NRI Omits Rs 14.02 Lakh Interest Income From ITR; ITAT Cuts Penalty From Rs 4.85 Lakh To Rs 1.21 Lakh

A non-resident Indian (NRI) woman who left out more than Rs 14 lakh of interest income from her income tax return has received partial relief from the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT).

The assessing officer (AO) had treated the omission as misreporting of income and imposed a penalty of Rs 4,85,178 under Section 270A of the Income-tax Act, 1961. The amount represented 200 per cent of the tax payable on the under-reported income.

The tribunal, however, found that the facts did not justify the higher penalty rate. While it upheld the levy of penalty for under-reporting, it directed the AO to calculate it at 50 per cent. This brought the penalty down to Rs 1,21,295.

Interest Income Left Out Of Return

The 57-year-old taxpayer had filed her return for assessment year 2020-21, declaring an income of only Rs 43,796. During reassessment, the Income Tax Department found that her taxable income also included interest earnings of Rs 14,02,525 that had not been disclosed. After including the omitted amount, her income was assessed at Rs 14,46,321, according to a recent report by The Times of India.

The AO took the view that the complete omission of the interest income amounted to misreporting. Under Section 270A, ordinary under-reporting generally attracts a penalty equal to 50 per cent of the tax payable on such income. Where the under-reporting results from misreporting, the penalty rises to 200 per cent.

The Commissioner of Income Tax (Appeals), or CIT(A), upheld the AO’s decision. It observed that the taxpayer had neither disclosed the interest voluntarily nor furnished an explanation and supporting documents despite receiving several departmental notices.

Taxpayer Blamed Accountant For The Omission

Before the tribunal, the woman maintained that she had not deliberately concealed the income. She said she was living abroad and had limited technological knowledge. She had entrusted her tax compliance to an accountant, leaving her unaware of the electronic notices sent by the department.

According to her submission, she learnt about the additional liability only later. She subsequently paid Rs 2,42,589 as tax and Rs 3,06,821 as interest on January 23, 2025. Her total payment towards the reassessment demand was Rs 5,49,410.

She argued that the lapse could, at most, be regarded as under-reporting and not misreporting. Therefore, the penalty should be restricted to 50 per cent of the tax payable on the omitted income.

Detection Alone Does Not Prove Misreporting

The ITAT agreed that a failure to disclose income could attract a penalty. However, it drew a distinction between an omission and deliberate misreporting.

The tribunal noted that the woman was an NRI, had relied on an accountant and paid the tax and interest after becoming aware of the discrepancy. In these circumstances, her failure to respond to electronic notices could not, by itself, establish intentional misreporting.

It also held that the higher penalty cannot be imposed merely because the department detected the omitted income. The tax authorities must demonstrate that the taxpayer’s conduct falls within one of the specific categories of misreporting laid down in Section 270A.

The payment of outstanding tax and interest did not wipe out the penalty liability. It was, however, considered while deciding whether the more stringent 200 per cent rate was justified.

FAQs

1. What is the penalty for under-reporting income under Section 270A?

Under-reporting generally attracts a penalty equal to 50 per cent of the tax payable on the under-reported income.

2. When can the penalty rise to 200 per cent?

A 200 per cent penalty may apply when under-reporting results from misreporting, such as deliberate suppression or false recording of income.

3. Does paying the outstanding tax and interest cancel the penalty?

No. Payment of tax and interest does not remove the separate penalty liability, though it may be considered when deciding the applicable penalty rate.