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Facts
The assessee, Power Security Corp Private Ltd., failed to file its return of income for AY 2017-18. The case was reopened under Section 147, and an assessment was completed under Section 147 r.w.s. 144 r.w.s. 144B, estimating income. Subsequently, a penalty under Section 270A was levied for under-reporting of income.
Held
The Tribunal held that the satisfaction recorded by the AO for initiating penalty proceedings under Section 271(1)(c) was bad in law as it was not applicable for AY 2017-18 onwards. Consequently, the penalty levied under Section 270A for under-reporting of income was not legally sustainable.
Key Issues
Whether the penalty levied under Section 270A for under-reporting of income is sustainable when the assessment was based on estimation and the AO's initial satisfaction for penalty was under an inapplicable section?
Sections Cited
147, 144, 144B, 270A, 271(1)(c), 148, 149
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI ABY T VARKEY, HON’BLE & SHRI S. R. RAGHUNATHA, HON’BLE
PER S. R. RAGHUNATHA, ACCOUNTANT MEMBER:
This appeal by the assessee is filed against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, dated 28.03.2024 for the assessment year 2017-18.
:-2-: ITA. No: 1947/Chny/2024 2. At the outset, we find that there is a delay of 53 days in appeal filed by the assessee, for which petition for condonation of delay along with reasons for delay has been filed. After considering the petition filed by the assessee and also hearing both the parties, we find that there is a reasonable cause for the assessee in not filing appeal on or before the due date prescribed under the law and thus, in the interests of justice, we condone delay in filing of appeal and admit appeal filed by the assessee for adjudication.
The assessee has raised the following grounds:-
1. The Ld. CIT (A) erred in confirming the order of the ld. AO in imposing penalty u/s 270A without considering the facts and circumstances of the case.
2. The ld. CIT (A) has failed to note that the ld. AO has imposed the penalty for underreporting of income merely because the appellant has failed to file the Return of Income. The ld. AO has failed to establish that there was a conscious concealment of income as the appellant has paid the tax liability for the year under consideration and no tax was evaded.
3. The ld. CIT (A) has failed to appreciate that the ld. AO has levied penalty u/s 270A purely on the basis of estimated income at a higher figure of Rs.22.06 lakhs on best judgment, than what was admitted by the appellant at Rs.5,04,608/- in response to Section 148 notice. The ld. AO has made the best judgment assessment which is arbitrary and with an element of guess work. 4 For the above reasons and other reasons that may be adduced at the time of hearing, it is prayed to your good self that the penalty levied upon the appellant is unsustainable and may kindly be deleted and justice be rendered.
5. The Appellant craves leave to amend, alter, add or delete any of the above grounds of appeal.
:-3-: ITA. No: 1947/Chny/2024 3.1 In brief the sole ground before us is, the Ld.CIT(A) has erred in confirming the penalty U/s.270A of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) of Rs.3,40,861/-.
The brief facts are that the assessee M/s. Power Security Corp Pvt. ltd., is a company deriving income from business of providing security services, surveillance services, cleaning services and building maintenance services to corporate & non-corporate customers. The assessee had not filed its return of income for the assessment year 2017-18. Based on the information, the case was reopened u/s.147 of the Act and the assessment was completed u/s.147 r.w.s. 144 r.w.s. 144B of the Act on 18.04.2023 at an assessed income of Rs.22,06,215/- by estimating at 7% of the gross receipts. Further, the AO has also levied penalty u/s.270A of the Act for under reporting of income and imposed a penalty of Rs.3,40,861/- being 50% of tax on alleged under reported income in his order dated 22.08.2023 by holding as under: “During Penalty Proceedings, several Show cause notices dated 18.04.2023, and 11.05.2023 were issued to the assessee and delivered to the assessee through e-proceedings. The assessee filed his response dated 18.05.2023 and submitted that due to financial constraints and huge outstanding, labour issues and huge business loss, the company is dissolved w.e.f. 05.07.2017. The Ex director of the company also submitted that the assessee is bonafide. The assessee relied the judgment of CIT vs. G.R. Rajendran & Anr. (259 ITR 109) (Mad). The reply of the assessee has been :-4-: ITA. No: 1947/Chny/2024 duly perused and not found tenable. The reliance of the case is also not covered in its case.
The abstract of the above referred provisions is clear. After examining the facts, it is apparently established that provisions of section 270A are clearly acted in this case. I am satisfied that it is a fit case for imposing penalty.
S. No. Particulars Amount (Rs) 1 Returned income (Not Filed) NIL 2 Assessed Income (after 22,06,215/- including under-reported income) 3 Tax on returned income NIL 4 Tax on assessed income 6,81,722/- (after including under- reported income) 5 Tax on under-reported 6,81,722/- income (4-3) Quantum of penalty payable under section 270A of the Income Tax Act As per section 27OA of the Act, the assessee would be liable to pay penally amounting to a sum computed at the rate of 50% of the tax payable on under-reported income, Tax on under-reported income Rs, 6,81,722/- Penalty computed @ 50% of Tax on under-reported Income Rs. 3,40,861/- Therefore, penalty amounting to Rs.3,40,861/- is imposed u/s 27OA of the Income Tax Act, 1961. Issue demand notice and challan.
Aggrieved by the order of the AO the assessee preferred an appeal before the Ld.CIT(A), NFAC, Delhi.
