Income Tax 2025

Appearance

CHAPTER XXI PENALTIES

Penalty for under reporting and misreporting of income. ​

439(1) ​

The Competent Authority may, during the course of any proceedings under this Act, impose penalty on any person who has under-reported his income and such penalty shall be payable in addition to tax, if any.

439(2) ​

A person shall be deemed to have under-reported his income, if—

  • (a) the income assessed is greater than the income determined in the return processed under section 270(1)(a);
  • (b) the income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished or where return has been furnished for the first time under section 280;
  • (c) the income reassessed is greater than the income assessed or reassessed immediately before such reassessment;
  • (d) the amount of deemed total income assessed or reassessed as per section 206, is greater than the deemed total income determined in the return processed under section 270(1)(a);
  • (e) the amount of deemed total income assessed as per section 206, is greater than the maximum amount not chargeable to tax, where no return of income has been furnished or where return has been furnished for the first time under section 280;
  • (f) the amount of deemed total income reassessed as per section 206, is greater than the total income assessed or reassessed under the said sections immediately before such reassessment;
  • (g) the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.

439(3) ​

The amount of under-reported income shall be,—

  • (a) if income has been assessed for the first time,— (i) Where return has been furnished, the difference between the amount of income assessed and the amount of income determined under section 270(1)(a); (ii) Where no return of income has been furnished or if return has been furnished for the first time under section 280,— (A) the amount of income assessed, in the case of a company, firm or local authority; and (B) the difference between the amount of income assessed and the maximum amount not chargeable to tax, in a case not covered in item (A);
  • (b) in any other case, the difference between the amount of income reassessed or recomputed and the amount of income assessed, reassessed or recomputed in a preceding order.

439(4) ​

If under-reported income arises out of determination of deemed total income as per section 206, the amount of total under-reported income shall be determined as under— (A-B) + (C-D) where,— A = the total income assessed as per the provisions other than the provisions contained in section 206 (herein referred to as “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 section 206; D = the total income that would have been chargeable had the total income assessed as per section 206 been reduced by the amount of under-reported income.

439(5) ​

  • (a) If the amount of under-reported income on any issue is considered both under section 206 and under general provisions, such amount shall not be reduced from total income assessed while determining the amount under D referred to in sub-section (4);
  • (b) in a case where 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, assessed or reassessed.

439(6) ​

Subject to sub-section (8), where the source of any receipt, deposit or investment in any tax year is claimed to be an amount added to income or deducted while computing loss, in the assessment of such person in any year prior to the tax year in which such receipt, deposit or investment appears (herein referred to as “the preceding year”) and no penalty was levied for such preceding year, then, the under-reported income shall include such amount as is sufficient to cover such receipt, deposit or investment.

439(7) ​

The amount referred to in sub-section (6) shall be deemed to be income under-reported for the preceding year in the following order—

  • (a) the preceding year immediately before the year in which the receipt, deposit or investment appears, being the first preceding year; and
  • (b) where the amount added or deducted in the first preceding year is not sufficient to cover the receipt, deposit or investment, the year immediately preceding the first preceding year and so on.

439(8) ​

The under-reported income, for the purposes of this section, shall not include the following:—

  • (a) the amount of income in respect of which the assessee offers an explanation and the Competent Authority, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered;
  • (b) the amount of under-reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the Competent Authority, but the method employed is such that the income cannot properly be deduced therefrom;
  • (c) the amount of under-reported income determined on the basis of an estimate, if the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue, has included such amount in the computation of his income and has disclosed all the facts material to the addition or disallowance; and
  • (d) the amount of under-reported income represented by any addition made in conformity with the arm’s length price determined by the Transfer Pricing Officer, where the assessee had maintained information and documents as prescribed under section 171, declared the international transaction under Chapter X, and, disclosed all the material facts relating to the transaction.

439(9) ​

The penalty referred to in sub-section (1) shall be 50% of the tax payable on under-reported income.

439(10) ​

Irrespective of anything contained in sub-section (8) or (9), where under reported income is in consequence of any misreporting thereof by any person, the penalty referred to in sub-section (1) shall be 200% of the tax payable on under reported income.

439(11) ​

The cases of misreporting of income referred to in sub-section (10) shall be the following:—

  • (a) misrepresentation or suppression of facts;
  • (b) failure to record investments in the books of account;
  • (c) claim of expenditure not substantiated by any evidence;
  • (d) recording of any false entry in the books of account;
  • (e) failure to record any receipt in books of account having a bearing on total income; and
  • (f) failure to report any international transaction or any transaction considered to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.

