M/S ENRICE ENTERPRISES PVT. LTD,CHENNAI vs. DCIT,CENTRAL CIRCLE-3(4), CHENNAI

आदेश / O R D E R

PER MANJUNATHA. G, AM:

These two appeals filed by the assessee are directed against

separate, but identical orders of the Commissioner of Income Tax

(Appeals)-20, Chennai, dated 17.08.2023 and pertains to assessment

years 2017-18 & 2018-19. Since, facts are identical and issues are

common, for the sake of convenience, these appeals were heard together

and are being disposed off, by this consolidated order.

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for both the assessment years. Therefore, for the sake of brevity,

grounds of appeal filed for the AY 2017-18, are re-produced as under:

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as a consequence of misreporting" are two different concepts with clear boundaries and each operate under strict definitions and do not overlap each other and cannot exist simultaneously. While sub section (2) to (6) of 270(A) deals with "under reporting", sub section (9) of section 270(A) deals with "under reporting as a consequence of misreporting" and the same cannot be used interchangeably.

10.The learned CIT(A) ought to have seen that the discretion to impose penalty must be exercised judicially. The learned CIT(A) failed to see that addition made in the assessment order is on ad hoc basis, based on estimated disallowances of portion of marketing expense and based on surrender of income not backed by any incriminating material and would therefore not attract "under reporting as a consequence of misreporting" warranting levy of penalty under section (9) of section 2 70 (A).

11.The learned CIT(A) failed to see that in the instant case addition is made by the assessing officer merely based on income surrendered by the appellant and not based on any incriminating material warranting levy of penalty. Neither the appellant nor the investigation team had any evidence as to the quantum of inflated expenditure year wise.

For these and other grounds that may be rendered at the time of hearing it is most humbly prayed that the Hon'ble Tribunal may be pleased to allow the appellants appeal and thus render justice.

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Enterprises Pvt. Ltd., is engaged in the business of manufacture and sale

of Indian Made Foreign Liquor (IMFL) and it is one of the prime suppliers

to M/s.Tamilnadu State Marketing Corporation Ltd (TASMAC). A search

and seizure operation u/s.132 of the Income Tax Act, 1961 (in short “the

Act“), was conducted at the premise of the assessee on 06.12.2018.

During the course of search, a sum of Rs.55,27,70,000/- of unaccounted

cash was found and seized from the residential premise of Shri

M.Kothandarami Reddy as well as six individuals who identified

themselves as associates of the assessee and claimed that they have held

the cash for and on behalf of the assessee. The amount of cash seized

during the course of search and seizure on 06.12.20128 in the residential

premise of Shri. M.Kothandarmi Reddy and others was tabulated in Page

No.2 of the assessment order. In the course of search, a sworn statement

u/s.132(4) of the Act, was recorded from Shri S.D.Rami Reddy, working

Director of the assessee company and in response to Q.Nos.17 & 18, he

has explained the modus operandi of generation of cash found and seized

during the course of search and also admitted a sum of Rs.113.99 Crs. as

additional income for the period from 01.04.2014 to 06.12.2018 which

includes cash seizure of Rs.55.27 Crs. The Director of the assessee

company has also explained the modus operandi of generation of

unaccounted cash by way of inflated expenditure booked under the head

marketing expenses being ‘gift articles’ and admitted that on an average

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1/3rd of actual expenditure accounted in the books of accounts, has been

received back in cash from the suppliers. The relevant question and

answers in the statement recorded u/s.132(4) of the Act, from Shri

S.D.Rami Reddy, was reproduced as under:

"Q.17. While answering to Q.6, in your sworn statement recorded under section 132(4) dated 9.12.2018, while asking the modus operandi of generating unaccounted cash, you have stated that you will raise bogus bills for which you pay them through banking channels and receive cash from them. Please go through your statement and clarify about generation of unaccounted cash.

Ans. Sir, we have not raised any bogus bills from our suppliers of gift articles to generate unaccounted cash. However, we received back one third of the invoice value on an average in the form of cash from our gift article suppliers. Since this amounts to inflation of the expenditure in our books of account, we undertake to withdraw of claim towards expenditure in the respective years.

