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Facts
The assessee company, engaged in manufacturing Iron and Steel, filed its return for AY 2017-18 admitting a loss. The assessment was completed, and penalty proceedings under Section 270A were initiated due to alleged under-reporting of income based on an incorrect indexation of long-term capital loss on share sales.
Held
The Tribunal held that the Assessing Officer failed to record proper satisfaction before initiating penalty proceedings and that the assessee's explanation for the incorrect indexation was inadvertent and bonafide. Therefore, the penalty levied under Section 270A was not sustainable.
Key Issues
1. Whether the Assessing Officer properly recorded satisfaction before initiating penalty proceedings under Section 270A. 2. Whether the assessee's explanation for the incorrect indexation of capital loss was bonafide and warranted deletion of penalty.
Sections Cited
143(1), 270A, 274, 1961
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Income Tax Appellate Tribunal, HYDERABAD “A” BENCH: HYDERABAD
Before: SHRI VIJAY PAL RAO & SHRI MANJUNATHA G
Date of Hearing : 11.08.2025 Date of Pronouncement : 10.09.2025 ORDER PER MANJUNATHA G. :
The above appeal has been filed by the assessee company against the order of the learned CIT(A)- -National Faceless Appeal Centre [in short “NFAC], Delhi, relating to the assessment year 2017-2018.
2 ITA.No.908/Hyd./2025 2. Brief facts of the case are that, the assessee company is engaged in the business of manufacturing of basic Iron and Steel, has filed it’s original return of income for the assessment year 2017-2018 on 07.11.2017 admitting total loss of Rs.46,59,56,307/-. The assessment has been completed under section 143(1) of the Income Tax Act, 1961 [in short "the Act"] on 21.12.2019 and assessed total loss of Rs.32,84,25,197/-. Thereafter, penalty proceedings under section 270A of the Act were initiated and notice under section 274 r.w.s. 270A of the Act dated 21.12.2019 was issued and requested the assessee company to submit it’s explanation, if any. In response to show cause notice, the assessee company vide letter dated 22.12.2021 explained that, the loss computed under the Head “Long Term Capital Loss” from sale of shares by considering the indexation from assessment year 2009-2010 is a mistake and the same has been rectified by filing corrected statement of computation of loss to the Assessing Officer. Therefore, it cannot be said that, it is a under- reporting of income, which warrants levy of penalty under 3 ITA.No.908/Hyd./2025 section 270A of the Act. The Assessing Officer after considering the relevant submissions of the assessee company observed that, the assessee company has purchased shares of USAI Forge Private Limited in two financial years i.e., in financial year 2008-2009, 1,49,70,000 shares and in financial year 2013-2014, 34,89,197 shares, but, while computing the indexed cost of acquisition for the purpose of computation of capital gain, it has considered entire lot of shares, as purchased in financial year 2008-2009 and applied the indexation, which resulted in excessive loss to the extent of Rs.13,75,31,110/- for the assessment year under consideration. Therefore, observed that, the assessee company is liable for penalty under section 270A of the Act. Accordingly, levied penalty of Rs.1,58,65,589/- which is 50% of the total tax sought to be evaded on under-reported income. The relevant findings of the Assessing Officer are as under : “In view of the above, the Long Term Capital Loss on sale of USA Forge Private Limited was Rs.32,84,25,197/-. After making adjustment of Long Term Capital Loss on sale of shares of Rs.32,84,25,197/- with Long Term Capital Gain on sale of Immovable property of Rs.4,16,72,303/-, the net Long Term Capital Loss was Rs.28,67,52,894/-.”
4 ITA.No.908/Hyd./2025 3. Aggrieved by the assessment order, the assessee company has preferred appeal before the CIT(A). Before the CIT(A), the assessee company has challenged penalty levied by the Assessing Officer for under-reporting of income on multiple grounds including for not recording satisfaction by the Assessing Officer before initiation of penalty proceedings and further, on merit on the ground that, excessive computation of loss from sale of shares is only an inadvertent error by applying the benefit of indexation from financial year 2008-2009, even though, part of shares has been purchased for the financial year 2013-2014. The learned CIT(A) after considering the relevant submissions of the assessee company held that, during course of assessment proceedings, the assessee company admitted that, out of total number of 1,84,59,197 shares, 34,89,197 shares were purchased during financial year 2013-2014, on which, the benefit of indexation has been applied for financial year 2008-2009, which resulted in computation of excess loss and thus, it is a case of under-reporting of income and accordingly, there is no error in the reasons
5 ITA.No.908/Hyd./2025 given by the Assessing Officer to levy penalty of Rs.1,58,65,589/- under section 270A of the Act.
Aggrieved by the order of the learned CIT(A), the assessee company is now, in appeal before the Tribunal.
