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Facts
Vedant Properties, a partnership firm, declared NIL income for AY 2017-18. During scrutiny, the AO disallowed expenses of Rs.20,68,178/- and levied a penalty of Rs.12,78,134/- (200%) under Section 270A for misreporting income. The Ld. CIT(A) reduced the penalty to Rs.3,19,534/- (50%), against which the assessee appealed to the Tribunal.
Held
The Tribunal found that the Assessing Officer failed to specify the particular clause/limb of Section 270A(9) under which the penalty was initiated in both the penalty notice and the assessment order. Following judicial precedents requiring such specification, the Tribunal concluded that the penalty levied was not in accordance with law and directed its deletion.
Key Issues
Whether a penalty imposed under Section 270A for misreporting of income is valid if the Assessing Officer fails to specify the exact clause/limb of Section 270A(9) in the penalty notice or assessment order.
Sections Cited
270A, 143(2), 142(1), 274, 270A(9), 270A(8), 271(1)(c), 147, 144B, 148
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Income Tax Appellate Tribunal, PUNE “B” BENCH : PUNE
Before: SHRI RAMA KANTA PANDA & MS. ASTHA CHANDRA
This appeal filed by the assessee is directed against the order dated 26.08.2024 of the Ld. CIT(A)-NFAC, relating to assessment year 2017-2018. Although number of grounds have been raised by the assessee, however, the same relates to the order of the Ld. CIT(A) in confirming levy of penalty at Rs.3,19,534/- u/sec.270A of the Income Tax Act, 1961 (in short "the Act").
Facts of the case, in brief, are that the assessee is a partnership firm engaged in the business of builder and developer. It filed it’s return of income on 31.03.2018 declaring Rs.NIL total income. The case was selected for scrutiny under 2 ITA.No.2216/PUN./2024 CASS for the reason ‘introduction of large capital during the year of incorporation’. Accordingly, statutory notices u/sec.143(2) and 142(1) were issued and served on the assessee, in response to which, the Authorised Representative of the Assessee appeared before the Assessing Officer from time to time and filed the requisite details.
2.1. During the course of assessment proceedings, the Assessing Officer noted that assessee has debited advertisement expenses of Rs.34,500/-, development charges of Rs.1,17,778/-, land expenses of Rs.17,10,000/- excavation charges of Rs.2,05,900/-. In absence of justifying the said expenses with details and documents, the Assessing Officer held the same to be un-proved and pretentious. He, therefore, reduced the closing work-in-progress by Rs.20,68,178/-, on which, he initiated penalty proceedings u/sec.270A for mis- reporting of income. Since the assessee did not file any appeal against the said addition, the Assessing Officer held that the assessee has no objection against the addition. He, therefore, held that it is a fit case for levy of penalty u/sec.270A of the Act for mis-reporting of income. He, accordingly, levied penalty of Rs.12,78,134/- being 200% of tax sought to be evaded u/sec.270A of the Act.
In appeal, the Ld. CIT(A) held that the penalty @ 200% i.e., of Rs.12,78,134/- u/sec.270A of the Act is highly
3 ITA.No.2216/PUN./2024 excessive and, therefore, he reduced the same to 50% of the tax sought to be evaded, which according to him, is the minimum penalty. He, accordingly, restricted the penalty to Rs.3,19,534/-.
Against the order of the Ld. CIT(A), the assessee is in appeal before the Tribunal by raising the following grounds :
“The following grounds are taken without prejudice to each other -
On facts and in law, 1) The learned CIT(A) erred in confirming the levy of penalty at Rs.3,19,534/- u/s 270A of the Act. 2) The learned CIT(A) erred in holding that the assessee had underreported its income to the tune of Rs.20,68,178/- and therefore, penalty for underreporting of income u/s 270A was to be levied. 3) The learned CIT(A) failed to appreciate that the addition made of Rs.20,68,178/- was not justified at all and hence, there was no reason to levy penalty on account of underreporting of income u/s.270A of the Act and accordingly, the penalty levied may kindly be deleted. 4) The learned CIT(A) erred in not appreciating that the expenditure claimed of Rs.20,68,178/- was duly supported by proper evidences and accordingly, question of holding that the assessee underreported its income
4 ITA.No.2216/PUN./2024 simply did not arise and hence, the penalty levied may kindly be deleted. 5) The learned CIT(A) erred in not appreciating that the assessee had not claimed deduction of Rs.20,68,178/- and the same was part of work in progress and hence, as the said expenditure was not claimed as a deduction in the year under consideration, the question of levy of penalty u/s 270A simply did not arise. 6) The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.”