439(12) ​

The tax payable in respect of the under-reported income shall be—

  • (a) where no return of income has been furnished or where return has been furnished for the first time under section 280 and the income has been assessed for the first time, the amount of tax calculated on the under-reported income as increased by the maximum amount not chargeable to tax as if it were the total income;
  • (b) if the total income determined under section 270(1)(a) or assessed, reassessed or recomputed in a preceding order is a loss, the amount of tax calculated on the under-reported income as if it were the total income;
  • (c) in any other case, determined as follows— (X-Y) where,— X = the amount of tax calculated on the under-reported income as increased by the total income determined under section 270(1)(a) or total income assessed, reassessed or recomputed in a preceding order as if it were the total income; and Y = the amount of tax calculated on the total income determined under section 270(1)(a) or total income assessed, reassessed or recomputed in a preceding order.

439(13) ​

No addition or disallowance of an amount shall form the basis for imposition of penalty, if such addition or disallowance has already formed the basis for penalty in the case of the person for the same or any other tax year.

439(14) ​

The penalty referred to in sub-section (1) shall be imposed, by an order in writing by the Competent Authority.

439(15) ​

In this section,—

  • (a) “Competent Authority” means the Assessing Officer or the Joint Commissioner (Appeals) or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner; and
  • (b) “preceding order” means an order immediately preceding the order during the course of which the penalty under sub-section (1) has been initiated.
Explanation

Section Summary: ​

Section 439 of the Income Tax Act deals with penalties for under-reporting and misreporting of income. It outlines the circumstances under which a taxpayer may be penalized for not accurately reporting their income, the calculation of under-reported income, and the penalties applicable. The section aims to deter taxpayers from under-reporting or misreporting income by imposing significant financial penalties.

Key Changes: ​

  1. Introduction of Penalty for Under-Reporting and Misreporting: The section introduces a structured penalty regime for under-reporting and misreporting income, with specific penalties of 50% and 200% of the tax payable on under-reported income, respectively.
  2. Definition of Under-Reported Income: The section provides a detailed definition of what constitutes under-reported income, including scenarios like reassessment, first-time assessments, and cases where losses are reduced or converted into income.
  3. Exclusions from Penalty: Certain cases, such as bona fide explanations, correct accounting methods, and compliance with transfer pricing rules, are excluded from penalties.
  4. Misreporting Scenarios: Specific instances of misreporting, such as suppression of facts, false entries, or failure to report international transactions, are explicitly listed.

Practical Implications: ​

  1. For Taxpayers: Taxpayers must ensure accurate reporting of income to avoid penalties. Misreporting or under-reporting can lead to penalties of up to 200% of the tax payable on the under-reported amount.
  2. For Businesses: Companies and firms must maintain proper records and substantiate all claims to avoid penalties. Misreporting, such as false entries or unsubstantiated expenses, can attract severe penalties.
  3. For Compliance Processes: Tax authorities will scrutinize returns more closely, especially in cases of reassessment or discrepancies between filed returns and assessed income.

Critical Concepts: ​

  1. Under-Reported Income: This refers to the difference between the income assessed by the tax authorities and the income declared by the taxpayer. It includes cases where no return is filed, reassessment results in higher income, or losses are reduced or converted into income.
  2. Misreporting: This involves deliberate actions like suppression of facts, false entries, or failure to report transactions, which attract a higher penalty of 200%.
  3. Deemed Total Income: This is calculated under Section 206 and involves specific provisions for determining income in certain cases, such as international transactions.
  4. Penalty Calculation: The penalty is calculated as a percentage (50% or 200%) of the tax payable on the under-reported income, depending on whether it is under-reporting or misreporting.

Compliance Steps: ​

  1. Accurate Reporting: Ensure all income, expenses, and transactions are accurately reported in the tax return.
  2. Maintain Documentation: Keep proper records and documentation to substantiate all claims and transactions.
  3. Disclose Material Facts: Provide complete and accurate disclosures, especially for international transactions or complex income sources.
  4. Respond to Notices: If the tax authority identifies discrepancies, provide explanations and evidence to avoid penalties.

Examples: ​

  1. Under-Reporting Example: A taxpayer declares an income of ₹10 lakh, but the tax authority assesses it as ₹15 lakh. The under-reported income is ₹5 lakh. If this is due to an error (not misreporting), the penalty will be 50% of the tax payable on ₹5 lakh.
  2. Misreporting Example: A business fails to record a receipt of ₹20 lakh in its books. This is considered misreporting, and the penalty will be 200% of the tax payable on ₹20 lakh.
  3. Exclusion Example: A taxpayer claims a deduction for an expense but cannot provide evidence. If the taxpayer voluntarily discloses this and provides a reasonable explanation, the penalty may be waived under Section 439(8).

This section emphasizes the importance of accurate income reporting and imposes strict penalties for non-compliance, particularly in cases of deliberate misreporting. Taxpayers and businesses must ensure thorough documentation and transparency to avoid penalties.