AQURA AUTO ANCILLARY P. LTD.,CHENNAI vs. ITO, CHENNAI

The assessee is a private limited company and did not file the return of income for AY 2017-18. As per the information available with the Department, the assessee has received payment of more than Rs. 3 Crores on transfer of immovable property. The A.O therefore had reason to belief that the income chargeable to tax as escaped assessment and accordingly issued notice u/s. 148 of the Act. The assessee in response filed the return of income on 13.01.2022 declaring total income of Rs.3,20,64,558/-. The A.O treated the return as invalid since it is filed beyond the stipulated time as mentioned in notice u/s. 148 of the Act. Accordingly, the A.O completed the assessment u/s. 147 r.w.s 144 of the Act making an addition of Rs.2,99,07,001/- towards Long Term Capital Gains (LTCG), a sum of Rs.15,09,622/- towards Short Term Capital Gains (STCG) and an income from other sources of Rs.6,47,935/-. Aggrieved, the assessee filed further appeal before the CIT(A), who gave partial to the assessee. Subsequently, the A.O initiated penalty proceedings u/s. 270A of the Act. The A.O after considering the submissions of the assessee levied a penalty of Rs.32,58,844/- for underreporting the income and penalty of Rs.1,62,976/- for misreporting of income. The CIT(A) confirmed the penalty levied by the A.O on further appeal. The assessee is an appeal before the Tribunal against both the orders of the CIT(A).

The Ld. Authorized Representative (AR) of the assessee during the course of hearing submitted that if the penalty appeal is considered and allowed in favour of the assessee then the appeal against the quantum addition will not be pressed. Accordingly, we will first proceed to consider the appeal filed against the penalty levied u/s. 270A of the Act.

The primary contention of the Ld. AR with regard to levy of penalty is that the AO in the notice u/s. 274 r.w.s 270A of the Act had stated that the assessee has under reported the income which is in consequence of misreporting of income. The Ld. AR further submitted that the A.O in the subsequent notices issued also has stated the same. In this regard, the Ld. AR drew our attention to the penalty notices dated 30.03.2022 and 05.08.2022 which are extracted below:

The Ld. AR further submitted that the AO however while levying penalty has levied both for underreporting and also for misreporting as given below:

The Ld. AR submitted that the levy of penalty for underreporting in consequence of misreporting amounting to Rs,1,62,976/- is not contented but the levy of penalty for underreporting is contended for the reason that the assessee is not properly informed of the default for the initiation of such penalty proceedings and levied. The Ld. AR argued that underreporting in consequence of misreporting and under reporting are two separate defaults and section 270A of the Act lays down separate provisions including the percentage of penalty. Accordingly, the Ld. AR argued that the assessee has to be clearly informed of the default committed by him which in the present case the AO failed to do so. Therefore, the Ld. AR submitted that the penalty levied for underreporting is void-ab-initio and therefore the penalty levied in this regard should be deleted. The Ld. AR brought to our attention that an identical issue has been considered by the Coordinate Bench in the case of AVM Productions vs. ACIT [ITA No.2359/Chny/2025 dated 04.03.2026], where it has been held that:

The Ld. Departmental Representative (DR), on the other hand, submitted that the AO has clearly stated in the assessment order the two separate defaults committed by the assessee and therefore, the penalty has been levied by the A.O rightly under two different provisions of section 270A of the Act. The Ld. DR accordingly supported the orders of the lower authorities.

We have considered the rival submissions and perused the material on record. The issue before us is whether the penalty levied u/s.270A of the Act towards underreporting is sustainable in the facts of the present case. The Ld. AR has contended that the notices issued u/s.274 r.w.s.270A of the Act did not clearly specify the precise default for which the assessee was required to defend itself. We notice that in the notices dated 30.03.2022 and 05.08.2022, the A.O has stated the default as “under-reporting of income in consequence of misreporting of income”. We further notice that, while passing the penalty order, the A.O has proceeded to levy penalty separately for under-reporting of income as well as for underreporting in consequence of misreporting of income. Therefore, there is merit in the argument that, the charge communicated to the assessee in the course of penalty proceedings and the basis on which the penalty has ultimately been levied is not in conformity with each other. In this regard, we find that the Coordinate Bench of the Tribunal in the case of AVM Productions (supra) on an identical issue where it is held that mere reproduction of the provisions of section 270A and a general conclusion that the assessee has misreported its income would not satisfy the requirement of law. The Coordinate Bench noted that “under- reporting” and “under-reporting in consequence of misreporting” are distinct defaults, with the latter attracting the higher rate of penalty u/s.270A(8). It was further held that where the A.O. seeks to invoke misreporting, he is required to apply his mind to the specific instances enumerated in section 270A(9) of the Act and record reasons as to how the assessee's conduct falls within any of those instances. It is also held that the failure to identify the particular limb of section 270A(9) of the Act and failure to disclose the basis for treating the case as one of misreporting reflects a clear non-application of mind, rendering the penalty unsustainable.

In the light of the above findings, when we consider the facts of the present case, we notice that the A.O., in the notices issued to the assessee, has not clearly stated that the penalty proceedings are initiated for both underreporting and underreporting in consequence of any misreporting. We further notice on perusal of the penalty order that the A.O has merely extracted the provisions of section 270A of the Act and has levied the penalty for underreporting stating that the A.O in the assessment order has stated that the penalty under both limbs to be levied. Therefore, it is clear that while levying the penalty, the A.O. has levied penalty for underreporting without demonstrating the specific failure of the part of the assessee The mere fact that the assessment order may contain the additions giving rise to the alleged under-reporting cannot, by itself, cure the failure to specify and establish the statutory charge in the penalty proceedings. In our considered view the penalty proceedings are separate proceedings and the A.O is required to disclose his satisfaction and the precise statutory default which, according to him, has been committed by the assessee in the notice initiating the penalty proceedings. We are, therefore, of the view that the infirmity in the present case is not merely a technical defect in the notice, but goes to the very basis of the levy of penalty. Accordingly, respectfully following the ratio laid down by the Coordinate Bench AVM Productions (supra), we hold that the penalty levied u/s.270A of the Act towards under reporting amounting to Rs.32,58,844/- cannot be sustained. Accordingly, the penalty levied is directed to be deleted.

Since we have deleted the penalty levied by the A.O, the appeal filed by the assessee against quantum additions is dismissed as not contested considering the submissions of the ld AR to that effect.

In the result, the appeal of the assessee in ITA No.2106/Chny/2026 is dismissed and the appeal in ITA No.2107/Chny/2026 is partly allowed.