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Facts
The assessee claimed depreciation on an amount of Rs. 3 crores paid as compensation, which was disallowed by the AO. The AO initiated penalty proceedings under Section 270A for misreporting of income.
Held
The Tribunal held that the AO failed to apply his mind and did not specify how the assessee's case fell under Section 270A(9) for misreporting income. The penalty order was deemed not to be a speaking order.
Key Issues
Whether the penalty levied under Section 270A for misreporting of income is sustainable when the AO has not properly applied his mind and specified the relevant sub-section.
Sections Cited
270A, 270
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Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & MS. PADMAVATHY. S
आदेश / O R D E R
PER ABY T. VARKEY, JM:
1. This is an appeal preferred by the assessee against the order of the Learned Commissioner of Income Tax (Appeals)/NFAC, (hereinafter in short "the Ld.CIT(A)”), Delhi, dated 03.07.2025 for the Assessment Year (hereinafter in short "AY”) 2017-18 confirming the penalty of ₹6,82,606/- levied u/s.270 of the Income Tax Act, 1961 (hereinafter in short "the Act”).
Brief facts of the case as discussed from the penalty order of the AO are that the assessee e-filed its return of income for the A.Y. 2017-18 on (AY 2017-18) M/s. AVM Productions :: 2 ::
30.10.2017 admitting loss of Rs.1,62,38,803/-. The case was taken up for scrutiny under CASS and the AO issued statutory notices, In compliance to the notices, the assessee uploaded the details called for from time to time through E-asst proceeding module.
The AO noticed that assessee has claimed depreciation in the relevant year, which issue is permeating from AY 2007-08. The AO noted from the assessment records of earlier A.Y 2007-08, that the assessee had claimed depreciation on Rs 3 crores qua "building block" which the assessee had paid to one Sri M. Balasubramanian (on 27.01.2007) consequent to compromise-deed entered into by the assessee with the said person. The assessee's explanation for making the depreciation claim was that the Sri M. Balasubramanian had filed a writ petition before the Hon'ble Madras High Court objecting to the construction raised by the assessee and obtained stay against the construction. And he withdrew the same consequent to payment of Rs.3 crores after entering into the ibid compromise agreement. So, the assessee's claim was that without payment of the above amount of Rs 3 crores, its construction could not have been completed. The Assessing Officer opined that payment of the above amount didn’t lead to acquisition of any right etc in assessee's favour and hence depreciation on the same was not allowable.
Accordingly, the AO disallowed depreciation of Rs.15 lacs (@5% of Rs. M/s. AVM Productions Crores; since put to use for less than 180 days) claimed by the assessee.
On appeal filed by the assessee, the Ld CIT(A) upheld the order of the AO. On further appeal filed before Tribunal, the Tribunal vide its consolidated order in & 983/Mds/12 dtd05.09.2012 for A.Ys 2007-08 and 2008-09 upheld the order of the Ld CIT(A) on the above issue.