4.1 The assessee submitted that the AO has imposed the penalty for concealment of income merely because the assessee has failed :-5-: ITA. No: 1947/Chny/2024 to file the return of income, without establishing that there was a conscious concealment of income. Further, the penalty is levied based on the additions made only on the basis of estimation in the assessment order passed u/s.147 r.w.s.144 of the Act. The assessee had admitted an income based on estimation at Rs.5,04,610/- as against the higher estimation @ 7% on Rs.3.15 Crores i.e. Rs.22,06,215/- made by the AO in his order. The assessee also claimed that no penalty u/s.270A of the Act can be imposed when the income is determined on the basis of estimation. However, the Ld.CIT(A) was not convinced with the claim of the assessee and dismissed the appeal in his order dated 28.03.2024 by holding as under: “16.04 Accordingly, the contention of the appellant that its case is an estimated income case, hence the exceptional provisions of Sec.270A(6) of the Act are applicable is rejected and the relevant grounds of appeal are dismissed. Further, the penalty proceedings levied u/s 271(1)(c) are completely different from penalty levied u/s 270A of the Act. The case laws which directing to cancel the penalty u/s.271(1)(c) cannot be applied ipso facto to the situations of the cases falling u/s 270A of the Act. The circumstances & conditions under which penalty cannot be imposed u/s 270A are clearly specified for the situations of estimated incomes vide its clause (b) & (c) of the sub-section (6) of Sec.270A of the Act. The non- applicability of the above exceptions is detailed in the preceding paragraph of the order. Hence this is considered to be a fit case to impose the penalty u/s 270A of the Act and I do not find any compelling reasons to cancel the penalty order of AO/PO. Accordingly, all the connected grounds of appeal raised are dismissed.
:-6-: ITA. No: 1947/Chny/2024 Aggrieved by the impugned order of the Ld.CIT(A), the Assessee preferred an appeal before us.
The Ld.AR for the assessee assailed the action of the Ld.CIT(A) and stated that the Ld.CIT(A) has erred in sustaining the penalty u/s.270A of the Act, as the assessment u/s.147 r.w.s. 144 of the Act was concluded with an addition made based on the estimation of income. Further, the Ld.AR stated that in this case the time for issue of notice u/s.148 for the A.Y. 2017-18 has ended on 31.03.2021. Further, the escaped income added in the assessment u/s.147 was Rs.22.06 lakhs, which is less than Rs.50.00 Lakhs and thus the notice cannot get the benefit of extended period of limitation which is beyond 3 years till 10 years. As the notice itself is illegal, there is no foundation for assessment order based on time barred notice u/s.148 of the Act. Further, the Ld. AR stated that there are various courts held that reopening of notice issued u/s.148 to be quashed if barred by limitation period prescribed u/s.149 of the Act. Therefore, the Ld.AR stated that it is well established principle of law that if the foundation of any proceeding is illegal and unsustainable in law, then all consequential proceedings or order are also bad in law.
:-7-: ITA. No: 1947/Chny/2024 The Ld.AR submitted that the AO has imposed the penalty for concealment of income merely because the assessee has failed to file the return of income, without establishing that there was a conscious concealment of income. The Ld.AR also submitted that the Ld.CIT(A) has failed to observe that the AO has initiated penalty u/s.271(1)(c) of the Act for furnishing inaccurate particulars whereas the penalty u/s.270A of the Act was actually levied for under reporting of income, which is contradictory and suffers from non-application of mind. The Ld.AR also argued that the penalty levied by the AO is based on the additions made only on the basis of estimation in the assessment order passed u/s.147 r.w.s.144 of the Act. The assessee had admitted an income based on estimation at Rs.5,04,610/- as against the higher estimation @ 7% on Rs.3.15 Crores i.e. Rs.22,06,215/- made by the AO in his order. The AO has made the best judgement assessment which is arbitrary and with an element of guess work. Hence, the Ld.AR submitted that the exceptions for under reporting of income are laid down in Section 270A(6) of the Act as given below: (a)….. (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 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; :-8-: ITA. No: 1947/Chny/2024 (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; In the present facts of the case, the entire addition was made based on estimation in spite of furnishing complete and correct accounts, particularly, when the assessee has on its own estimated a lower amount of income computed and therefore, the exception provided in section 270A(6)(b) and (c) is squarely applicable and hence prayed for setting aside the order of the Ld.CIT(A).
Per contra, the Ld. DR, asserted action of the Ld.CIT(A) and stated that the Ld.CIT(A) has rightly confirmed penalty levied by the AO and prayed for confirming the order of the Ld.CIT(A).
We have heard both the parties, perused materials available on record, and gone through orders of the authorities below. We note that the AO in the course of assessment proceedings i.e., in the Assessment Order dated 18/04/2023, has expressed his satisfaction that the Assessee has furnished inaccurate particulars of Income u/s.271(1)(c) of the Act. However, the satisfaction recorded by the AO for initiation of penalty proceedings u/s.271(1)(c) for furnishing of inaccurate particulars for the Assessment Year 2017-18 is bad in :-9-: ITA. No: 1947/Chny/2024 law for the simple reason that such a provision (i.e Section 271) shall not apply to and in relation to any assessment year commencing on or after 01/04/2017. Meaning, from A.Y.2017-18, there is no penalty provision u/s.271 including 271(1)(c) of the Act in the statute. In such a scenario, once the initiation of penalty proceedings vitiated for non-application of mind, consequent action taken to levy penalty u/s.270A that too for ‘under reporting’ of income is not legally sustainable.
7.1 In the present facts and circumstances of the case, the penalty order passed u/s.270A of the Act by the AO and confirmed by the Ld.CIT(A) is not sustainable in law and hence we are inclined to delete the Penalty levied u/s.270A of the Act by allowing the grounds of appeal raised by the assessee.
In the result, appeal filed by the assessee is allowed.
Order pronounced in the open court on 17th April, 2025 at Chennai.