Loading judgment…
Facts
A batch of appeals was filed by the assessee against penalty orders under Section 271(1)(c), 270A, and 271AAB of the Income Tax Act for assessment years 2014-15 to 2020-21. The penalties arose from additions/disallowances made post a search and seizure action, which the assessee largely accepted.
Held
The Tribunal held that penalties under Section 271(1)(c), 270A, and 271AAB are not sustainable. The additions were based on disallowances of expenditure and income declared in returns, not on incriminating material found during the search, and did not meet the conditions for imposing penalties under the respective sections.
Key Issues
Whether penalties levied under Sections 271(1)(c), 270A, and 271AAB are sustainable when additions are based on disallowances and not on incriminating material found during search, and do not meet the conditions laid out in the respective sections.
Sections Cited
271(1)(c), 270A, 271AAB, 250, 139(1), 132, 153A, 37(1), 40(a)(ia), 36(1)(iii), 145(3), 270A(2), 270A(6)(b), 270A(6)(a), 143(1), 122(4), 119(1), 92D, X, 13
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: SHRI ANIKESH BANERJEE & SHRI PRABHASH SHANKAR
O R D E R Per Bench: This batch of appeals has been filed by the assessee against the order of the Learned Commissioner of Income-tax (Appeals)–47, Mumbai [hereinafter referred to 1906/Mum/2025 Trig Detectives Pvt Ltd to as “Ld. CIT(A)”], passed under section 250 of the Income-tax Act, 1961 (“the Act”), pertaining to Assessment Years 2014–15 to 2020–21. All these appeals arise from the respective penalty orders passed by the Ld. DCIT, Central Circle–1(2), Mumbai. The penalty orders under section 271(1)(c) of the Act for Assessment Years 2014–15 to 2016–17 were passed on 10/02/2023; the penalty orders under section 270A of the Act for Assessment Years 2017–18 to 2019–20 were also passed on 10/02/2023; and the penalty order for Assessment Year 2020–21 was passed under section 271AAB of the Act on 27/02/2023.
All the appeals have same nature of facts and common issue. So all the appeals were taken together, heard together and are being disposed of by this common order.
U/s 271(1)(c) of the Act. ITA 1900/Mum/2025 (AY 2014-15) 3. The brief facts of the case are that the assessee filed the original return u/s 139(1) of the Act. Subsequently, a search and seizure action 132 of the Act was conducted by the DDIT(Inv), Chandigarh in assessee’s case, its associated concerns, directors and related persons on 18/07/2019. Finally, the notice u/s 153A was issued and the assessment was framed u/s 153A with the following additions / disallowances :- 1. Disallowance of “salary & wages” u/s 37(1) Rs. 1,37,72,924/- 2. Disallowance of “Administrative expenses” u/s 37(1) Rs. 1,17,826/- 3. Disallowance u/s 40(a)(ia) Rs. 7,03,277/- 4. Suo moto disallowance of excess depreciation In ROI filed u/s 153A Rs. 4,20,640/- 5. Additional income in the return filed u/s 153A Rs.1,07,84,250/- Rs.2,57,98,917/- to 1906/Mum/2025 Trig Detectives Pvt Ltd The assessee had not challenged the quantum addition and accepted addition made by the Ld. AO. Finally, the notice u/s 274 r.w.s. 271(1)(c) of the Act was issued and the penalty was levied amount to Rs.83,70,459/- i.e. 100% of tax sought to be evaded. The aggrieved assessee filed an appeal before the Ld.CIT(A). The Ld.CIT(A) granted the relief amount to Rs.2,28,178/- by deletion of penalty related to disallowance u/s 40(a)(ia) amount to Rs.2,28,178/-. The rest of the penalty is sustained by the Ld. CIT(A). The aggrieved assessee filed an appeal before the ITAT by challenging the order of the Ld. CIT(A).