Q:18. Please furnish the quantity of cash generated invoice-wise and party -wise with details of suppliers?

Ans. Sir I don't have the invoice-wise and party -wise details of cash generated. However, I am here by submitting year-wise details of cash generated on this account as under –

S.No. Financial Year Amount in Crores 1 2014-15 16.39 2 2015-16 23.62 3 2016-17 15.79 4 2017-18 25.73 5 2018-19 32.46 113.99

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However, no corroborative evidence to the sworn statement was unearthed during search.

scrutiny assessments. In response to notice u/s 153A of the Act, issued

by the AO for both the assessment years, the assessee has filed its return

of income on 19.02.2021 admitting a total income of Rs.2,55,35,485/-

and Rs.34,55,46,473/- which includes additional income offered during

the course of search towards inflated expenditure. In the return of

income filed for AYs 2017-18 & 2018-19, the assessee company has

offered additional income of Rs.25.73 Crs. & Rs.32.46 Crs. respectively

towards additional income offered during the course of search on account

of inflated expenditure under the head ‘gift articles’. During the course of

assessment proceedings, on enquiry with the suppliers of gift articles,

replies were received from the suppliers of gift articles along with account

copy as reflected in the books of the assessee, where, all of them stated

to have supplied gift articles to the assessee, but some of them also

stated that the assessee took back some cash at times. The AO

completed the assessment u/s.143(3) r.w.s.153A of the Act on

26.07.2021, accepting the additional income voluntarily offered by the

assessee towards inflated expenditure under the head marketing

expenses being purchase of ‘gift articles’. While completing the

assessment, the AO has observed that after considering relevant

submissions of the assessee, the income offered by the assessee,

including estimated disallowance of portion of marketing expenses, is

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found to be in order and accepted. The relevant submissions of the

assessee and findings of the AO are reproduced as under:

In continuation to the above, during assessment proceedings, assessee claimed that no corroborative evidence to the sworn statement w.r.t. found/seized materials was unearthed so as to suggest the culpability of tax evasion.

After going through the circumstances in entirety. The income offered by the assessee, including the estimated disallowance of portion of marketing expenses, is found to be in order and accepted.

assessment years, penalty proceedings were initiated u/s 270A of the Act,

and notice u/s.274 r.w.s.270A of the Act dated 26.07.2021 was issued

and called upon the assessee to explain ‘as to why’ an order imposing

penalty should not be made u/s.270A of the Act, for ‘under reporting of

income and under reporting as a consequence of misreporting of income’.

In response to the show cause notice, the assessee vide letter dated

07.08.2021 filed detailed explanation and argued that show cause notice

issued u/s.274 r.w.s.270A of the Act, is invalid, because, the AO has not

specified any charge, for which, penalty u/s.270A of the Act, was initiated

whether it is for ‘under reporting of income and under reporting as a

consequence of misreporting of income’. The assessee had also

challenged levy of penalty u/s.270A of the Act, on additional income

offered by the assessee towards estimated disallowance of marketing

expenses being ‘gift articles’ purchased on the basis of statement

recorded from the Director of the assessee company during the course of

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search and argued that the AO has not made out a case of ‘under

reporting of income and under reporting as a consequence of misreporting

of income’, because, if you go through the findings of the assessment

order, there is no observation with regard to ‘under reporting of income

and under reporting as a consequence of misreporting of income’, but the

additional income offered by the assessee, has been accepted and stated

that income offered by the assessee, including the estimated disallowance

of portion of marketing expenses, is found to be in order and accepted.

