Penalty under Section 270A – Misreporting vs. Underreporting of Income

Many times a taxpayer may try to reduce his tax liability by underreporting or misreporting of income. In such a case, by virtue of Section 270A, the taxpayer will be held liable for penalty.

Objective of Section 270A

• To reduce litigation that arose due to subjective interpretation of “concealment” or “inaccurate particulars”;

• To reward honest compliance by prescribing a lower penalty for genuine errors; and

• To impose a heavier penalty where income is intentionally misreported.

Penalty- A sum equal to 50% of the amount of tax payable on under-reported income.

However, if under-reported income is in consequence of any misreporting thereof by any person, the penalty shall be equal to 200% of the amount of tax payable on under-reported income.

When Is Income Considered Under-Reported? - A person shall be considered to have under-reported his income in the following cases:

Computation of under-reported Income

The amount of under-reported income shall be computed as under:

1. Where income is assessed for the first time and return of income was furnished by the assessee, the difference between the amount of income assessed and the amount of income determined after processing of return under Section 143(1) shall be considered as underreported income.

2. Where income is assessed for the first time and no return of income was furnished by the assessee or return was furnished by the assessee for the first time under section 148, the difference between the amount of income assessed and the basic exemption limit applicable in case of the assessee shall be considered as underreported income.

3. Where income is not assessed for the first time, the difference between the amount of income reassessed or recomputed and the amount of income assessed, reassessed or recomputed in a preceding order shall be considered as underreported income.

4. If an assessment or reassessment has the effect of reducing the loss declared in the return or converting that loss into income, the amount of under-reported income shall be the difference between the loss claimed and the income or loss, as the case may be, assessed or reassessed.

5. Where income assessed as per the provisions of Minimum Alternate Tax (MAT) or Alternate Minimum Tax (AMT), underreported income shall be computed as per the following formulae:

(A — B) + (C — D) where,

A = the total income assessed as per the provisions other than the provisions contained in section 115JB or section 115JC (herein called general provisions);

B = 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 = the total income assessed as per the provisions contained in section 115JB or section

115JC;

D = 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.

Misreporting of Income

The following cases will be considered as misreporting of income:

1. Misrepresentation or suppression of facts;

2. Failure to record investments in the books of account;

3. Claim of expenditure not substantiated by any evidence;

4. Recording of any false entry in the books of account;

5. Failure to record any receipt in books of account having a bearing on total

income; and

6. Failure to report any international transaction or any transaction deemed to be an

international transaction or any specified domestic transaction, to which the

provisions of Chapter X apply.

7. Issue of shares at higher price than fair market value of shares

If the amount of under-reported income on any issue is considered both under the provisions contained in section 115JB or section 115JC and under general provisions, such amount shall not be reduced from total income assessed while determining the amount under item D.

Circumstances Where No Penalty Shall Be Imposed (Section 270A(6))

Penalty is not leviable in the following cases:

• Bona fide explanation is offered and all facts disclosed.

• Income determined on estimate basis and books are otherwise correct.

• Difference arises due to interpretation of law or accounting method.

• Transfer pricing adjustment made despite proper documentation.

• Income already included in another person’s income on which tax is paid.

• Disclosure made in return, though AO disagrees with tax treatment.

Recent Judicial pronouncement in favor of Assessee- 

• Tribunal held that penalty under Section 270A imposed on M/s. Redington Distribution Pte Ltd for under-reporting income was unjustified. The issue revolved around the existence of a Permanent Establishment (PE) in India, which remained debatable and unresolved even under the Mutual Agreement Procedure (MAP). Since the assessee offered a bona fide explanation with full disclosure, the Tribunal directed deletion of the penalty for all assessment years. [2025] 212 TAXLOK.COM (IT) 536 (ITAT-CHENNAI)

• The assessee purchased properties below stamp duty value; AO added Rs.30.50 lakhs u/s 56(2)(x) and levied Rs.4.75 lakhs penalty u/s 270A for underreporting. CIT(A) confirmed. ITAT held additions under deeming provisions like Section 56(2)(x) do not automatically trigger penalty. Since assessee disclosed all facts and offered bona fide explanation, the case fell under Section 270A(6) exceptions. Following Alrameez Construction (ITAT Mumbai), Tribunal quashed penalty. Appeal allowed in assessee’s favour. [2025] 212 TAXLOK.COM (IT) 147 (ITAT-AHMEDABAD)

• ITAT  deleted penalty levied u/s 270A on disallowances for late deposit of employees’ PF/ESI and MSME interest. The AO had imposed penalty without specifying whether it was for “under-reporting” or “misreporting” of income. The Tribunal held such ambiguity invalidates penalty. Further, delayed PF/ESI deposits were a debatable issue, finally settled by Supreme Court in Checkmate Services (2022). Since the additions were disclosed and not concealment, penalty was unsustainable. Appeal allowed. [2025] 212 TAXLOK.COM (IT) 055 (ITAT-DELHI)

• Tribunal deleted penalty of Rs.10.61 lakh levied under Section 270A where the AO failed to specify whether the default was under-reporting or misreporting of income. The assessee’s exemption claim under Section 54F was disallowed, and penalty was imposed at 200%. The Tribunal held that penalty proceedings require identification of a specific charge; ambiguous notices citing both defaults are void. Following St. Joseph’s Educational Trust (ITAT Chennai) and other rulings, the penalty was quashed. [2025] 211 TAXLOK.COM (IT) 630 (ITAT-AHMEDABAD)

• Tribunal deleted penalty u/s 270A levied for underreporting income on deduction of education cess. The assessee had claimed deduction based on favourable High Court rulings prevailing during AY 2020-21 and surrendered it when confronted with retrospective amendment made by Finance Act, 2022. Tribunal held that assessee’s claim was bona fide and fell within the protective scope of section 155(18), which intended to grant immunity. Hence, penalty was unsustainable and deleted. [2025] 211 TAXLOK.COM (IT) 569 (ITAT-AHMEDABAD)