In view of the foregoing, the assessee was asked to furnish the particulars of consequential depreciation claimed in respect of the above addition to building block from A.Y 2007-2008 and onwards. On verification of the particulars filed by the assessee, the AO found that the depreciation claimed by the assessee attributable to the above addition of Rs.3 Cr worked out to Rs.11,04,148/- for A.Y 2017-18. In view of the reasons given by the AO while finalizing scrutiny assessment for A.Y 2007-08, the depreciation claimed of Rs.11,04,148/- attributable to the compensation paid of Rs.3 Cr was disallowed and added to the loss returned by the assessee. Accordingly, penalty proceedings u/s 270A of the Income Tax Act, 1961 was initiated vide notice u/s.270A of Act dated 25.10.2019 for mis-reporting of income and after hearing the assessee’s objection is noted to have imposed penalty of ₹6,82,606/- viz 200% of the amount of tax payable on misreporting income, vide penalty order
5. The Ld.AR, inter-alia, has assailed the action of the Ld.CIT(A) confirming the order of the AO u/s.270A of the Act and pointed out that the AO while levying penalty has not applied his mind and the penalty order doesn’t specify as to which part of sub-section of (9) of sec.270A was attracted in this case to warrant levy of penalty for misreporting its income. And the Ld.AR drew our attention to the penalty order and submitted that the AO has not made out a case against the assessee that assessee had misreported its income. In order to appreciate the aforesaid submissions of the Ld.AR, it would be gainful to reproduce the relevant part of the impugned penalty order of the AO levying penalty which is reproduced as under:
1. Analysis of issues involved Description of issue: The Assessing Officer noticed that the assessee had added an amount of Rs 3 crores qua "building block" alleged to have been paid to Sri M. Balasubramanian on 27.01.2007 consequent to compromise deed entered into by the assessee with the above person. The assessee's explanation offered in support thereof was that the M.Balasubramanian had filed a writ petition before the Hon'ble Madras High Court as he objected to the construction raised by the assessee and obtained stay against the construction. He withdrew the suit consequent to payment of Rs.3 crores and entering into a compromise agreement. So, the assessee's claim was that without payment of the above amount of Rs 3 crores, its construction could not have been raised. The Assessing Officer opined that payment of the above amount had not led to acquisition of any right etc. in assessee's favour and hence depreciation on the same was not allowable. Accordingly, the assessing officer disallowed depreciation of Rs.15 lacs (@5% of Rs.3 Crores; put to use for less than 180 days) claimed by the assessee. On appeal filed by the assessee, the CIT(A) upheld the order of the assessing officer. On further appeal filed before ITAT, the Hon'ble ITAT vide its consolidated order in & 983/Mds/12 dtd05.09.2012 for A.Ys 2007-08 and 2008-09 upheld the order of the CIT(A) on the above issue In view of the foregoing, the assessee was asked to furnish the particulars of consequential depreciation
:: 5 :: claimed in respect of the above addition to building block from A.Y 2007-2008 and onwards. On verification of the particulars filed by the assessee, it is found that the depreciation claimed by the assessee attributable to the above addition of Rs.3 Cr worked out to Rs. 11,04,148/-for A.Y 2017-18 .In view of the reasons detailed above by the assessing officer while finalizing scrutiny assessment for A.Y 2007-08, the depreciation claimed of Rs.11,04,148/- attributable to the compensation paid of Rs.3 Cr is disallowed and added to the loss returned by the assessee. The assessee has filed appeal before Ld.CIT(A) against the assessment order.
The Ld. CIT(A) stated that the appellant in its grounds of appeal has assailed the AO in following the Assessment Order for AY 2007-08, AY 2008-2009 AY 2009-2010, AY 2010-2011 and AY 2011-2012 and AY 2013-14 which are contested in appeal by the Appellant and in concluding that the payment of compensation had not resulted in acquisition of any right to the Appellant. The appellant stated that the AO ought to have considered the fact payment of Compensation resulted in Capital Expenditure of enduring benefit, in the form of a building that was constructed by the Appellant, which has been capitalized along with cost of the building. The appellant further submitted that the AO has erred in in not considering the fact that the delayed interest on remittance of TDS is not a tax. The facts of the case are analyzed and the submission made by the appellant is examined. Since the issue under consideration has been examined by my preceding CIT (A) and that the Hon'ble ITAT has upheld the order of the AO and the CIT(A) and the Tribunal the last fact-finding authority has upheld the findings of the AO. And that the appeal of the appellant is in Hon'ble High Court and is pending adjudication. Therefore, the order of the ITAT is binding unless overturned by the Hon'ble HC. And as the facts emerges that the appeal is pending. Therefore, following the legacy of the case, the action of the AO is upheld and the grounds of appeal are dismissed.
