Loading judgment…
Facts
The assessee company filed its return of income. A search was conducted, and subsequently, a notice under section 153A was issued, leading to the assessee filing a revised return. The Assessing Officer (AO) made additions to the income and initiated penalty proceedings under section 270A for underreporting of income. The Principal Commissioner of Income Tax (PCIT) initiated revision proceedings under section 263, holding that the AO erred in not initiating penalty for the entire amount of underreporting due to misreporting.
Held
The Tribunal held that for penalty proceedings under section 270A to be initiated, the assessee must first be considered to have under-reported income as per sub-section (2) of section 270A. In this case, since no 'Intimation' was issued under section 143(1)(a), the condition for under-reporting under sub-section (2)(a) was not met. Consequently, the invocation of sub-section (9) for misreporting was not applicable, and the direction by the PCIT was legally untenable.
Key Issues
Whether the Principal Commissioner of Income Tax had the jurisdiction to direct the Assessing Officer to initiate penalty proceedings under Section 270A(9)(e) when the basic condition of 'under-reporting of income' as per Section 270A(2) was not met.
Sections Cited
139, 132, 153A, 270A, 263, 271(1), 143(3), 115JB, 115JC, 143(1)(a), 270A(9)(e), 270A(8), 270A(2), 148, 92D
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI ABY T VARKEY, HON’BLE & SHRI S.R.RAGHUNATHA, HON’BLE
PER S. R. RAGHUNATHA, ACCOUNTANT MEMBER:
This is an appeal preferred by the assessee against the order of the Learned Principal Commissioner of Income Tax, (hereinafter in short "the Ld.PCIT”), Chennai-2, dated 25.03.2024 for the Assessment Year (hereinafter in short "AY”) 2020-21.
The brief facts are that the assessee company was incorporated in the year 2009 and is in the business of :-2-: ITA. No:1366/Chny/2024 manufacturing tiles, sanitary wares, taps and bath fittings. The assessee filed its original return of income (RoI) u/s.139 of the Income Tax Act, 1961 (hereinafter in short ‘the Act’) admitting an income of Rs.9,85,94,880/-. A search u/s.132 of the Act was conducted on 26.02.2021 in the assessee’s group and consequently, the case was centralized in Central Circle-2(1), Chennai.
Consequently, notice u/s.153A of the Act was issued on 03.09.2021 and pursuant to that assessee filed its return of income (RoI) of Rs.17,39,87,610/- on 30.11.2021. The AO made an addition of Rs.32,25,627/- by alleging that there was a difference between the undisclosed income quantified and that admitted in the return filed in response to the notice u/s.153A of the Act [22% of Gross Profit addition @ 23% of unaccounted sales of Rs.32,25,62,705/- which works out to Rs.7,41,89,422/- led to the addition of Rs.32,25,627/-] and passed the assessment order on 25.03.2022. Thereafter, the AO initiated penalty proceedings u/s.270A of the Act, alleging underreporting of income to the tune of Rs.32,25,627/- on account of undisclosed sales. Thereafter, the Ld.CIT(A) issued show cause notice to the assessee on 28.02.2024 conveying his desire to revise the assessment order dated 25.03.2022. According to the Ld.PCIT, while completing the assessment, the AO had initiated penalty u/s.270A of the Act for underreporting of income of Rs.32,25,627/-
:-3-: ITA. No:1366/Chny/2024 which addition was made in the assessment order passed pursuant to assessment passed u/s.153A of the Act. According to him, sec.270A(9)(e) of the Act provides penalty for misreporting of income which is warranted in the present case, since there was “failure to record any receipts in the books of accounts of the assessee having bearing on total income”. Hence, according to the Ld.PCIT, since the assessee in its original RoI returned only Rs.9,85,84,880/-, whereas, after search it filed RoI (pursuant to notice u/s153A of the Act), by declaring Rs.17,39,87,310/-, it tantamount to admitting Rs.7,09,63,795/- as its undisclosed income and failed to initiate penalty u/s. 270A of the Act for under-reporting of income. The Assessing Officer while passing the assessment order dated 25.03.2022 had only initiated penalty u/s. 270A of the Act for underreporting of income to the tune of Rs.32,25,627/- (addition made by Assessing Officer) in consequence of misreporting of income of Rs.7,41,89,422/- i.e. undisclosed income admitted by assessee and additions made by Assessing Officer in the assessment order. According to the Ld.PCIT, omission on the part of the AO to initiate penalty u/s.270A of the Act for underreporting of income in consequence of misreporting of income of Rs.7,41,89,422/- vitiates the assessment order passed by the AO u/s.153A of the Act thereby making assessment order, erroneous as well as prejudiced to the :-4-: ITA. No:1366/Chny/2024 interest of the Revenue and therefore he justified his action to invoke the jurisdiction u/s.263 of the Act, by citing the decision of the Hon’ble Madras High Court in the case of CIT v. Chennai Metro Rail Ltd., reported in [2018] 92 taxmann.com 329 (Madras), wherein, the Hon’ble Madras High Court observed that the Ld.PCIT has power to revise the assessment order in view of Sec.271(1) r.w.s.263 of the Act and observed as under:
"In view of Section 271(1) read with Section 263 of the Act, the Principal Commissioner might pass such order as the circumstances of the case might justify, which could include an order enhancing or modifying the assessment or cancelling the assessment or directing a fresh assessment. Directing fresh assessment would, in our view, include assessment of penalty. It cannot, therefore, be said that the Principal Commissioner had no jurisdiction to pass such order.”
