Section 439: penalty for under-reporting and misreporting of income

The basic power to penalise

Sub-section (1): the Competent Authority may, during any proceeding under the Act, impose a penalty on a person who has under-reported income, and this penalty is in addition to any tax payable.

When income is deemed under-reported

Sub-section (2) deems a person to have under-reported income in any of the following situations:

• The income assessed is greater than the income determined in the return processed under section 270(1)(a)
• The income assessed is greater than the maximum amount not chargeable to tax, where no return was furnished, or a return was furnished for the first time only under section 280
• The income reassessed is greater than the income assessed or reassessed immediately before the reassessment
• The deemed total income assessed or reassessed under section 206(1) and (2) is greater than the deemed total income determined in the return processed under section 270(1)(a)
• The deemed total income assessed under section 206(1) and (2) is greater than the maximum amount not chargeable to tax, where no return was furnished or a return was furnished for the first time under section 280
• The deemed total income reassessed under section 206(1) and (2) is greater than the deemed total income assessed or reassessed immediately before the reassessment
• The income assessed or reassessed has the effect of reducing a declared loss or converting that loss into income

How the amount of under-reported income is computed

Sub-section (3): where income is assessed for the first time, the under-reported amount is (i) the difference between the income assessed and the income determined under section 270(1)(a), where a return was furnished; or (ii) where no return was furnished, or a return was furnished for the first time only under section 280 - the entire income assessed (for a company, firm or local authority), or the difference between the income assessed and the maximum amount not chargeable to tax (for anyone else). In any other case, it is the difference between the income reassessed/recomputed and the income assessed/reassessed/recomputed in the preceding order.

Sub-sections (4) and (5) give a formula for cases where the under-reported income arises out of deemed total income determined under section 206(1) and (2), and clarify that the same amount is not double-counted between the general provisions and section 206, and that where an order reduces a declared loss or converts it into income, the under-reported income is the difference between the loss claimed and the income or loss finally assessed or reassessed.

Sub-sections (6) and (7): where the source of a receipt, deposit or investment in a tax year is claimed to be an amount added to income (or deducted while computing loss) in an earlier year's assessment for which no penalty was levied, that earlier amount is treated as under-reported income of the earlier year(s), attributed first to the year immediately preceding the year the receipt/deposit/investment appears, and then to progressively earlier years if the first year's addition isn't enough to cover it.

What is excluded from under-reported income

Sub-section (8) excludes the following from "under-reported income":

• Income for which the assessee offers a bona fide explanation that the Competent Authority is satisfied with, and for which all material facts were disclosed
• Income determined on an estimate basis, where the accounts are correct and complete to the Competent Authority's satisfaction but the method of accounting used makes correct income deduction difficult
• Income determined on an estimate basis, where the assessee has already estimated a lower addition/disallowance on the same issue, included it in the computed income, and disclosed all material facts
• Income represented by an addition made in conformity with the arm's length price determined by the Transfer Pricing Officer, where the assessee maintained the prescribed section 171 information/documents, declared the international transaction under Chapter X, and disclosed all material facts

The penalty rates: 50% and 200%

What counts as misreporting

Sub-section (11) lists the cases of misreporting of income that trigger the steeper 200% penalty:

• Misrepresentation or suppression of facts
• Failure to record investments in the books of account
• Claim of expenditure not substantiated by any evidence
• Recording of any false entry in the books of account
• Failure to record any receipt in the books of account having a bearing on total income
• Failure to report any international transaction, deemed international transaction, or specified domestic transaction to which Chapter X applies
• Income referred to in section 195(1)(b)

How the tax payable on under-reported income is worked out

Sub-section (12) sets out how to compute the tax payable on under-reported income for penalty purposes: (a) where no return was furnished (or a return was furnished for the first time under section 280) and income is assessed for the first time, tax is calculated on the under-reported income increased by the maximum amount not chargeable to tax, as if that total were the total income; (b) where the earlier determined/assessed total income was a loss, tax is calculated on the under-reported income as if it were the total income; (c) in any other case, it is the difference between (X) tax on the under-reported income added to the earlier determined/assessed total income, and (Y) tax on the earlier determined/assessed total income alone.

No double penalty; other procedural points

Sub-section (13): an addition or disallowance cannot form the basis of a penalty if it has already been the basis of a penalty on the same person for the same or any other tax year.

Sub-section (13A): where additional income-tax is paid under section 267(5)(ii), the income on which that additional tax is paid does not form the basis for a penalty under this section.

Sub-section (14): the penalty is imposed by an order in writing of the Competent Authority.

Sub-section (15) defines "Competent Authority" as the Assessing Officer, Joint Commissioner (Appeals), Commissioner (Appeals), Commissioner or Principal Commissioner, and "preceding order" as the order immediately preceding the one during which the section 439 penalty proceedings were initiated.

Frequently asked questions