Sec 270A of the IT Act : Encouraging assessee to disclose unreported income?

The Finance bill 2016 bought a new array of sections to the income tax act that are section 207A and 207AA.

The law aims to provide a new procedure for charging penalty for concealment or understatement of income which intends to replace the existing array of sections that is 271(1)(c).

In the existing modus operandi of the income tax act the assessment of income for an assessee being from section 139 where in the assessee file the return of income earned by them in the previous financial years under the different heads given by the law.

If in case the return of income is not filed by the assessee the law gives power to the Assessing officer to issue notice to the assessee directing him to file return of income under section 142.

Hence it is safe to conclude that the filing of return of income is necessary in assessment by the AO.

When return of income is filed by the assessee the AO begins to assess his income

The main purpose of assessment of income by the department is to ensure that the assessee has not understated his income or overstated his loss. In case such scenario exist the it’s said that the assessee has concealed the particular of income from the tax in order to escape the levy of income tax which is essentially defrauding the Central Government

Section 147 Income tax Act gives the power to AO to assess as well as re assess the income when the AO has reason to believe that the income has escaped the assessment and charge it to tax.

Further the new section 207A provides that penalty shall be levied when there is under reporting of income and misreporting of income

Subsection (1) says that the “assessing officer or the Commissioner (appeals) or the principal commissioner may, during the course of any proceedings under this act, direct that any person who has under reported his income shall be liable to pay a penalty in additions to tax. If any on the under reported income.”

Section 270A provides that if there is “under -reporting” of income under any of the said seven situations (stated in subsection 2), then penalty equal to 50% of the tax payable on the under-reported income would be levied. In the case of “under-reporting” of income, two rates for levy of penalty have been prescribed by the statue, as follows:-

1. When the “under-reporting” is not because of misreporting, the penalty would be 50% of tax payable on the “under-reported” income.
2. When the “under-reporting” is because of misreporting, the penalty would be 200% of the tax payable on the “under-reported” income.

Further the wordings of sub section 8 is “notwithstanding anything contained in subsection 6 or subsection 7 where under reporting is in consequence of any misreporting thereof by any person, the penalty referred to in subsection (1) shall be equal to two hundred per cent of the amount of tax payable on under reported income”

On literal interpretation of this law the understanding gained is that where the under reporting is due to misreporting of the fact then the penalty of 200% is levied.

In a situation where in the assessee has disclosed all his income and the assesseed income is equal to the returned income and the assessee has paid all the tax and duties and interest payable on it he has not under reported his income. Hence he is out of the purview of the section 270A(1).

And no penalty under subsection 9 shall be levied as it narrates “where under reporting is in consequence of any misreporting thereof by any person”.

The law is not clear that if the assessee is not able to explain his source of income then whether it will be regarded as misreporting or not.

If we go by the literal interpretation there will be no penalty.