4. Synopsis of all submissions of the assessee relating to the issue indicating the dates of submission: A show cause notice u/s. 274 read with section 270A was issued to the assessee on 25.10.2019 asking the assessee to show cause as to why an order imposing penalty u/s. 270A should not be passed for mis- reporting of income Another show cause notice u/s. 274 r.w.s 270A was issued to the assessee on 13.02.2024 giving one more opportunity to present his case. In response to the same, the assessee has submitted the reply.
Synopsis of submissions made during personal hearing through VC, if any: Assessee has not opted for personal hearing.
6. Conclusion drawn for Imposition of Penalty:
The assessment was completed u/s. 143(3) on 22.10.2019 determined the loss.
During the course of penalty proceedings a show cause notice was issued on 13/02/2024
In response to the same the assessee has submitted that a) The issue of depreciation on the compensation capitalized by the Assessee is pending in the Madras High court and it has claimed the, as this is a pending issue and the issue is also covered in earlier years cannot be considered as under Reported income. b) Further it is submitted that the issue is pending and the claim is made on bona fide belief that the issue is pending in Madras high court by no stretch of imagination be considered as Under reporting of Income. c) Further the payment of compensation is not disputed, assessee treated the (AY 2017-18) M/s. AVM Productions
:: 6 :: compensation as capital expenditure and claimed depreciation, as without the payment of compensation the Building block in respect of depreciation claimed on Compensation paid towards easementary rights amounting to Rs.3,00,00,000/- capitalized with Buildings on the grounds that the said payment did not result in acquisition of any asset which is contested in appeal by the Assessee.
It is further submitted that the depreciation issue is not also misreporting of income and further that the Assessee had furnished all details of the transaction relating to disallowance of depreciation which is an earlier issue and this cannot be concluded as misreporting or under reporting and no limb of section 270A can be attracted and thus Notice of penalty be dropped.
The submission made by assessee is considered, however, it is not acceptable as the Ld. CIT(A) has confirmed the action of AO for denial of claim of depreciation. Therefore, addition which is confirmed by Ld. CIT(A), it is held that the assessee had mis- reporting the income and hence liable for imposition of penalty u/s.270A, which is accordingly being imposed.
In this context, relevant extract of Section 270A is reproduced as under:
"270A. Penalty for under reporting misreporting of income, etc.-
(1) If the Assessing Officer or the Commissioner (Appeals) or Principal Commissioner or Commissioner may during the course of any proceeding under this act, direct that any person who has under reported his income shall be liable to pay a penalty in addition to tax, if any, on the under reported income.
(2) A person shall be considered to have under reported his income, if-
(a) the income assessed is greater than the income determined in the return processed under clause(a) of sub section (1) of section 143.
(b) the income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished
(c) the income reassessed is greater than the income assessed or reassessed immediately before such assessment.
(3) The amount of under reported income shall be-
(i) in a case where income has been assessed for the first time- a) if return has been furnished, the difference between the amount of income assessed and the amount of income determined under clause (a) of sub-section(1) of section 143.
Therefore, it is clear that the assessee has mis-reporting the particulars of income and in my opinion, it is a fit case for imposition of penalty and accordingly. Hence, for the reasons discussed above, I am satisfied that the assessee has without any reasonable cause mis-reporting the particulars in respect of income amounting to Rs. 11,04,541/- and had rendered himself liable for penalty u/s 270A of the Act.
A reading of the penalty order u/s.270A of the Act, would reveal that the AO has merely reproduced sub-section (1), (2) & (3), wherein, Legislature has newly inserted Section 270A of the Act w.e.f. 01.04.2017.
Section 270A provides for levy of penalty in case of underreporting and misreporting of income. Sub-section (1) provides that the AO or authorities specified therein, during the course of any proceedings under the Act may levy penalty, if a person has under-reported income. Sub- section (2) provides that a person shall be considered to have under- reported his income if the income assessed/reassessed falls in one of the seven instances given therein at clause (a) to (g). The amount of under- reported income shall be calculated in different scenarios as discussed in sub-section (3) of Section 270A of the Act. It can be noticed from the penalty order that the AO after reproducing the aforesaid sections of section 270A of the Act, has not discussed about the provisions which spells out instances where a person’s case may attract misreporting of income, which infraction/dereliction/charge, he has alleged against the assessee; and then, the AO thereafter, abruptly concludes “……therefore, it is clear, that assessee has misreporting the particulars of income and in my opinion, it is a fit case for imposition of penalty and accordingly.
