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Facts
The assessee, a charitable trust, reported unutilized accumulated income from a previous year as taxable income and claimed a 15% deduction under Section 11(1)(a) based on a bona fide belief, relying on a High Court decision. The AO disallowed this deduction, deeming the entire amount taxable, and initiated penalty proceedings under Section 270A for under-reporting of income. The assessee also claimed depreciation, which was disallowed by the AO.
Held
The Tribunal found that the assessee had reported the unutilized amount and there was no suppression of facts. The claim for 15% deduction was made based on a bona fide belief and legal position, making it a debatable issue. The Tribunal also noted that the AO had shifted the reason for penalty from under-reporting to misreporting without fulfilling the criteria for misreporting. Furthermore, the penalty related to capital expenditure was not tenable as there was no disallowance or initiation of penalty proceedings for it in the assessment order. Therefore, the penalty imposed by the AO was not tenable.
Key Issues
Whether the penalty under Section 270A was imposable on the assessee when the claim was based on a bona fide belief and was a debatable issue? Whether the AO was justified in levying penalty for misreporting without fulfilling the criteria under Section 270A(9)?
Sections Cited
Section 11(1)(a), Section 11(2), Section 11(3), Section 11(6), Section 270A, Section 270A(6)(a), Section 270A(9), Section 12A, Section 143(3), Section 250
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Income Tax Appellate Tribunal, “B” BENCH MUMBAI
Before: SHRI AMIT SHUKLA & SHRI GIRISH AGRAWAL
O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by the assessee is against the order of Commissioner of Income Tax (Appeal), National Faceless Appeal Centre (NFAC), Delhi vide order no. ITBA/NFAC/S/250/2025- 26/1078465227(1) dated 14.07.2025 passed against the penalty order u/s. 270A of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), for AY 2018-19.
Grounds taken by the assessee are reproduced as under: 1. In the facts and circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals), National Faceless Appeals Centre, Delhi ["the CIT (A)") u/s 250 of the Income Tax Act, 1961 ["the Act for short erred in confirming the penalty u/s 270A of the Act passed Narottam Morarjee Institute of Shipping AY 2018-19 by the Assessment Unit, National Faceless Assessment Centre ["the NFAC" for short] which is in fact contrary to the extant law and therefore void.
While so affirming the penalty u/s 270A the Ld. CIT(A) failed to appreciate that: a) The Appellant is a charitable trust and its entire income is exempt from tax u/s 11 of the Act since the past several years: b) The penalty u/s 270A as levied by the Ld. AO is without a fair and judicious exercise of discretion, without granting a fair and reasonable opportunity of being heard and is therefore contrary to law and deserves to be deleted; c) There was no occasion to levy penalty at 200% in terms of sub- section (8) of Section 270A of the Act; d) There was neither any under-reporting nor any misreporting of income, the taxes due on the returned income were duly paid and therefore there was no occasion to levy penalty u/s 270A of the Act on the Assessee, e) No penalty should have been levied by the Ld. AO since the Appellant had made bona-fide claims in its return of income in respect of; (i)accumulation at 15% of the unutilized funds (Rs.81,64,360/-) of earlier years; and (ii) Claim of depreciation of Rs.6,77,649/- and none of the facts pertaining to these items were suppressed or misrepresented; f) The very additions made by the Ld. AO are in fact contrary to certain judgements of the Hon'ble Courts and based on these judgements, the Assessee had made bona fide claims of exemption u/s 11 of the Act on which no penalty should have been levied; g) Without prejudice to the above, the entire receipts of the Appellant are exempt u/s 11 of the Act even after the addition of the amount of depreciation, Rs. 6,77,649/- and therefore no penalty u/s 270A should have been levied on the said amount; 3. In the facts and circumstances of the case and in law, it is prayed that, the penalty u/s 270A is contrary to law and it is prayed that the same be deleted.
The appellant craves leave to add, amend, alter, modify or delete all or any of the grounds raised in the appeal
Narottam Morarjee Institute of Shipping AY 2018-19 3. Brief facts of the case are that assessee is a society running an institute of shipping to promote and assist study of shipping business and all of its branches. Assessee receives income from student fee, interest income and donations. It is registered with the Directorate of Income Tax (Exemption), Mumbai u/s.12A vide registration no. INS/1399. It is also registered with Charity Commissioner vide registration no. F-2472 (Mumbai). Assessee filed its return on 11.09.2018, reporting total income at Rs.62,04,580/-.
