KAG INDIA PRIVATE LIMITED,CHENNAI vs. PCIT CENTRAL CIRCLE -2, CHENNAI

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.

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.”

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.

“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

:-7-: ITA. No:1366/Chny/2024

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.

want us to interfere with the impugned order of the ld.PCIT u/s.263

of the Act.

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.

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.

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.

चे�ई/Chennai, �दनांक/Dated, the 11th December, 2024 JPV

:-16-: ITA. No:1366/Chny/2024

आदेशकी�ितिलिपअ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. �(थ�/Respondent 3.आयकर आयु./CIT – Chennai 4. िवभागीय �ितिनिध/DR 5. गाड= फाईल/GF