The Ld.AR argued and stated that the penalty imposed for A.Ys. 2014-15 to 2016-17 are related to penalty u/s 271(1)(c) of the Act on estimated addition and addition was declared in return U/s 153A of the Act. The Ld. AR argued that addition was confirmed related to disallowance of expenses and income declared in return filed U/s 153A of the Act. On plain reading of Explanation 5A of section 271(1)(c) of the Act prevails that any post-search declaration not considered as self declaration which will attract the penalty U/s 271(1)(c) of the Act. The issue is sqarally covered in case of the Director of the assessee-company by the order of the co-ordinate bench of ITAT-Mumbai, C-Bench in the case of Swaran Nadhan Salaria vs DCIT CC-1(2) in date of pronouncement 30/07/2025. The relevant observation of the bench is reproduced as below:-
“7.2 We have heard rival submissions of the parties and perused the relevant material on record. The Assessing Officer has invoked Explanation 5A below the section 271(1)(c) of the Act. For ready reference, said Explanation is reproduced as under:
[Explanation 5.-Where in the course of a day of June, 2007], the assessee is found to be the owner of any money, bullion, jewellery or other valuable article or thing (hereafter in this Explanation referred to as (a) fot for any previous year which has ended before the date of the search, bout the return of income for such year has not been furnished before the said date or, where such return hat been furnished before the said date, such income has not been declared therein, or (b) for any previous year which is to end on or after the date of the search, then notwithstanding that such income is declared by him in any return of income furnished on or after the date of the search, he shall, for the purposes of imposition of a penalty under clone (c) of sub-section (1) of this section, be deemed to have concealed the particulars of hit income or furnished inaccurate particulars of such income, [unless-
(1) such income is, or the transactions resulting in such income are recorded-
(i) in a case falling under clause (a), before the date of the search, and (ii) in a case falling under clause (b), on or before such date. in the books of account, if am, maintained by him for any source of income or such income in otherwise disclosed to the [Principal Chief Commissioner or] Chief Commissioner or [Principal Commissioner or] Commissioner] before the said date, or (2) he, in the course of the search, makes a statement under sub-section (4) of section 122 the any money, bullion, jewellery or other valuable article or thing found in his possession or under his control, has been acquired out of his income which hat not been disclosed so far in his return of income to be furnished before the expiry of time specified in [***] sub-section (1) of section 119, and also specifies in the statement the manner in which such income has been derived and pays the tax, together with interest, if any, in respect of such income]
7.3 From plane reading of above provisions, we find that for invoking explanation 5A, the assessee must be found to be a owner of tangible asset acquired out of the undisclosed income. In the instant case before us is also the issue in dispute is whether the assessee is found to be owner of the tangible assets and whether such tangible assets have been acquired by the assessee using the relevant undisclosed income before the date of the to 1906/Mum/2025 Trig Detectives Pvt Ltd search. The assessee in the return of income filed in response to notice under section 153A of the Act made variation in total income as compared to the original return of income filed. But detail of variation has not been mentioned by the AO in impugned assessment order. The AO has simply stated that the assessee has withdrawn the expenses on interest and depreciation which were claimed to have been incurred through shell entities, but nowhere brought on record as how said withdrawal of expenses in the return filed u/s 153A was as a consequence to search action. Under the Explanation 5A, the Assessing Officer has to establish that the suo-motu disallowance made by the assessee for any money, bullion, jewellery or other valuable article or thing or income was based on the books of account or the documents found during the course of search and unless this condition is satisfied, the penalty levied invoking Explanation 5A is not sustainable in law. The lower authorities have not established the fact that the suo-motu disallowance made by the assessee was a result of any tangible assets or documents found during the course of the search, therefore, the suo-moto disallowance made by the assessee don't attract penalty u/s 271(1)(c) of the Act unless the conditions provided under Explanation 5A to section 271(1)(c) of the Act are fulfilled. In view of the above, the penalty in respect of interest and the excess depreciation is also cancelled. The relevant grounds of the appeal of the assessee are allowed.”