According to the Ld.PCIT, even though in the case of CIT v.
Chennai Metro Rail Ltd. (supra), the conclusion of the Hon’ble High Court was in favour of the assessee since there was a perverse finding made by the Ld.PCIT in that case, to the extent that Assessing Officer in the assessment order has made a finding that there was concealment of income, whereas there was no such finding of fact made by Assessing Officer in the assessment order.
Therefore, the Hon’ble High Court held that the Ld.PCIT had distorted the order of assessment and held it to be perverse and therefore, according to the Ld.PCIT, in the peculiar facts of the case
:-5-: ITA. No:1366/Chny/2024 of CIT v. Chennai Metro Rail Ltd. (supra), the Hon’ble Madras High Court gave relief to the assessee. Therefore, according to the Ld.PCIT, in the present case, he has jurisdiction to direct initiation of penaltyu/s.270A of the Act (misreporting of income of Rs.7,41,89,422/-). Further, the Ld.PCIT noted that in this case, the concealment was well established by the search team consequent to which the assessee had admitted the suppressed sales in the return of income, by returning an income of Rs.17.39 Crores. whereas, in the original Return of income it was offered only Rs.9.85 Crores as its income. According to the Ld.PCIT, since the said disclosure was found short of what the actual suppression was, further additions were made by the AO in the assessment order to the tune of Rs.32,25,627/-. Moreover, according to the Ld.PCIT, in the absence of search, the issue of suppression of sales would not have been brought to light and the mere admission of the assessee of the unreported sales unearthed during the search in the return of income doesn’t absolve the assessee from the rigors of penal provisions. And also in this, the Ld.PCIT pointed out that in the assessment order the AO has made a clear finding that there was under reporting of income on account of undisclosed sales. Hence, according to the Ld.PCIT, the said case laws relied on by the :-6-: ITA. No:1366/Chny/2024 assessee are distinguishable and not applicable to the facts and circumstances of the instant case.
Thereafter, the Ld.PCIT held as under:
“9.3 Section 270A(9)(e) includes (e) failure to record any receipt in books of account having a bearing on total income, Hence, additions made as well as the income admitted in the return of income u/s. 153A on account of unaccounted sales subsequent to search findings in the order squarely attract penalty as per the provisions of section 270A(9)(e). It is not that additions were made on estimated basis but only adopting GP on the undisclosed sales quantified during the course of search which has been admitted by the assessee in its return of income. Hence the assessing officer ought to have initiated penalty for underreporting consequent to misreporting for the entire undisclosed income of Rs.7,41,89,422/-. Instead erred in initiating penalty u/s. 270A for underreporting of income of Rs.32,25,627/-. To that extent the order is erroneous and prejudicial to the interest of revenue.
9.5 In the case of Malabar Industrial Co. Ltd. Vs. CIT [(2000) 2 SCC 718: (2000) 243 ITR 83 (SC)], the Hon'ble Supreme Court held that AO passing an order without application of mind renders the order erroneous within the meaning of Section 263 of the IT Act. In the instant case also, the Assessing Officer has passed the order without invoking the applicable penalty. This is not an instance of AO having taken one of the two possible views, but one of a patent error in applying the law or an order passed without application of mind. DERA
On a careful consideration of the facts on record, assessee's submissions, relevant provisions of the Income tax Act and the judicial precedent, discussed in paragraph Supra, it is held that the assessment order u/s 143(3) r.w.s. 153A of the Act dated on 25/03/2022 passed by the assessing officer for the AY 2020-21 is erroneous and prejudicial to the interest of the revenue to that extent that the order had omitted initiating of penalty u/s 270A(9)(e) on the sum of Rs.7,41,89,422/-, Accordingly, in exercise of powers conferred on me u/s.263(1) of the Act, do hereby modify the assessment order passed u/s 143(3) r.w.s. 153A of the Act on 25.03.2022 with a direction to the assessing officer to invoke the applicable penalty provisions of section 270A(9)(e) on the entire sum of Rs.7,41,89,422/- for the AY 2020-21.