CA M Poorna Chander Rao, Learned Counsel for the Assessee submitted that, the learned CIT(A) was erred both in law and on facts in confirming the penalty of Rs.1,58,65,589/- levied by the Assessing Officer under section 270A of the Act, without appreciating the fact that, the Assessing Officer has levied penalty for under-reporting of income, even though, he has not recorded any satisfaction before initiation of penalty proceedings either in the assessment order or in the show cause notice issued under section 274 r.w.s. 270A of the Act. Learned Counsel for the Assessee referring to the assessment order submitted that, the Assessing Officer has not even initiated penalty proceedings in the assessment order. Further, the show cause notice is silent about the limbs of penalty, whether it is for under-reporting of income or under-reporting as a 6 ITA.No.908/Hyd./2025 consequence of misreporting of income. The Assessing Officer in the penalty order has not specified under which limb, he has levied the penalty, whether for under-reporting of income or under-reporting as a consequence of misreporting of income, except stating that, penalty @ 50% has been levied on total tax sought to be evaded. From the above, it is very clear that, before initiation of penalty preceding, the Assessing Officer has failed to record satisfaction that, it is a case of under reported income and thus, in absence of satisfaction, the initiation of penalty proceedings is void abinitio and liable to be quashed.
Learned Counsel for the Assessee further submitted that, even on merit, the CIT(A) is erred in sustaining the penalty, even though, the assessee company has explained that it's case falls under clause (a) of sub- section (6) of section 270A of the Act, where the assessee company has explained the case to the satisfaction of the Assessing Officer that, computation of excessive loss from shares is only on account of an inadvertent error by applying indexation benefit from the financial year 2008-
7 ITA.No.908/Hyd./2025 2009 for 34,89,197 shares, even though, the said shares were purchased in assessment year 2013-2014. Therefore, he submitted that, penalty levied by the Assessing Officer should be deleted. In this regard, he relied upon decision of Hon'ble High Court of Rajasthan in the case of Chambal Fertilizers and Chemicals Ltd., vs., Office of the Pr. CIT [2024] 462 ITR 4 (Rajasthan).
Sri Siva Prasad SV, learned Sr. AR for the Revenue, on the other hand, supporting the order of the learned CIT(A) submitted that, the provisions of section 270A of the Act is clear in as much as under-reporting of income applies to even computation of excessive loss which is evident from clause-(g) of sub-section (2) of section 270A of the Act. Further, the case of the assessee company does not fall under sub-section (6) of section 270A of the Act because, the assessee company could not explain it’s case with bonafide disclosure of relevant facts, which is evident from computation of long term capital loss by the Assessing Officer during the course of assessment proceedings, where the assessee company has claimed excessive indexation for 8 ITA.No.908/Hyd./2025 purchase of shares. Therefore, he submitted that, there is no merit in the arguments of the Learned Counsel for the Assessee and thus, penalty levied by the Assessing Officer should be upheld.
We have heard both the parties, perused the material on record and gone through the orders of the authorities below. Facts borne out from the record indicate that, during the financial year relevant to assessment year under consideration, the appellant has sold 1,84,59,197 shares of M/s. USAI Forge Private Limited and computed long term capital loss of Rs.46,56,11,716/-. Further, the shares were purchased in two financial years. The assessee company has purchased first lot of 1,49,70,000 shares in financial year 2008-2009 and second lot of 34,89,199 shares in financial year 2013-2014. However, while computing capital gain/loss from sale of shares in financial year relevant to assessment year 2017-2018, the appellant has applied indexation for entire lot of 1,84,59,197 shares from financial year 2008-2009, which resulted in computation of long term capital loss at Rs.46,59,56,307/-.
9 ITA.No.908/Hyd./2025 Further, during the course of assessment proceedings, the assessee company has filed revised computation of long term capital loss from sale of shares by applying indexation for two financial years and claimed that, by an inadvertent error, the benefit of indexation has been applied for entire lot of shares from 2008-2009 onwards. The Assessing Officer on the basis of revised computation filed by the assessee company, has computed long term capital loss at Rs.32,84,25,197/- which resulted in excessive loss claimed at Rs.13,75,31,110/-. The Assessing Officer levied penalty for under reporting of income @ 50% of tax sought to be evaded and levied penalty of Rs.1,58,65,589/-. Therefore, it is necessary for us to examine the arguments of the Learned Counsel for the Assessee in light of satisfaction required to be recorded by the Assessing Officer for initiation of penalty proceedings and explanation offered by the assessee company for computation of excessive loss.