5. Learned Counsel for the Assessee, at the outset, referring to the copy of the notice issued u/sec.274 r.w.s.270A of the Act dated 02.12.2019 submitted that the Assessing Officer has not mentioned as to under which Clause of sec.270A of the Act the penalty proceeding has been initiated.
Referring to the decision of the Coordinate Bench of the Tribunal in the case of Sagar Subhash Wedhane, Nashi vs. ITO, Nashik vide ITA.No.191/ PUN./2024 dated 03.07.2024 and in case of Smita Virendra Lodha, Ahmednagar vs. ITO, Ward-1, Ahmednagar vide ITA.No.1980/PUN./2024 dated 12.11.2024, he submitted that under identical circumstances, the Coordinate Benches of the Tribunal have cancelled the penalty on account of failure of the Assessing Officer for non- mentioning as to under which clause/limb of Sec.270A such penalty proceedings have been initiated.
5 ITA.No.2216/PUN./2024 5.1. Even on merit also, he submitted that assessee is justified in capitalization of such expenditure and all the details were filed before the Ld. CIT(A) at the time of appeal proceedings. Merely because the assessee did not respond to the notice issued by the Assessing Officer, it cannot validate an invalid proceeding. He accordingly submitted that both legally and factually, the Ld. CIT(A) is not justified in confirming the penalty levied by the Assessing Officer u/sec.270A of the Act.
6. The Learned DR on the other hand relied on the order of the Assessing Officer and Ld. CIT(A).
We have heard the rival submissions made by both the sides and perused the material available on record. We find the Assessing Officer in the instant case levied penalty @ 200% of the tax sought to be evaded on account of expenses to the tune of Rs.20,68,178/- which according to him are un- proved and pretentious for which he reduced the same from the capital work-in-progress. Since the assessee did not file any appeal, he initiated penalty proceedings u/sec.270A of the Act for misreporting of income. Since the assessee did not respond to the notice issued by him while deciding the penalty proceedings, he held that assessee has nothing to say and, therefore, it is a fit case for levy of penalty for misreporting income. We find the Ld. CIT(A) while upholding the order of the Assessing Officer restricted such penalty to Rs.3,19,534/-
6 ITA.No.2216/PUN./2024 being 50% of the tax sought to be evaded, which is the subject matter of appeal in the instant case. It is the submission of the Learned Counsel for the Assessee that since the Assessing Officer in the penalty notice or in the assessment order has not mentioned under which clause/limb the penalty has been levied, therefore, such penalty is not being in accordance with law has to be cancelled.
7.1. We find some force in the above arguments of the Learned Counsel for the Assessee. A perusal of the assessment order shows that the Assessing Officer at para 4.4 of the order has mentioned “Penalty proceedings u/sec.270A for misreporting of income are initiated separately on this issue.”
Similarly, a perusal of the notice issued u/sec.274 r.w.s.270A dated 02.12.2019 shows that there is no clause/limb under which such penalty notice has been issued. We find, an identical issue had come-up before the Coordinate Bench of the Tribunal in the case of Smita Virendra Lodha, Ahmednagar vs. ITO (supra) wherein the Tribunal, following the decision of Coordinate Bench of Tribunal in the case of Kishor Digambar Patil vs. ITO vide ITA.Nos.54 & 55/PUN./2023 dated 30.03.2023 has cancelled such penalty by observing as under:
“10. We have heard the rival arguments made by both the sides and perused the orders of the Assessing
Officer and Ld. CIT(A)/NFAC. We find the Assessing
7 ITA.No.2216/PUN./2024 Officer completed the assessment u/s 147 r.w.s. 144B of the Act on a total income of Rs.18,74,800/- which was the income returned by the assessee in response to the notice u/s 148 of the Act. We find the Assessing Officer levied the penalty of Rs.6,37,912/- u/s 270A of the Act on account of under-reporting of income in consequence of mis-reporting. We find the Ld. CIT(A) /NFAC upheld the action of the Assessing Officer, the reasons of which have already been reproduced in the preceding paragraphs. It is the submission of the Ld. Counsel for the assessee, that the penalty notice issued by the Assessing Officer is silent about the clause under which the assessee has under- reported or mis-reported the income.