With respect to the penalty proceedings for AYs 2017–18 to 2019–20, the penalties were levied under section 270A of the Act. AY 2017–18 is taken as the lead year for examining the penalty imposed under section 270A. For A.Y. 2017–18, the Ld. AO levied a penalty of Rs.52,94,933/- under section 270A of the Act. The Ld. CIT(A) granted partial relief amounting to Rs.49,23,176/-. The assessee has filed the present appeal challenging the balance penalty of Rs.3,71,757/- sustained by the Ld. CIT(A). The Ld. AR submitted that the quantum additions were made on account of (i) disallowance of salary and wages, to 1906/Mum/2025 Trig Detectives Pvt Ltd (ii) disallowance of administrative expenses, (iii) disallowance under section 40(a)(ia), (iv) suo-moto disallowance of interest in the return of income filed under section 153A, and (v) income declared in the return of income filed under section 153A of the Act. The Ld. CIT(A) deleted the penalty relating to the disallowance under section 40(a)(ia), the suo-moto disallowance of interest in the return filed under section 153A, and the income declared in the return filed under section 153A. The only surviving components for the purpose of penalty are the disallowances pertaining to “salary and wages” and “administrative expenses”. The Ld. AR contended that penalty cannot be sustained on mere disallowance of expenditure. It was further argued that this proposition is squarely covered by the decision of the co-ordinate bench of the ITAT, Mumbai, C-Bench in the case of Swaran Nadhan Salaria (supra). The relevant paragraph of the said order is reproduced below:— “10. We have heard the rival submissions advanced on behalf of the parties and perused the material available on record. The issue for our consideration is the validity of the penalty levied under Section 270A of the Income-tax Act, 1961, on account of under reporting of income by the assessee. The impugned penalty pertains to two components: (i) disallowance on an estimated basis in respect of salary, wages and administrative expenses; and (ii) suomotu disallowance of interest amounting to Rs.44,65,742/- and excess depreciation of Rs.97,75,277/- in the return filed under Section 153A of the Act. 10.1 We find that from assessment year 2017-18 onward penalty u/s 270A of the Act for under reporting and miss-reporting of income has been introduced. In the present case, to 1906/Mum/2025 Trig Detectives Pvt Ltd the assessee has been held to be under reported his income and accordingly, the penalty has been computed by the Assessing Officer. Under the provisions of section 270A(2) of the Act a person shall be considered to have under reported his income if the income assessed/processed under clause (a) of sub-section (1) of section 143 is greater than the income determined in the return of income. Further, sub-section 6 of section 270A prescribe that under reported income shall not include subject to certain conditions. The relevant section is reproduced as under: (6) The under reported income, for the purposes of this section, shall not include the following, namely: (a) the amount of income in respect of which the assessee offers an explanation and the Assessing Officer or the Joint Commissioner (Appeals) or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered,
(b) the amount of under reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the Assessing Officer or the Joint Commissioner (Appeals) or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, but the method employed is such that the income cannot properly be deduced therefrom;
(c) the amount of under reported income determined on the basis of an estimate, if the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue, has included such amount in the computation of his income and has disclosed all the facts material to the addition or disallowance;
(d) the amount of under-reported income represented by any addition made in conformity with the arm's length price determined by the Transfer Pricing Officer, where the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X, and, disclosed all the material facts relating to the transaction; and (e) the amount of undisclosed income referred to in section 271AAB.
10.2 The Ld. Counsel for the assessee referred to the clause (a) of sub-section 6 and submitted that assessee has duly offered explanation in respect of interest and excess depreciation and suo-motu offered income in the return of income filed in response to section 153A of the Act therefore, according to the assessee, the explanation of the assessee is bonafide and the assessee has disclosed all the material fact to substantiate to 1906/Mum/2025 Trig Detectives Pvt Ltd the explanation offered, therefore, no penalty in respect of interest and excess depreciation should be levied invoking clause (a) sub-section (1) of section 143 of the Act in respect of estimate in respect to salary and wages and administrative expenses. The Ld. Counsel for the assessee referred to clause (a) of section (2) and addition has been made purely on the estimate basis and books of accounts have not been rejected u/s 145(3) of the Act and therefore, accounts have been treated by the Ld. AO as correct and complete to satisfaction and addition has been made on estimate basis from non- production of the vouchers on the expenses on the part of the assessee. The Ld. Counsel submitted that the Assessing Officer has himself estimated part of the expenses as genuine and merely estimated the addition for non-maintenance of the vouchers, therefore, the case of the assessee falls under clause (b) of section 270 and no penalty is leviable due to exclusion carved from the definition of the under-reported income.
