revision of order prejudicial to
the Revenue.

2. Instances of under-reported Income: Sub-section (2) to section

270A lists out the following instances for under-reported income:

(i) Where the income assessed is greater than the income

determined in the ITR processed under section 143(1)(a).
Thus, when the ITR is processed under section 143(1)(a) with
some upward revision of income, it is not taken as under-
reporting of income. However, after the ITR is processed when
the income assessed is greater than the income determined
under section 143(1)(a), it is treated as under-reporting of
 income.
(ii) Where the assessee has not filed ITR and the income assessed
is greater than the maximum amount not chargeable to tax it
is treated as under-reported income. Also, where the ITR is
furnished for the first time under section 148 and the income
admitted is more than the maximum amount not chargeable to
tax, it is treated as under-reported income.
(iii) Where the income reassessed is greater than the income
assessed or reassessed immediately before such reassessment
it would be treated as under-reported income. The quantum
being the amount so enhanced.
(iv) The amount of deemed total income assessed or reassessed as
per section 115JB or section 115JC when it is greater than the
deemed total income determined under section 143(1)(a).
(v) Where no ITR is filed, the amount of deemed total income
assessed as per section 115JB or section 115JC which is
greater than the maximum amount not chargeable to tax. Also,
where the ITR has been furnished under section 148 and the
deemed total income assessed under section 115JB or section
115JC is greater than the maximum amount not chargeable to
tax.
(vi) Where the amount of deemed total income reassessed as per
section 115JB or section 115JC is greater than the deemed
total income assessed or reassessed before such
reassessment.
(vii) The income assessed or reassessed has the effect of reducing
the loss or converting such loss into income.
The following table gives snapshot of the under-reported income listed
above:

S. A B C D (B)-(D)*
No

Rs. Rs. Rs.

(i) Income 10,00,000 Income 8,00,000 2,00,000

assessed determined
under section under section
143(3). 143(1)(a).
(ii) No ITR filed, 6,00,000 Maximum 3,00,000 3,00,000
income amount not
assessed chargeable to
above tax.
maximum
amount not
chargeable to
tax (say,
individual
senior
citizen).

(iii) Income 12,00,000 Income 7,00,000 5,00,000

reassessed assessed
under section under section
147. 143(3) earlier.

(iv) Deemed total 9,00,000 Deemed total 7,50,000 1,50,000

income under income
section 115JB originally
assessed or assessed
reassessed. under section
115JB
determined
under section
143(1)(a).

(v) No ITR filed 11,00,000 Maximum 0 11,00,000

and deemed amount not
total income chargeable to
under section tax.
115JB
determined in
assessment
or
reassessment
for the first
time.

(vi) Where ITR is 10,00,000 Maximum 0 10,00,000

furnished for amount of
the first time income not
 under section chargeable to
148 and tax.
deemed total
income
determined
under section
115JB.

(vii) Deemed total 14,00,000 Deemed total 11,50,000 2,50,000

income under income
section 115JB assessed as
reassessed per section
under section 115JB in the
147. assessment or
reassessment,
previously.

(viii) Income (5,00,000) Income (8,00,000) 3,00,000

assessed determined
under section under section
143(3). 143(1)(a).

(ix) Income 2,00,000 Income (8,00,000) 10,00,000

assessed determined
under section under section
143(3). 143(1)(a).
*Under-reported income.

3. Quantifying under-reported income: Where income is assessed

for the first time and ITR was furnished by the assessee the difference
between the income assessed and income determined under section
143(1)(a) would be the under-reported income.

Where no ITR is furnished or where it is furnished in response to notice

under section 148 then (i) the amount of income assessed would be
treated as under-reported income in the case of company, firm or local
authority; and (ii) the difference between the income assessed and the
basic exemption limit would be the under-reported income for other
taxpayers.

Where it is not a case of the income being assessed for the first time
the difference between the income reassessed or recomputed less the
amount of income assessed or reassessed or recomputed previously
would be the quantum of under-reported income.

4. Instances where it is not under-reporting of income: Section

270A(6) says that the following shall not be treated as under-reported
income:

(i) Where the assessee offers an explanation and the Assessing

Officer or the Commissioner (Appeals) or the Commissioner or
the Principal Commissioner, as the case may be, is satisfied
that the explanation is bona fide and the assessee has
disclosed all material facts to substantiate the explanation
offered by him, the income so enhanced shall not be treated as
under-reporting of income.
(ii) The amount of under-reported income determined on the basis
of an estimate shall not be treated as under-reported income if
the accounts are correct and complete to the satisfaction of
the Assessing Officer or Commissioner (Appeals) or the
Commissioner or the Principal Commissioner provided the
method employed is such that the income cannot properly be
deduced therefrom.
(iii) The amount of under-reported income determined on the basis
of estimate and the assessee on his own estimated a lower
amount of addition or disallowance of the same but has
included such amount in the computation of his income and
has disclosed all the facts material to the addition or
disallowance.
(iv) The amount of under-reported income represented by any
addition made with reference to ALP determined by the TPO
in case where the assessee has maintained information and
documents prescribed under section 92E and declared the
international transaction under Chapter X and disclosed all
the material facts relating to the transaction.

