AAWAGAMAN MERCANTILE LLP ,MUMBAI vs. INCOME TAX OFFICER, WARD, 1(1), KOLKATA

The solitary grievance of the assessee, in the present appeal, is against the levy of penalty under section 270 A of the Act.

The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a Limited Liability Partnership firm and is engaged in the business of providing temporary loans and hundi business. For the year under consideration, the assessee filed its return of income on 21/07/2018, declaring a total income of INR 3,09,21,920. Subsequently, the assessee filed a revised return of income on 26/02/2019 declaring the same income. The return filed by the assessee was selected for complete scrutiny through CASS with the issue of verification being “Short Term Capital Gains under section 111A of the Act and Refund Claim”. Accordingly, statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, the assessee was asked to submit the details of short-term capital gain and long-term capital gains shown by the assessee in the income tax return. In response, the assessee filed the computation statement wherein the assessee itself accepted the mistake in the computation of short-term capital gain and disallowance of the Securities Transaction Tax (“STT”). The assessee submitted that an amount of INR 6,35,357 was shown as short-term capital gain and tax was calculated @15% instead of the actual tax calculation of @30% being the said short-term capital gains arrived on account of the sale of liquid bonds. The assessee further admitted that by oversight it had not added the STT paid of INR 1,84,773, which was already considered in arriving at the net profit as per the profit and loss account. Accordingly, the assessee submitted the revised computation of income wherein the tax liability increased. Since the assessee admitted it was a mistake, the Assessing Officer (“AO”) completed the assessment by considering the above modification and the total income of the assessee was assessed at INR 3,11,06,693.

In the meanwhile, penalty proceedings under section 270A were initiated and notice under section 274 read with section 270A of the Act was issued on 12/02/2021 for under-reported income which is in consequence of misreporting. In response to the aforesaid notice, the assessee filed its reply on 08/03/2021 submitting that the assessee while preparing the first submission during the assessment proceedings realised the error, which was not pointed out to it during the assessment and filed the revised computation of income. Thus, the assessee submitted that there was no malafide intention to evade the tax. The assessee also submitted that in the earlier as well as the subsequent year, the STT was duly disallowed by the assessee while filing its return of income. Therefore, it was submitted that the error was merely accidental and not intentional. As regards the computation of tax on the short- term capital gains earned by the assessee, it was submitted that in past the assessee never made investments in mutual fund units and all the investments were made in equity shares where STT is paid. Since investment in liquid bonds was not a regular transaction, therefore due to oversight, the same was treated under the STT paid transaction and tax was not offered @30% to the bonafide mistake.

The AO, vide order dated 28/03/2022, disagreed with the submissions of the assessee and held that the assessee has under-reported its income, which is in consequence of misreporting of income under section 270A of the Act. Accordingly, the AO levied a penalty of INR 3,47,776 under section 270A of the Act.

The learned CIT(A), vide impugned order, dismissed the appeal filed by the assessee and upheld the penalty levied under section 270A of the Act. Being aggrieved, the assessee is in appeal before us.

We have considered the submissions of both sides and perused the material available on record. From the perusal of the penalty order dated 28/03/2022 passed under section 270A of the Act, it is evident that the penalty was levied for under-reported income which is in consequence of misreporting as the assessee failed to disallow the STT paid and offered the short-term capital gains to tax @15% instead of @30% being the short-term capital gains arrived on sale of liquid bonds. As per the assessee, both mistakes were bonafide mistakes, which were not pointed out by the Revenue during the assessment proceedings, and the assessee, while filing its first submission in response to the statutory notices issued under section 142(1) of the Act, suo motu realised its mistake and corrected the error by filing the revised computation of income. As regards the disallowance of STT paid during the year, we find from the computation of income for the preceding assessment year, i.e. 2017-18, which forms part of the paper book on page 75-77, and subsequent assessment year, i.e. 2019-20, which forms part of the paper book from pages 78-80, that the assessee disallowed the STT paid. As regards the computation of tax on the short-term capital gains earned by the assessee @15%, it is the plea of the assessee that due to oversight the short-term capital gains were grouped under the short-term capital gains earned from the equity shares and therefore the tax was computed @15% instead of 30%. Therefore, as per the assessee, the aforesaid mistakes occurred due to oversight and there was no malafide intention on the part of the assessee to evade any tax.

Apart from claiming that the aforesaid mistakes were due to bonafide oversight on the part of the assessee, it was submitted that neither in the notice issued under section 274 read with section 270A of the Act nor in the penalty order passed under section 270A of the Act, the AO has specified the specific limb of section 270A(9) under which the assessee has misreported its income. Before proceeding further, it is pertinent to note the relevant provisions of section 270A of the Act, which reads as follows: -

Therefore, from a careful perusal of the provisions of section 270A(9) of the Act, it is evident that section 270A(9) of the Act lays down the circumstances under which it can be held that under-reported income is in consequence of misreporting thereof. In the present case, it is undisputed that the AO has alleged that the assessee has under-reported its income which is in consequence of misreporting of income under section 270A of the Act. However, it is the plea of the assessee that the AO has not specified the specific limb of section 270A(9) under which the assessee has misreported its income.

We find that while deciding a similar issue in favour of the taxpayer, the coordinate bench of the Tribunal in M/s Allied Photographics India Ltd. v/s NFAC, in ITA No. 3540/Mum./2023, vide its order dated 30/04/2024, held that while passing the penalty order under section 270A(1) read with section 270A(8) of the Act, the AO is required to specify the specific limb of section 270A(9) of the Act under which the assessee has misreported its income leading to under-reporting of income. The relevant findings of the coordinate bench, in the aforesaid decision, are reproduced as follows: –

Since, in the present case, from the perusal of the penalty order passed under section 270A of the Act, it is discernible that the AO has failed to specify the specific limb of section 270A(9) of the Act under which the assessee was held to have under-reported income in consequence of misreporting of income, respectfully following the aforesaid decision of the coordinate bench of the Tribunal, we are of the considered view that the penalty levied under section 270A of the Act is unsustainable and therefore is deleted. Accordingly, the impugned order is set aside and grounds raised by the assessee challenging the levy of penalty under section 270A of the Act are allowed.

In the result, the appeal by the assessee is allowed. Order pronounced in the open Court on 09/12/2024