Failing to disclose income in an income tax return (ITR) can result in a substantial penalty from the Income Tax Department. However, the penalty can depend on whether the omission is treated as simple under-reporting or as deliberate misreporting of income.
In a recent case involving a non-resident Indian (NRI) woman, the Income Tax Department had levied a penalty at 200% of the tax payable on income that was not disclosed in her return. The Income Tax Appellate Tribunal (ITAT), Mumbai, however, reduced the penalty rate to 50%, holding that the omission could not automatically be treated as misreporting.
Interest income was not disclosed in ITR
The taxpayer had declared an income of ₹43,796 for the assessment year 2020-21. During reassessment proceedings, the Income Tax Department found interest income of ₹14,46,321 that had not been reported in the original return.
The Assessing Officer treated the omission as misreporting of income and imposed a penalty of around ₹4.85 lakh. This represented 200% of the tax payable on the under-reported income.
The additional interest income was brought to tax during reassessment after the department found that it had not been included in the taxpayer’s original return.
Under Section 270A of the Income Tax Act, ordinary under-reporting of income can attract a penalty of 50% of the tax payable on the under-reported income. Where under-reporting is considereda result of misreporting, the penalty can rise to 200%.
Taxpayer denied deliberate concealment
The taxpayer challenged the penalty, maintaining that she had not intentionally concealed or misreported her income.
She argued that she had regularly filed her income tax returns within the prescribed deadlines and had no intention of under-reporting her income.
The Commissioner of Income Tax (Appeals), however, upheld the penalty. The CIT(A) noted that interest income of ₹14,02,525 had been completely omitted from the return.
The appellate authority also observed that the taxpayer had neither voluntarily disclosed the income nor furnished an explanation and supporting documents despite receiving several notices from the department.
NRI cited accountant and lack of awareness of e-notices
The taxpayer subsequently approached the ITAT Mumbai.
Her advocate submitted that she was living abroad, had limited knowledge of technology and had entrusted her tax compliance to an accountant. As a result, she was unaware of the electronic notices issued by the Income Tax Department.
According to the taxpayer, once she became aware of the discrepancy, she paid the additional tax and interest, amounting to around ₹5 lakh.
She argued that the circumstances indicated under-reporting rather than deliberate misreporting. Therefore, the penalty should have been limited to 50% of the tax liability, which she calculated to be ₹1,21,295.
The woman also maintained that she had remained an NRI during the relevant period and continued to have that status until April 1, 2025.
The ITAT ruling
The tribunal held that merely omitting income from an does not, by itself, mean that the has committed misreporting.
ITAT Mumbai considered the taxpayer’s circumstances, including her residence abroad, her reliance on an accountant, and the subsequent payment of tax and interest after she became aware of the discrepancy.
The tribunal observed that failure to comply with electronic notices, in the particular circumstances of the case, could not alone establish that the original omission of interest income was deliberate misreporting deserving a 200% penalty.
The tribunal also highlighted the distinction under Section 270A between ordinary under-reporting and under-reporting arising from misreporting. While the former attracts a penalty of 50% of the tax payable, the latter can result in a 200% penalty.
Accordingly, ITAT Mumbai upheld the levy of penalty for under-reporting but directed the Assessing Officer to calculate it at 50% instead of 200%.