Income tax evasion in India: A Comprehensive Guide to Avoid Penalties

Under the Income Tax Act, penalties are levied for various defaults committed by a taxpayer. Apart from penalty on defaults like not making payment of Self Assessment Tax, default in payment of taxes, default on furnishing return of income and others, Income Tax department also levies penalty for underreporting and misreporting of income.

Under-reporting of income refers to cases where the income reported by the taxpayer in his or her return of income is less than the actual income earned by the taxpayer. Misreporting of income refers to cases where the taxpayer has given inaccurate or false information in his or her return of income.

Some of the penalties are mandatory and a few are at the discretion of the tax authorities. Many times a taxpayer may try to reduce the 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.

Under Section 270A, the Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or 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 addition to tax, if any, on the under-reported income.

What is the penalty under the Income Tax Act?

As per the IT department, the rate of penalty shall be 50% of the tax payable on under-reported income. However, in a case where under-reporting of income results from misreporting of income, the taxpayer shall be liable for penalty at the rate of 200% of the tax payable on such misreported income.

What is 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.

Chapter X of the Income-tax Act, 1961 contains special provisions relating to avoidance of tax. Terms such as ‘associated enterprise’, ‘international transaction’, ‘intangible property’, and ‘specified domestic transaction’ are defined in different sections of the Chapter.

The IT department has elaborated various provisions and conditions of underreporting or misreporting of income and taxpayers can check the official website for more details. Taxpayers are advised to consult a tax expert to understand various provisions of the IT Act in order to comply with the rules.