3.1. Being registered u/s. 12A. assessee claims deduction u/s. 11(1)(a) and u/s. 11(2). Assessee had accumulated Rs.81,64,360/- for the A.Y. 2013-14 for five years, but the same was not utilized till 31.03.2018. Due to non-utilization of this amount set apart u/s 11(2) relating to A.Y. 2013-14, the same was deemed as taxable income under the year under consideration. While offering this amount as taxable income, assessee claimed deduction at the rate of 15 per cent of this amount also u/s 11(1)(a). Being a charitable trust registered u/s 12A of the Act, assessee had a bona fide belief that the addition of non-utilized set apart fund is similar to the other normal income and deduction u/s 11(1)(a) is allowable. For this bona fide belief, it relied on the decision of Hon’ble High Court of Calcutta in the case of CIT vs. Natwarlal Chowdhury Charity Trust [1991] 189 ITR 656 (Cal). Assessee asserted that it itself had offered the whole amount which was not utilized as income during the year. However, it claimed exemption u/s 11(1)(a) at the rate of 15 per cent on the same which the ld. AO disallowed. According to him, it amounts to a double deduction and therefore, whole amount of Rs.81,64,360/- is taxable in the year under consideration. He thus, added the entire amount while making the assessment. In this regard penalty proceedings u/s 270A were initiated for under-reporting of income.
3.2. In the course of assessment proceeding, ld. AO also noted that assessee had claimed depreciation of Rs.6,77,649/-. He also noted that assessee had claimed capital expenditure of Rs.7,35,122/- on account of acquisition of capital assets. In this respect, he observed that depreciation is not allowable u/s 11 of the Act. He thus, concluded that in view of provisions of Section 11(6), depreciation is not allowable and thus, held it to be disallowed. In this regard also, penalty proceedings u/s 270A were initiated for under-reporting of income. Assessment was thus, completed u/s 143(3) with total income assessed at Rs.81,64,360/- which is nothing but unutilized accumulation u/s 11(3).
In the penalty proceedings u/s 270A, ld. AO made a detailed discussion on the issue relating to unutilized amount which was added to the total receipts of the assessee, suo moto in its return, whereupon, it had claimed 15 per cent deduction u/s 11(1)(a) under a bona fide belief. Explanations furnished by the assessee in this regard were declined. Furthermore, ld. AO observed that assessee had under- reported this income which is in consequence of misreporting thereof within the meaning of Section 270A and thus, held that assessee had misreported its income on which penalty equal to 200 per cent of the amount of tax payable on the under-reported income by reason of misreporting of such income is leviable. For the purpose of levying penalty, he computed the tax payable at Rs.6,66,130/- for which no working is given in the penalty order. With this amount, he thus levied a penalty applying the rate of 200 per cent, amounting to Rs.13,32,260.
Narottam Morarjee Institute of Shipping AY 2018-19 4.1. In the penalty order, there is no discussion in respect of disallowance made by ld. AO towards depreciation nor in respect of application of income towards capital expenditure though in the assessment order ld. AO had mentioned about initiation of penalty proceedings u/s 270A while making disallowance for depreciation, holding it as under-reporting of income.
Assessee has worked out the computation of penalty imposed by the ld. AO. Based on the working given by the assessee, it is noted that penalty on disallowance of accumulation at the rate of 15 per cent of the unutilized amount comes to Rs.4,16,260/-. In this regard, 15 per cent of Rs. 81,64,360/- comes to Rs.12,24,654/-. It is this income of Rs.12,24,654 which is alleged to be under-reported on which tax is payable by the assessee. Tax at the rate of 30 per cent plus surcharge at the rate of 10 per cent and education cess at the rate of 3 per cent works out to 33.99 per cent. Thus, applying this percentage on Rs.12,24,654/-, the tax payable comes to Rs.4,16,260/-. Also, ld. AO without making any discussion in respect of amount applied towards capital expenditure, has taken this into account while computing the penalty. Applying the same percentage of tax rate that is, 33.99 per cent on Rs.7,35,122/-, tax payable comes to Rs.2,49,870/-. Thus, the total penalty comes to Rs.6,66,130 (Rs. 4,16,260 + Rs.2,49,870). By applying 200 per cent on this amount treating it as misreporting of income, the penalty finally imposed by the ld. AO in the impugned penalty order is Rs.13,32,260/-.