:-7-: ITA. No:1366/Chny/2024
The Ld.AR cited the decision in the case of CIT v. CRK Swamy reported in [2002] 254 ITR 158 (Mad.) and he also cited the decision of the Hon’ble Rajasthan High Court in the case of CIT v.Keshrimal Parasmal reported in [1986] 157 ITR 484 (Raj.) to assail the impugned action of the Ld.PCIT invoking his revisional jurisdiction u/s.263 of the Act to interfere with the initiation of penalty by the AO in the assessment order.
Per contra, the ld.DR supporting the action of the ld.PCIT, doesn’t want us to interfere with the impugned order of the ld.PCIT u/s.263 of the Act.
We have heard both the parties and perused the records. The facts are not repeated for the sake of brievity. The only issue need to be examined is whether the Ld.PCIT’s action of invoking section 263 of the Act and interfering with the Assessing Officer’s order passed dated 25.03.2022 by modifying the assessment order with a direction to Assessing Officer to “invoke the applicable penalty provisions u/s.270A(9)(e) of the Act on the entire sum of Rs.7,41,89,422/- for the assessment year 2021-22”. We need to first ascertain whether the direction given by the ld.PCIT is legally
:-8-: ITA. No:1366/Chny/2024 valid or not. For doing so, it would be gainful to reproduce section 270A of the Act, which reads as under:
270A. Penalty for under-reporting and misreporting of income.
(1)The Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner may, during the course of any proceedings 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 or where return has been furnished for the first time under section 148;
(c)the income reassessed is greater than the income assessed or reassessed immediately before such reassessment;
(d)the amount of deemed total income assessed or reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income determined in the return processed under clause (a) of sub-section (1) of section 143;
(e)the amount of deemed total income assessed as per the provisions of section 115JB or section 115JC is greater than the maximum amount not chargeable to tax, where no return of income has been furnished or where return has been furnished for the first time under section 148;
(f)the amount of deemed total income reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income assessed or reassessed immediately before such reassessment;
(g)the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.
:-9-: ITA. No:1366/Chny/2024 (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;
(b)in a case where no return of income has been furnished or where return has been furnished for the first time under section 148,—
(A)the amount of income assessed, in the case of a company, firm or local authority; and (B)the difference between the amount of income assessed and the maximum amount not chargeable to tax, in a case not covered in item (A);
(ii)in any other case, the difference between the amount of income reassessed or recomputed and the amount of income assessed, reassessed or recomputed in a preceding order:
Provided that where under-reported income arises out of determination of deemed total income in accordance with the provisions of section 115JB or section 115JC, the amount of total under-reported income shall be determined in accordance with the following formula— ………….. …………….
(4)Subject to the provisions of sub-section (6), where the source of any receipt, deposit or investment in any assessment year is claimed to be an amount added to income or deducted while computing loss, as the case may be, in the assessment of such person in any year prior to the assessment year in which such receipt, deposit or investment appears (hereinafter referred to as "preceding year") and no penalty was levied for such preceding year, then, the under-reported income shall include such amount as is sufficient to cover such receipt, deposit or investment.
(5)The amount referred to in sub-section (4) shall be deemed to be amount of income under-reported for the preceding year in the following order—
:-10-: ITA. No:1366/Chny/2024
(a)the preceding year immediately before the year in which the receipt, deposit or investment appears, being the first preceding year; and (b)where the amount added or deducted in the first preceding year is not sufficient to cover the receipt, deposit or investment, the year immediately preceding the first preceding year and so on.
(6)The under-reported income, for the purposes of this section, shall not include the following, namely:—
(a)the amount of income in respect of which the assessee offers an explanation and the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered;
(b)the amount of under-reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, but the method employed is such that the income cannot properly be deduced therefrom;
(c)the amount of under-reported income determined on the basis of an estimate, if the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue, has included such amount in the computation of his income and has disclosed all the facts material to the addition or disallowance;
(d)the amount of under-reported income represented by any addition made in conformity with the arm's length price determined by the Transfer Pricing Officer, where the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X, and, disclosed all the material facts relating to the transaction; and (e)the amount of undisclosed income referred to in section 271AAB.
(7)The penalty referred to in sub-section (1) shall be a sum equal to fifty per cent of the amount of tax payable on under-reported income.
:-11-: ITA. No:1366/Chny/2024
(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.