Admittedly, the Assessing Officer has not initiated penalty proceedings in the assessment order, which is evident from assessment order passed by the Assessing
10 ITA.No.908/Hyd./2025 Officer dated 21.12.2019 ,where there is no finding from the Assessing Officer for initiation of penalty proceedings under section 270A of the Income Tax Act, 1961. Further, even in the show cause notice issued under section 274 r.w.s 270A of the Income Tax Act, 1961 dated 21.12.2019 and 10.06.2021, there is no satisfaction from the Assessing Officer, whether penalty proceedings has been initiated for under-reporting of income or under-reporting of income as a consequence of misreporting of income. The said lapse is even continued in the Order passed by the Assessing Officer imposing penalty under section 270A of the Act, where the Assessing Officer has not recorded any finding as to satisfaction with regard to under-reporting of income or under-reporting as a consequence of misreporting of income, except, stating that, penalty @ 50% has been levied for under-reported income. From the above, it is very clear that, before initiation of penalty proceedings under section 270A of the Act, the Assessing Officer has not recorded satisfaction or arrived at a satisfaction about under- reporting of income or under-reporting as a consequence of 11 ITA.No.908/Hyd./2025 misreporting of income. Therefore, we are of the considered view that, in absence of any satisfaction from the Assessing Officer about under-reporting of income or under-reporting as a consequence of misreporting of income, the Order passed by the Assessing Officer levying penalty for under reported income is bad in law, void abinitio and liable to be quashed. This legal principal is supported by the decision of Hon’ble Supreme Court in the case of Pr. CIT vs., Golden Peace Hotels and Resorts (P.) Ltd., [2021] 124 taxman.com 249 wherein it was held that, “in absence of satisfaction by the Assessing Officer about concealment of income or that any inaccurate particulars were furnished by the assessee, which is sine qua non for initiation of penalty proceedings, such proceedings are to be dropped”.
Coming back to the penalty levied for under- reported income. Admittedly, the assessee company has computed long term capital loss of Rs.46,59,56,307/- from sale of 1,84,59,197 shares of M/s. USAI Forge Private Limited. The above shares were purchased in two financial years. The first lot of 1,49,70,000 shares were purchased in 12 ITA.No.908/Hyd./2025 financial year 2008-2009 and the second lot of 34,89,197 shares were purchased during financial year 2013-2014. However, while computing the long term capital loss, the assessee company has applied the benefit of indexation for entire lot of 18,45,91,970 shares from financial year 2008- 2009, even though, 34,89,197 shares were purchased during financial year 2013-2014, which resulted in excess computation of long term capital loss. Further, the above mistake has been rectified by filing a revised computation of long term capital loss during the course of assessment proceedings and the Assessing Officer on the basis of revised statement of long term capital loss furnished by the assessee company, has determined correct long term capital loss of Rs.32,84,25,197/-. The assessee company explained the reasons for computation of excessive loss and according to the assessee company by an inadvertent error it has wrongly applied the benefit of indexation from financial year 2008-2009 for remaining 34,89,197 shares purchased during financial year 2013-2014. In our considered view, going by the facts on record, it is very clear that, the 13 ITA.No.908/Hyd./2025 assessee company has computed loss from sale of shares by applying an incorrect indexation from financial year 2008- 2009, even though, shares were purchased in financial 2013-2014, but, the assessee company has explained reasons for the said inadvertent error and according to the assessee company, there is no intention of reducing the capital loss from sale of shares. We find that, the assessee company has computed loss of Rs.46.60 crores and the same has been reduced by the Assessing Officer to Rs.32.84 crores. In otherwords, the assessee company has not computed any income or loss from sale of shares with an intention to reduce the tax liability, which is evident from the facts available on record, where even after applying correct indexation, the loss has been reduced to the extent of Rs.13.75 crore, but, it does not result in taxable income for the year under consideration. Therefore, in our considered view, once the assessee company attributes excessive computation of loss, for inadvertent error, in our considered view, the Assessing Officer ought to have consider the case of the assessee company under clause-(a)
14 ITA.No.908/Hyd./2025 of sub-section-(6) of section 270A of the Income Tax Act, where, it has been clearly laid down that, under-reported income for the purpose of this Section, shall not include the amount of income, in respect of which, the assessee company offers an explanation and the Assessing Officer is satisfied that, the explanation is bonafide and the assessee company has disclosed all the material facts to substantiate the explanation offered. In the present case, going by the facts available on record, the Assessing Officer did not disbelieve the explanation of assessee company with regard to application of incorrect indexation for part of shares from the assessment year 2008-2009. Therefore, in our considered view, the case of the assessee company squarely covered under section 270A(6)(a) of the Income Tax Act, 1961 and thus, it is not a fit case for levy of penalty u/sec. 270A of the Income Tax Act, 1961 for under-reporting of income.
In this view of the matter and considering the facts and circumstances of the case, we are of the considered view that, the Assessing Officer erred in levying
15 ITA.No.908/Hyd./2025 penalty under section 270A of the Income Tax Act, 1961 for Rs.1,58,65,589/-. The learned CIT(A) without appreciating the relevant facts, has simply sustained the penalty levied by the Assessing Officer. Thus, we set-aside the Order of the learned CIT(A) and direct the Assessing Officer to delete the penalty of Rs.1,58,65,589/- levied under section 270A of the Income Tax Act, 1961 for under-reporting of income.
In the result, appeal of the assessee is allowed.
Order pronounced in the open Court on 10.09.2025.