We find some force in the above arguments of the Ld. Counsel for the assessee. We find the Co-ordinate
Bench of the Tribunal in the case of Kishor Digambar Patil vs. ITO (supra) while deciding an identical issue has quashed the penalty levied u/s 270A for failure of the Assessing Officer in quoting any of the six limbs as mentioned in section 270A(9) of the Act. The relevant observations of the Tribunal from para 4 onwards read as under :
"4. Both the learned representatives vehemently reiterated their respective stands against and in support of the impugned penalties. The assessee
8 ITA.No.2216/PUN./2024 more particularly argued that both the learned lower authorities have erred in law and on facts in imposing sec.270A penalties in issue without even specifying the relevant limb under sub-section (9) thereof pertaining to "misreporting of income".
Learned counsel quoted the erstwhile earlier penalty mechanism provided u/sec.271(1)(c) of the Act wherein the law stood duly settled in light of Mohd.
Farhan A Shaikh vs. ACIT [2021] 434 ITR 1 (Bom.) (FB): CIT vs. M/s. SSA's Emerald Meadows [2016] 386 ITR (St.) 13 (SC) and CIT vs. Manjunatha Cotton
Ginning Factory (2013) 359 ITR 565 (Kar) (HC) that an assessing authority has to specify the corresponding limb in the show cause notice to be issued w/sec.274 of the Act. Learned counsel's case is that the legal position would hardly be any different wherein the legislature has now prescribed clauses (a) to (f) in sec.270A (9) of the Act only to "rationalise and bring objectivity, certainty and clarity in the penalty provisions" as per the CBDT's circular no.3/2017 [F.No.370142/20/2016-TPL). Mr.
Sonawane strongly argued in tune thereof that the very line of reasoning is required to be adopted herein as well whilst dealing with penalty proceedings under this new scheme of u/s.270A
9 ITA.No.2216/PUN./2024 introduced by the legislature by the Finance Act,
2016 w.e.f. 01.04.2017.
Mr. Murkunde on the other hand strongly
supported the learned lower authorities action imposing the impugned penalties. He took us to the Assessing Officer's corresponding assessments, penalty orders as well as the lower appellate discussion extracted in the preceding paragraphs that the rigor of sub-section (9) stands duly complied with once it has been categorically concluded that this is a fit case to impose penalty u/sec.270A of the Act for "under reporting which is in consequence of misreporting of income". His further contention is that such a penalty @ 200% is levied u/sec.270A(8) of the Act reading as under:
"Sec.270A(8) - Notwithstanding anything contained in subsection (6) or sub-section (7) where under-reported income is in consequence of any misreporting thereof by any person, the penalty referred to in sub-section (1) shall be equal to two hundred per cent of the amount of tax payable on underreported income."
5.1. Mr. Murkunde lastly sought to buttress the point that section 270A(8) nowhere makes it mandatory to include any of the clause "(a) to (f)" provided in sub-section
10 ITA.No.2216/PUN./2024 (9) thereof. He further submitted that various judicial precedents quoted at the assessee's behest in the preceding paragraphs are no more applicable once the legislature has amended the penalty provision Le.. sec.271 itself.
I have given my thoughtful consideration to the vehement rival stands and find no merit in the Revenue's
arguments. It is made clear that the assessee's case law indeed relates to the earlier penalty provision i.e., sec.271(1)(c) of the Act only wherein various hon'ble higher judicial forums had settled the law that the Assessing
Officer ought to specify as to whether the concerned taxpayer had concealed or furnished inaccurate particulars of his taxable income during the course of assessment. I am of the view that the very line of judicial precedents would squarely apply even for the amended penalty provision i.e., sec.270A of the Act as well wherein the legislature has not only prescribed twin limbs of "under reporting of income as well as misreporting of income", but also, unlike the earlier provision u/sec.271. this time it has stipulated specific deeming illustrations under both the twin foregoing heads of the "under reported income" and "misreporting of income" in sub-sections (2) and (9) (a to f) respectively. In my considered opinion, once the instant twin appeals involve levy of penalty @ 200% of 11 ITA.No.2216/PUN./2024 the taxes sought to be evaded and the learned lower authorities have held the assessee to have "under-reported his taxable income in consequence to misreporting", the latter limb of misreporting containing six "sub-limbs" in clauses (a to f) under sub-section- (9) deserve to be read as an extension of sub- section (8) to section 270A only. This indeed seems to be the only possible view as the legislature has incorporated the non-obstante clause
"Notwithstanding anything contained in sub-sec.(6) or sub- sec.(7)" thereby not including the sub- section (9) envisaging the six instances defining "misreporting of income" in section 270A of the Act.