also taken note of provisions of Sec.270A of the Act, rejected arguments

of the assessee and observed that there is no merit in the contentions of

the assessee on the issue of notice issued u/s.274 r.w.s.270A of the Act,

because, notice was specifically referred to ‘under reporting of income and

under reporting as a consequence of misreporting of income’ as per sub-

section-2 of Sec.270A of the Act, and as per sub-section 9 of Sec.270A of

the Act. The AO further observed that penalty has been initiated u/s.270A

of the Act for misreporting of income, which is manifestly clear from the

notice issued u/s.274 r.w.s.270A of the Act. Therefore, the AO has

rejected preliminary objection raised with regard to show cause-notice

issued u/s 274 r.w.s. 270A of the Act. The AO had also rejected

arguments of the assessee on ‘under reporting of income and under

reporting as a consequence of misreporting of income’ and held that the

search results clearly shows gross misreporting of income in the return

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filed for relevant assessment year and had search was not taken place,

the huge unaccounted cash generated by the assessee by inflating

marketing expenses was not found. Therefore, the AO opined that it is a

clear case of ‘under reporting of income and under reporting as a

consequence of misreporting of income’, and thus, opined that the

arguments of the assessee that it is voluntarily surrendered additional

income to avoid litigation and buy peace is devoid of merits. Thus,

rejected arguments of the assessee and levied penalty u/s.270A of the

Act, for ‘under reporting of income and under reporting as a consequence

of misreporting of income’ for both the assessment years. The relevant

findings of the AO are as under:

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an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee

challenged the notice issued by the AO u/s.274 r.w.s.270A of the Act, and

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argued that there is no specific charge under which limb the penalty

proceedings has been initiated. The assessee had also challenged penalty

levied on estimated disallowance of marketing expenses on the ground

that the AO has not made out a case of ‘under reporting of income and

under reporting as a consequence of misreporting of income’ as specified

in sub-section 9 of section 270 of the Act, which is very clear from the

fact that ‘misreporting of income’ has been specifically referred to under

sub-section 9 and the case of the assessee does not come under any

clauses, and thus, the question of levy of penalty does not arise.

assessee and also taken note of provisions of Sec.270A of the Act, held

that the assessee case is covered by Sec.270A of the Act as claimed,

because, the facts gathered during the course of search clearly suggest

‘under reporting of income and under reporting as a consequence of

misreporting of income’, which is evident from the enquiries conducted

during the course of assessment proceedings, where the suppliers of ‘gift articles’ clearly admitted payment of 1/3rd of cash back to the assessee on

the basis of admission of the assessee Company Director ‘under reporting

of income and under reporting as a consequence of misreporting of

income’ has been quantified for all these assessment years. The Ld.CIT(A)

further held that the assessee company at the time of search itself has

admitted inflation of expenditure under the head ‘marketing expenses’ and receipt of 1/3rd of cash back from suppliers of ‘gift articles’ which is

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not recorded in books. Hence, it is a clear case of ‘misreporting of

income’ u/s.270A(9) of the Act, which does not require elaborate

discussion by the AO in the penalty order. The Ld.CIT(A) further held

that the AO has rightly applied sub-clauses (c) & (d) of Sec.270A(9) of

the Act, which deals with claim of expenditure not substantiated by any

evidence and recording of any false entry in the books of accounts. The

assessee has not substantiated with necessary evidences marketing

expenses and also recorded false entry in the books of accounts by

inflating expenditure. Therefore, opined that it is a clear case of ‘under

reporting of income and under reporting as a consequence of misreporting

of income’ as per sub-section (9) of Sec.270A of the Act. Therefore, there

is no error in the reasons given by the AO to impose penalty u/s.270A of

the Act, and thus, rejected arguments of the assessee and upheld penalty

levied by the AO. The relevant finings of the Ld.CIT(A) are as under:

7.1 I have gone through the assessment order u/s 153A r.w.s. 143(3), order u/s.270A, Grounds of appeal and written submissions of the appellant, judicial precedents relied on by it.

7-2 Ground of appeal No 1&2:

Above are general grounds which do not require separate adjudication.

7.3 Ground of appeal No 3:

7.3.1 The appellant has contested this appeal on technical ground that in the penalty notice sent both limbs of 'Under-reporting of Income* and 'Underreporting of Income as a consequence of misreporting of Income' were retained. Facts leading to penalty have been carefully considered by me. It is a case where appellant company has been making wrong entries of marketing Expenditure by inflating the expenditure in its books. Inflation of marketing expenditure is an admitted fact by Managing Director of Appellant company Sri D. Rami Reddy vide sworn statement dated 04-02-2019 while answering to questions 17 & 18 of sworn

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statement. Admittedly the appellant company received back I/3rd of invoice value as cash from suppliers of gift articles. Cash received back was not recorded in books of company thereby generated unaccounted cash. Hence it is a clear-cut case of misreporting of Income.