10.3 We are of the opinion that addition in respect of salary, wages and administrative expenses have been made by the Assessing Officer on estimate only, due to lack of vouchers maintained by the assessee in respect of cash. If according to the Assessing Officer, the expenditure was not genuine, then the Assessing Officer could have disallowed the entire cash expenses but he did not do so and only estimated disallowance of 4% of the salary and wages and 10% on administrative expenses and no basis for such estimation has been provided by the Assessing Officer. In the circumstances, addition being merely on the estimate basis cannot be sustained in view of reasons parimateria with penalty cancelled u/s 271(1)(c) of the Act and particularly in view of clause of sub-section 2 of section 270 of the Act as in the case of the assessee, the Assessing Officer has made disallowance out of cash expenses and no books of accounts have been rejected invoking section 145(3) of the Act. As regards the penalty levied for interest and excess depreciation suomotu offered by the assessee in the return of income filed in response to section 153A of the Act, we find that the assessee has explained the suo-motu variation made in the return of income and provided all material facts to substantiate the explanation. Thus explanation being bonafide in nature no to 1906/Mum/2025 Trig Detectives Pvt Ltd penalty is leviable u/s 270A of the Act. Accordingly, the penalty levied by the Assessing Officer for under reporting of the income u/s 270A of the Act is hereby deleted.
10.4 The Ld. CIT(A) in assessment years 2018-19 and 2019-2020 has followed his finding in assessment year 2017-18. Being identical facts and circumstances, following our finding in AY 2017-18, the penalty levied by the Assessing Officer u/s 270A of the Act in assessment years 2017-18 and 2019-2020 is also hereby cancelled and relevant grounds are accordingly allowed.”
The Ld. AO levied a penalty of Rs.44,29,729/- under section 271AAB of the Act for AY 2020-21. The Ld. CIT(A) granted partial relief amounting to Rs.2,17,896/-. The assessee has filed the present appeal challenging the balance penalty of Rs.42,11,833/- sustained by the Ld. CIT(A). The Ld. AR submitted that the quantum additions were made on account of 1. Disallowance of “salary & wages” u/s 37(1) Rs. 11,60,000/- 2. Disallowance of “Administrative expenses” u/s 37(1) Rs. 15,42,998/- 3. Disallowance u/s 40(a)(ia) Rs. 3,63,160/- 4. Suo moto disallowance of excess depreciation In ROI filed u/s 153A Rs. 12,28,685/- 5.Disallowance interest U/s 36(1)(iii) Rs. 30,88,040/- Rs. 73,82,883/- The Ld. CIT(A) deleted the penalty relating to the disallowance under section 40(a)(ia) of the Act. The rest additions are the surviving components. The Ld. AR contended that penalty cannot be sustained on mere disallowance of expenditure. It was further argued that this proposition is squarely covered by the decision of the co-ordinate bench of the ITAT, Mumbai, C-Bench in the case of Swaran Nadhan Salaria (supra). The relevant paragraph 12.5 of the said order is reproduced below:— to 1906/Mum/2025 Trig Detectives Pvt Ltd “12.5 Thus for disallowance of the expenses on the salary, wages and administrative expenses falling into the definition of the undisclosed income, same should be found to be false and would not have been found to be so if the search had not been conducted. Thus, the two conditions are required to be fulfilled, firstly, said expenses should be found to be false and secondly, said expenses should be found in the course of the search action. We find that both these conditions are not satisfied in the instant case. The Assessing Officer has nowhere held the said cash expenditure is either bogus or false but he made disallowance merely for the lack of verification of the vouchers of the expenses made in cash. The second condition is that the fact of expenses being false should emerge in search action. But nothing has been brought on record that non availability of vouchers was observed in search action, rather, it appears that fact has been recorded in assessment proceeding. Unless, the conditions specified for disallowance to be in the nature of the undisclosed income specified in section 271AAB are satisfied, no penalty could be levied in respect of disallowance merely for the reason that Assessing Officer has made addition in the assessment order. The ground No. 2 of the appeal of the assessee is accordingly allowed.”