Hence for the reason discussed above, I am satisfied that the assessee has without any reasonable cause misreporting the particulars in respect of income amounting to ₹11,04,541/- and rendered himself for penalty (AY 2017-18) M/s. AVM Productions u/s.270A of the Act.” Accordingly, he held assessee to be an assessee in default u/s.270A of the Act for misreporting its income. We don’t countenance the action of the AO levying penalty for the simple reason that there was total failure on part of AO to apply his mind to hold assessee to be an assessee in default u/s.270A of the Act for misreporting its income. Merely reproducing sub-section (1) to (3) of section 270A of the Act, which is relating to underreporting income, the AO is noted to have imposed penalty @200% for ‘underreporting in consequence of misreporting income’, which is a distinct lapse/infraction spelled out in sub-section (8) & (9) of Section 270A of the Act. It would be gainful to reproduce sub-section (8) & (9) of Section 270A of the Act, which reads as under:
(8) Notwithstanding anything contained in sub-section (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 under-reported income.
(9) The cases of misreporting of income referred to in sub-section (8) shall be the following, namely:-
(a) misrepresentation or suppression of facts; (b) failure to record investments in the books of account; (c) claim of expenditure not substantiated by any evidence; (d) recording of any false entry in the books of account; (e) failure to record any receipt in books of account having a bearing on total income; and (f) failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.
As noted, the AO has not given any reason as to how the assesee’s case, its alleged ‘infraction/lapse/charge’ falls in the ken of sub-section (9) of section 270A of the Act to warrant imposition of penalty for ‘underreporting in consequence of misreporting income’. Non-application of mind is discernable from perusal of the penalty order itself, since there is no whisper as to which limb of sec.270A(9) is attracted; and how the ingredient of sub-section (9) of Sec.270A has been satisfied. We find that there is failure on the part of the AO to specify which part of sub-section (9) of section 270A of the Act is attracted in this case. Therefore, penalty levied by the AO can’t be sustained for the reason that the order is not a speaking order. The AO has made more or less a computerized approach while levying penalty, which action cannot be countenanced. Hence, we don’t countenance the action of the AO holding assessee to be an assessee in default u/s.270A of the Act for misreporting its income.
In this context, it has to be borne in mind that ‘reason’ is the heart- beat of every judgment, without the same, it become life less (refer Ram Phal v. State of Haryana & Ors reported in [2009] (3) SCC 258). The AO’s action of levy of penalty without giving any reason is arbitrary exercise of power and abuse of process of law. Application of mind is demonstrated by disclosure of mind, and disclosure of mind is demonstrated by recording reasons (refer Maya Devi v. Raj Kumari Batra (AY 2017-18) M/s. AVM Productions reported in (2010) 9 SCC 486, failure to give reasons amounts to denial of justice (refer Mangalore Ganesh Beedi Works v. CIT AIR 2005 SC 1308.
Merely reproducing the facts of the case as stated in assessment order, or appellete order, will not suffice. The AO is duty bound to speak through his order, how the assessee’s act/omission would fall in one of the limb of sub-clause (a) to (f) of sub-section (9) of Section 270A of the Act.
Therefore, in the light of the aforesaid discussion, we find that penalty levied by the AO suffers from the infirmity of non-application of mind and therefore, the impugned action of Ld CIT(A) can’t be sustained in the eyes of law and therefore, it is set-aside and consequently, we direct the AO to delete penalty levied u/s.270A of the Act.
In the result, appeal filed by the assessee is allowed. Order pronounced on the 04th day of March, 2026, in Chennai.