(10)The tax payable in respect of the under-reported income shall be—
(a)where no return of income has been furnished or where return has been furnished for the first time under section 148 and the income has been assessed for the first time, the amount of tax calculated on the under-reported income as increased by the maximum amount not chargeable to tax as if it were the total income;
(b)where the total income determined under clause (a) of sub- section (1) of section 143 or assessed, reassessed or recomputed in a preceding order is a loss, the amount of tax calculated on the under-reported income as if it were the total income;
(c)in any other case, determined in accordance with the formula— (XY) where,
X = the amount of tax calculated on the under-reported income as increased by the total income determined under clause (a) of sub-section (1) of section 143 or total income assessed,
:-12-: ITA. No:1366/Chny/2024 reassessed or recomputed in a preceding order as if it were the total income; and Y = the amount of tax calculated on the total income determined under clause (a) of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order.
(11)No addition or disallowance of an amount shall form the basis for imposition of penalty, if such addition or disallowance has formed the basis of imposition of penalty in the case of the person for the same or any other assessment year.
(12)The penalty referred to in sub-section (1) shall be imposed, by an order in writing, by the Assessing Officer, the Commissioner (Appeals), the Commissioner or the Principal Commissioner, as the case may be.
A bare reading of section 270A (supra) would reveal that there can be penalty levied for two lapses/faults:
(i) under-reporting income for which assessee shall be levied 50% of the amount of tax payable on the under-reported income (ii) for under-reporting income in consequence to mis- reporting for which penalty leviable shall be leviable @200% of the amount of tax payable on the under- reported income.
As stated (supra) here in this case, the Ld.PCIT has directed modification of the assessment order dated 25.03.2022 with a direction to Assessing Officer“to invoke the applicable penalty provisions u/s.270A(9)(e) of the Act on the entire sum of Rs.7,41,89,422/- for the assessment year 2021-22”. In other
:-13-: ITA. No:1366/Chny/2024 words, the Assessing Officer has been directed to initiate penalty u/s.270A(9)(e) of the Act, which enacts cases of mis-reporting of income of referred to in section 270A(8) of the Act inter alia for failure to record any receipt in books of accounts having a bearing on total income. Such an impugned action of the ld.PCIT has been challenged as not tenable in the eyes of law. A bare reading of section 270A of the Act would reveal that unless a person is considered to have under-reported his income as contemplated by sub-section (2) of section 270A, he cannot be found to have attracted the penalty u/s. 270A of the Act as envisaged for “under- reporting of income in consequence of mis-reporting”. Therefore, first of all we have to see whether the assessee’s case as narrated by the Ld.PCIT would fall in the ken of sub-section (2) of section 270A of the Act. For convenience again sub-section (2) is reproduced:-
“270A(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 or where return has been furnished for the first time under section 148;
(c)the income reassessed is greater than the income assessed or reassessed immediately before such reassessment;
(d)the amount of deemed total income assessed or reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater
:-14-: ITA. No:1366/Chny/2024 than the deemed total income determined in the return processed under clause (a) of sub-section (1) of section 143;
(e)the amount of deemed total income assessed as per the provisions of section 115JB or section 115JC is greater than the maximum amount not chargeable to tax, where no return of income has been furnished or where return has been furnished for the first time under section 148;
(f)the amount of deemed total income reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income assessed or reassessed immediately before such reassessment;
(g)the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.” Having considered the facts, in this case, it is undisputed that assessee’s case would not fall in any of the sub clause (b) to (g) of sub-section (2) of Section 270A of the Act, and the only clause which remains is clause (a) of section 270A(2), which is that (a)a person shall be considered to have under-reported his income, assessed is less than income determined in the return processed u/s. 143(1)(a) of the Act.
In the present case on hand, it is undisputed that there has been no ‘Intimation’ issued by the revenue u/s.143(1)(a) of the Act.
Therefore, it can be safely presumed that the assessee cannot be considered to have under-reported his income within the meaning of sub-section(2) of section 270A of the Act. In that event, unless assessee’s case falls in the ken of sub-section 2, the invocation of sub-section (9) of section 270A does not arise. Moreover, in this case as noted (supra), the machinery provisions to levy penalty u/s. :-15-: ITA. No:1366/Chny/2024 270A of the Act also fails because, the penalty is computed @50% of the amount of tax payable on the under-reported income in consequence to mis-reporting of income or @200%of the amount of tax payable on the under-reported income in consequence to mis- reporting of income. So, without computing “under-reporting income” as per sub-section (2) of section 270A of the Act, machinery provisions also fails. It is a trite law that the penalty provisions must be construed strictly. Therefore, the direction given by the Ld.PCIT modifying the assessment order with a direction to Assessing Officer to invoke the applicable penalty provisions u/s. 270A(9)(e) of the Act on the entire sum of Rs.7,41,89,422/- for the assessment year 2021-22 vide impugned order is legally untenable in the peculiar facts and circumstances of the case and hence the same is interdicted and we set aside the impugned direction and therefore, the impugned action is held to be bad in law.