6.1. Mr. Murkunde could further not dispute the fact that right from the Assessing Officer's twin assessments to his impugned penalty orders as well the NFAC's detailed discussion, the learned lover authorities have nowhere specified the corresponding sub-limbs (a to f) in sub-sec (9) of sec.270A of the Act. That being the case, I wish to quote para 62.10 in the CBDT's circular no.3/2017 (supra) making it explicitly clear that these six clauses (a to f) would indeed form part of sub-section (8) to sec.270A as under:
62.10. The rate of penalty shall be fifty per cent of the tax payable son under-reported income.
However in a case where under reporting of income
12 ITA.No.2216/PUN./2024 results from misreporting of income by the assessee, the person shall be liable for penalty at the rate of two hundred per cent of the tax payable on such misreported income. The cases of misreporting of income have been specified as under:
(i) misrepresentation or suppression of facts; (ii) non-recording of investments in books of account; (iii) claiming of expenditure not substantiated by evidence; (iv) recording of false entry in books of account; (v) failure to record any receipt in hooks of account having a bearing on total income: (vi) failure to report any International transaction or deemed international transaction under Chapter
X of the Income tax Act."
6.2. Faced with the situation and in light of overwhelming material strongly supporting the assessee's case and going by stricter interpretation as per Commissioner of Customs (Imports). Mumbai vs. Dilipkumar And Co. & Ors. 2018 (9) SCC 1 (SC)
(FB). I am of the view that the above stated judicial precedents regarding the "limb theory" would squarely apply even in case of failure of the Assessing Officer to quote any of the six sub-limbs as well prescribed in sec.270A(9) (a) to (f) of the Act
13 ITA.No.2216/PUN./2024 introduced by the legislature in order "to rationalize and bring objectivity, certainty and clarity in the penalty provisions" And that his noncompliance to this clinching effect would not only defeat the legislative mandate but also it renders the amending provisions an otiose. I accordingly hold in these peculiar facts and circumstances that both the impugned penalties deserve to be quashed as not sustainable in the eye of law. Ordered accordingly.
Since the Assessing Officer in the instant case
has admittedly not mentioned as to under which limb of sub-section (9) of section 270A he has levied the penalty, therefore, respectfully following the decision of the Co- ordinate Bench of the Tribunal in the case of Kishor
Digambar Patil vs. ITO (supra), we hold that the penalty so levied by the Assessing Officer u/s 270A is not in accordance with law. We, therefore, set aside the order of the Ld. CIT(A)/NFAC and direct the Assessing Officer to delete the penalty. The grounds raised by the assessee are accordingly allowed.
In the result, the appeal filed by the assessee is allowed.”
7.2. Similar view has been taken by the Coordinate Benches of the Tribunal in various other decisions relied on by the Learned Counsel for the Assessee. Since admittedly the 14 ITA.No.2216/PUN./2024 Assessing Officer in the instant case neither in the assessment order nor in the penalty notice has mentioned the specific clause/limb under which the penalty proceedings have been initiated u/sec.270A of the Act, therefore, following the decision of Coordinate Bench of the Tribunal in the case of Smita Virendra Lodha, Ahmednagar vs. ITO (supra), we hold that such penalty levied by the Assessing Officer u/sec.270A of the Act is not in accordance with law. We, therefore, set aside the order of the Ld. CIT(A) and direct the Assessing Officer to cancel the penalty. Grounds raised by the assessee are allowed.
In the result, appeal of the Assessee is allowed.
Order pronounced in the open Court on 10.01.2025.