(v) The amount of undisclosed income which is dealt with in

section 271AAB.
The quantum of penalty shall be 50% of the amount payable on under-
reported income.

5. Misreporting of income: Section 270A(1) says that the income-tax

authority may direct any person who has under-reported income shall
be liable to pay penalty in addition to tax. The under-reported
income can be a simpliciter under-reported income given above
or it could be an under-reported income due to misreporting of
income. The misreported income falls within the domain of under-
reported income. The term 'under-reported income' encompasses
'misreported income'. The following diagram explains the same.

The following are stated as cases of misreporting of income:

(i) Misrepresentation or suppression of facts;

(ii) Failure to record investments in the books of account;
(iii) Claim of expenditure not substantiated by any evidence;
(iv) Recording of any false entry in the books of account;
(v) Failure to record any receipt in the books of account having a
bearing on the total income; and
(vi) Failure to report any international transaction or any
transaction deemed to be an international transaction or
specified domestic transaction, to which the provisions of
Chapter X apply.
6. Immunity from imposition of penalty: Section 270AA empowers
the Assessing Officer to grant immunity from penalty under section
270A provided the assessee pays the tax and interest payable as per
the order of the assessment within the period specified in the notice of
demand and no appeal against the order is filed by him. The section
provides the time limit for filing of Form No.68 seeking immunity from
penalty and the time limit within which the Assessing Officer shall
either accept or reject the application for immunity from penalty. This
provision would not apply to under-reporting of income due to
misreporting. It covers only under-reporting of income simpliciter.

7. Certain practical issues:

(a) Onus of proof: It would be useful to compare section 270A(6)(a) and
Explanation 1 to section 271. It may be noted that the Clause (A) of
Explanation to section 271 which says that the assessee "fails to offer
explanation or offers an explanation which is found to be …..false" by
the income-tax authority . This is conspicuously missing in section
270A.

However, Clause (B) of explanation 1 to section 271 is accommodated

in section 270A(6) and the comparative table is given below:

Section 270A(6)(a) Clause (B) of Explanation

1 to Section 271

" the amount of income in respect of "Such person offers an

which the assessee offers an explanation which he is
explanation and the Assessing Officer not able to substantiate
or the Commissioner (Appeals) or the and fails to prove that
Commissioner or the Principal such explanation is bona
Commissioner, as the case may be, is fide and that all the facts
satisfied that the explanation is relating to the same and
bona fide and the assessee has material to the computation
disclosed all material facts to of his total income have
substantiate the explanation been disclosed by him".
offered"
Thus, under section 270A(6) the income-tax authority must record his
satisfaction or dissatisfaction before dropping or slapping penalty, as
the case may be. The taxpayer can use section 270A(6)(a) to press his
stand that he has offered bona fide explanation and it is for the income-
tax authority to record why he is not satisfied with the explanation of
the taxpayer.

(b) Placement of section 270A(6):Section 270A(1) gives the overall

scope of the provision empowering the income-tax authorities to levy
penalty for under-reported income which could include under-reported
income as such or due to misreporting of income. Sub-section (6) is
meant for the entire section 270A and not for under-reported income
simpliciter. Unfortunately, it is placed after describing the under-
reported income simpliciter but much before the misreporting of
income dealt with in sections 270A(8) and 270A(9). Ideally, section
270A(6) must have been placed after explaining both under-reported
and misreported incomes so that its applicability / coverage would not
have created confusion and ambiguity.

(c) Misrepresentation or suppression of facts: Under-reporting of

income due to misreporting of income is one of the instances covered
in section 270A(9). The expression 'misrepresentation' could be found
in section 245D(6) (relating to settlement of cases) and in section 245T
(relating to advance ruling). In both, settlement of cases and in
advance ruling the taxpayer is given opportunity of being heard. Only
on representing the case before the prescribed authority, there could
be a possibility of misrepresentation.

Where there is no query from the income-tax authority and no reply

from the taxpayer, any addition made could not be called as
'misrepresentation'. It could be argued that misrepresentation is
implicit by submitting incorrect ITR with details of income chargeable
to tax and thus when wrong claims in the ITR when negatived, it
amounts to misrepresentation of income.