We have carefully considered the rival submissions and perused the orders of the revenue authorities. It is an admitted position that the additions made in the assessments framed under section 153A of the Act, for all relevant assessment years, were not based on any incriminating material found during the course of search under section 132 of the Act. The assessee had accepted the quantum additions; however, the issue before us concerns the sustainability of the penalties levied under sections 271(1)(c), 270A, and 271AAB of the Act across different years.
In respect of penalties levied under section 271(1)(c) for AYs 2014–15 to 2016–17, we find merit in the contention of the Ld. AR that the additions arose to 1906/Mum/2025 Trig Detectives Pvt Ltd merely from disallowance of expenditure and income declared in the return filed under section 153A, without any nexus to incriminating material unearthed during search. The co-ordinate bench of the ITAT, Mumbai, in the case of Swaran Nadhan Salaria (supra), has held that Explanation 5A to section 271(1)(c) is attracted only where the assessee is found to be the owner of money, bullion, jewellery, valuable articles, or other tangible assets representing undisclosed income detected during search. In the present case, no such condition is satisfied. The disallowances made by the Ld. AO do not emanate from any seized material. Accordingly, following the ratio of the co-ordinate bench, the penalty levied under section 271(1)(c) is unsustainable and is directed to be deleted.
In respect of penalties levied under section 270A for AYs 2017–18 to 2019– 20, the additions consist primarily of estimated disallowances of salary, wages, and administrative expenses. As held in Swaran Nadhan Salaria (supra), estimated additions arising from non-production of vouchers, where books of account have not been rejected under section 145(3), fall outside the ambit of “under-reported income” in view of section 270A(6)(b). Furthermore, the suo- moto disallowances made by the assessee in the returns filed under section 153A have been duly explained and substantiated, satisfying the exclusion under section 270A(6)(a). We find no distinguishing facts in the present case. Therefore, respectfully following the detailed findings of the co-ordinate bench, the penalties levied under section 270A for these years are also liable to be deleted.
With respect to penalty under section 271AAB for AY 2020–21, we note that the penalty has been imposed solely on account of disallowances of to 1906/Mum/2025 Trig Detectives Pvt Ltd expenditure and interest, none of which were found to be false or bogus during search. As held in Swaran Nadhan Salaria (supra), two conditions must be cumulatively satisfied for an addition to qualify as “undisclosed income” under section 271AAB of the Act, (i) the expenditure or income must be false, and (ii) such falsity must be detected during search. In the present case, both conditions remain unfulfilled. The disallowances were made only on account of absence of supporting vouchers, which is not equivalent to establishing falsity. Consequently, the penalty sustained by the Ld. CIT(A) under section 271AAB cannot be upheld.
In view of the above discussions and respectfully applying the ratio of the co-ordinate bench decision in Swaran Nadhan Salaria (supra), we hold that the penalties imposed under sections 271(1)(c), 270A, and 271AAB of the Act across the relevant assessment years are not sustainable in law. The Ld. CIT(A) has already granted partial relief in some years; however, for the reasons discussed herein, the balance penalties sustained by the Ld. CIT(A) also deserve to be deleted.
Accordingly, all appeals of the assessee are allowed, and the penalties levied for the respective assessment years under sections 271(1)(c), 270A, and 271AAB of the Act are hereby deleted. to 1906/Mum/2025 Trig Detectives Pvt Ltd 13. In the result, the appeals filed by the assessee bearing to 1906/Mum/2025 are allowed. Order pronounced in the open court on 02/12/ 2025 Sd/- sd/- (PRABHASH SHANKAR) (ANIKESH BANERJEE) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai,िदनांक/Dated: 02/12/2025 Pavanan