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Firm A records a bogus purchase of ₹7,00,000 using an invoice supplied by Firm X, which caused the false entry. The tax payable on the resulting under-reported income of Firm A is ₹2,10,000. If the…

Question and options

Firm A records a bogus purchase of ₹7,00,000 using an invoice supplied by Firm X, which caused the false entry. The tax payable on the resulting under-reported income of Firm A is ₹2,10,000. If the misreporting penalty under section 439(10) and the false-entry penalty under section 444 of the Income-tax Act, 2025 are both imposed to the full extent allowed, what are the penalties?

  1. ₹9,10,000 on Firm A and ₹7,00,000 on Firm X

  2. ₹11,20,000 on Firm A and nothing on Firm X

  3. ₹11,20,000 on Firm A and ₹7,00,000 on Firm X

  4. ₹4,20,000 on Firm A and ₹7,00,000 on Firm X

Answer and explanation

Correct answer: C - ₹11,20,000 on Firm A and ₹7,00,000 on Firm X

Section 439(10) of the Income-tax Act, 2025 sets the misreporting penalty at 200% of the tax on under-reported income, ₹4,20,000, and section 444(1) adds a penalty equal to the false entry, ₹7,00,000, so Firm A faces ₹11,20,000. Section 444(2) separately allows a penalty of the same ₹7,00,000 on the person who caused the false entry, so Firm X is not outside the section; ₹9,10,000 wrongly uses a 100% rate.

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