The other aspect 'suppression of facts' entails a deliberate act of not

revealing the facts and not necessarily twisting of facts. Not furnishing
the facts could amount to suppression of facts.

The expression "misrepresentation and suppression of facts" could

create great hardship to the taxpayers as any addition made otherwise
than by way of estimated addition would be construed as
misrepresentation or suppression of facts by the tax authorities.

(d) Failure to record investments in the books of account: This

expression would cover unrecorded investments of the taxpayers
chargeable to tax as income. But usage of the expression "recording
investments in the books of account" seems to provide a leeway in
cases where the investments do not belong to the business. Obviously,
in such cases, the unrecorded investment would belong to the family of
incomes which are chargeable to tax under section 115BBE with
resultant penal consequence under section 271AAC of 10% of the
unrecorded investments, which is less severe than 200% penalty
envisaged in section 270A(8) read with section 270A(9).

(e) Claim of expenditure not substantiated by any evidence: Where the

assessee incurs expenditure, which is not substantiated would be
treated as misreporting of income. For example, if the assessee has
incurred expenditure by way of salary to employees and did not
maintain vouchers or the payment was not incurred through banking
channel a confirmation from the employees would be adequate for
allowance of claim. Where the expenditure claim is not substantiated
by any evidence that could only lead to the claim of expenditure treated
as misreporting of income.

(f) Recording of false entry in the books of account: This would cover
making of accounting entries in the books of account for the purpose of
under-reporting of income through misreporting. Where the income is
not impacted even if the entry is a false entry for example a journal
entry between two suppliers account or inter se customers accounts
will not fall in this category. Further one has to take notice of section
271AAD which penalizes false entry in the books of account and which
is independent of any other provision in the Act. It includes not
only a false entry but also omission of any entry which can impact the
total income chargeable to tax under the Act. For example, purchase
not recorded in the books of account is not a false entry but it is an
omission of entry which is covered by section 271AAD.

Thus recording false entry /omission of entry in the books of account

would attract penalty under section 270A(8) @ 200% plus penalty
under section 271AAD @ 100%.

(g) Impact in survey under section 133A: During the course of survey
under section 133A it is possible that the books of account may be
incomplete with entries not being made or entries made for which no
documentary evidence like vouchers or purchase bills being available
at that point of time. The physical stock taking and the balance of
receivables and payables available in the records maintained in the
premises might pose some discomfort to the taxpayers. With the
singular motive of getting over the (survey) episode taxpayers admit
incomes not being aware of the penal consequence.

At the time of assessment, the income-tax authorities rely on MAK Data

(P) Ltd v. CIT [2013] 38 taxmann.com 448 (SC)/358 ITR 593
(SC)and levy penalty on the ground that the surrender of income was
the outcome of survey under section 133A and but for survey it would
not have been admitted as income.

Readers may draw solace from the Madras High Court decision in the
case of CIT v. Gem Granites [2014] 42 taxmann.com 493 (Madras)
taking note of the apex court decision in the case of MAK Data (Supra).
The assessee in this case admitted seizure of cash consequent to
search under section 132 and the case of the assessee as regards
quantum of assessment was dismissed by the court. As regards
penalty the tribunal held that the onus to prove concealment of
income is on the Department and it is not automatic. The Madras
High Court took note of the apex court decision in MAK Data (Supra)
and held that the burden is on the assessee to offer an explanation for
taking out the case from penal consequences. It held that if the
assessee has discharged onus by giving a cogent and reliable
explanation and if the Department did not agree with the explanation
the onus would be on the Department to prove that there was
concealment of particulars of income or furnishing of inaccurate
particulars of income.

Therefore in spite of the decision in the case of MAK Data (P) Ltd
(Supra) if the assessee gives a cogent and proper explanation, the
burden would be shifted on the Revenue for classifying the case as
misreporting of income.

Conclusion

Presently, when the ITR is processed under section 143(1)(a) and there
is enhancement of income no penalty is leviable. However, once the
assessment is made under sections 143(3), 144 and 147 then any
upward revision of income or reduction of loss would expose the
taxpayers to penal consequence except in certain cases provided in
section 270A(6). The penal consequence could be mitigated with
regard to under-reporting of income simpliciter by having recourse to
section 270AA. However, instance of under-reporting of income due to
misreporting is a heavy burden cast on the taxpayers. The penal
provisions are not only to penalize the errant assessees but also to have
deterrent effect. The quantum of penalty seems to be too much and
that would only pile up the cases for litigation. Section 270AA may have
to be expanded by allowing misreporting also by limiting the relief for
one or two times during the life time of the taxpayers so that the tax
realization is quick to the exchequer and the tax disputes are also kept
in check for better compliance and administration.

■■