In the first appeal, Ld. CIT(A) did not accept the submissions made by the assessee and upheld the penalty so imposed by the ld. AO.
Narottam Morarjee Institute of Shipping AY 2018-19 7. We have heard both the parties and perused the material on record including judicial precedents relied upon. Admittedly, factual position is that assessee had duly reported the unutilized amount on the expiry of five years which is deemed to be income as per section 11(3), in the return of income filed by it. Ld. AO has acknowledged this reporting of income by the assessee and thus, there is no suppression of facts to this extent. This has also been reported in Form 10 filed by the assessee at the assessment stage. Case of the assessee is that it had made a claim under a bona fide belief relying on the decision of Hon’ble High Court of Calcutta in the case of Natwarlal Chowdhury Charity Trust (supra.), whereupon exemption at the rate of 15 per cent was claimed even on the unutilized portion which is deemed to be income by applying provisions of Section 11(1)(a). According to the assessee, it is a debatable issue and, therefore, penalty u/s 270A is not imposable.
7.1. Also, assessee had a bona fide belief based on legal position in terms of decision of Hon’ble High Court of Calcutta (supra.) and is covered by the provisions of Section 270A(6)(a). According to the said provisions, under-reported income for the purpose of levying penalty shall not include amount of income in respect of which assessee has offered its explanation and the authority is satisfied that the explanation is bona fide and the assessee had disclosed all the material facts to substantiate the explanation so offered. Assessee also contended that it is not a case of misreporting of income in consequence of under-reporting as none of the criteria mentioned in section 270A(9) are satisfied. Ld. AO in the assessment proceedings had initiated penalty proceedings by treating it as under-reporting of income. However, in the penalty proceedings, he changed his stance to 7.2. We find that on the fact as stated above, treating it as a case of misreporting of income by the Ld. AO in the penalty proceedings though initiation on treating it as under-reporting of income is not tenable as none of the criteria listed in section 270A(9) are met. It is also admitted position that assessee is not in appeal on the addition/disallowance made by the ld. AO towards the unutilized amount u/s 11(3). Assessee has duly discharged its tax liability on the addition/disallowances so made and is contesting only on the penalty so imposed in this regard. We also note that though ld. AO has made discussion in respect of claim of depreciation and capital expenditure of the assessee but no disallowance/addition has been made in that regard while completing the assessment. Also, in the impugned penalty order, there is no whisper in respect of issues relating to depreciation and capital expenditure though while computing the tax payable for the purpose of levying penalty, quantum of capital expenditure has been taken into account.
7.3. It is important to note at this juncture that there is no observation by the ld. AO in the assessment order for disallowance of capital expenditure nor any observation on initiation of penalty proceedings in this regard. What ld. AO has discussed in the assessment order is in respect of depreciation to be disallowed and penalty proceedings to be initiated, but nothing eventually took place. Thus, penalty to the extent of tax payable relating to the capital expenditure claimed by the assessee is not tenable. We also ascribe to the stand of the assessee as to having bona fide belief in view of the decision of Hon’ble High Court of Calcutta (supra.), whereby after
Narottam Morarjee Institute of Shipping AY 2018-19 offering to tax, the unutilized amount of accumulation on its expiry of five years, it claimed deduction at the rate of 15 per cent u/s 11(1)(a) for which all the material facts were on record as disclosed in the return and in Form 10. Assessee has explained its case of bona fide belief though not accepted by the ld. AO nor by ld. CIT(A).
7.4. In the conspectus of the above discussion by taking into consideration the provisions of section 270A(6) and section 270A(9) along with judicial precedents referred above, we hold that the penalty imposed by the ld. AO is not tenable, much less at the rate of 200 per cent. Accordingly, penalty so imposed of Rs.13,32,260/- is deleted. Grounds raised by the assessee in this respect are allowed.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 16 February, 2026 Sd/- Sd/- (Amit Shukla) (Girish Agrawal) Judicial Member Accountant Member Dated: 16 February, 2026 Ankit, Sr.P.S. Copy to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. Guard File 5. CIT BY ORDER,
(Dy./Asstt.Registrar) ITAT, Mumbai