7.3.2 In my opinion, the appellant's case attracts both clauses (d) and (e} of section 270A (9) which lists instances of misreporting of Income. Clause (d) of section 270A (9) - "Recording any false entry in books of accounts" and Clause (e) of section 270A (9) - "Failure to record any receipt in books of account having a bearing on total income. In the present case appellant company admittedly inflated expenditure towards "Marketing expenses". It has recorded higher amount of expenditure than what has been incurred for that purpose. Modus operandi as Explained by appellant company is that initially company makes payment of marketing expenditure as per Invoice raised by suppliers of Gift Articles, Suppliers thereafter return 1/3rd of Invoice value back to appellant in cash. Amount received back as cash which is a receipt for company is never recorded books of company. It is a practice adopted by appellant company for several years to generate unaccounted cash. Therefore, at the time of raising invoice at a higher value, appellant company is aware that it is inflating expenditure thereby making wrong entry in books attracting clause (d) of.270A. Second instance when cash is received back from suppliers, such receipt of cash is not recorded in books which attracts clause (e) of 270A.

7.3.3 Perusal of penalty order shows that AO vide page 14 of order has held that multiple clauses of section 270A (9) are attracted in its case. The AO held that (a) - Misrepresentation or suppression of facts, (c)- Claim of Expenditure not substantiated by Evidence and (d) - Recording false entry in books of account of 270A (9) are attracted in appellant's case. Therefore, there is a clear finding in the penalty order that penalty has been levied for Misreporting of Income,

7.3.4 The appellant in its submissions argued that clause {c} of 270A (9). as alleged by the AO is not attracted in its case. It is noticed from submissions-made by the appellant that the AO has queried about marketing expenditure; during assessment proceedings. The appellant replied that all purchase invoices were available with department. Thereafter it appears that the AO has not pursued the matter of seeking further evidence from the appellant to prove genuineness of expenditure claimed as the appellant itself admitted inflation of Expenditure. As per provisions of section 270A (2)(a) underreporting of income is 'difference between income assessed u/s 143(3) rws 153A and income determined u/s 143(1)'. Therefore, in the return of Income originally filed appellant has claimed expenditure not substantiated by evidence. Recording of false entry in books of account / non-entry of cash received are both undisputed admitted facts. Having accepted inflation of expenditure, claiming purchase invoices available with department prove genuineness of expenditure is incorrect.

7.3.5 Similarly appellant mentioned that there is no finding in the assessment order that there have, been false entries in the books of account, hence 270A (9) (d) is not attracted as has been mentioned by AO, Examination of assessment order shows that vide para 3 of assessment order, the AO clearly mentioned that the appellant is involved in inflation of expenditure to meet certain expenditure's and that the

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appellant itself agreed that it has resorted into activity of withdrawing by way of cash a portion of RTGS payments towards supply of book gift articles booked under the head 'Marketing expenses' as part of selling expenses.

7.3.6 The appellant cited para 9 of assessment order to state that AO has expressed satisfaction with regard to genuineness of expenditure recorded in. Books. The appellant relied on observations made by the Assessing Officer in page 9 of assessment order which reads as:

"After going through the circumstances in the entirety, the income offered by the assesses, including the estimated disallowances of portion of marketing expenses, is found to be. in order and accepted."

7.3.7 I have also gone through the assessment order. Satisfaction recorded by the Assessing Officer is limited to sufficiency of income offered by the appellant on account of inflated marketing expenses since appellant stuck to its admission of undisclosed income for the year made before Investigating authorities. It can't be extended to conclude that the Assessing Officer has given a finding that genuineness of expenditure recorded in books has been established by appellant.

7.3.8 The appellant nowhere disputed modus operand! unearthed during search nor - it disputed generation of unaccounted cash by inflation of expenditure. Huge unaccounted cash was found during search to the tune of Rs.55.28 crores from various persons. All those persons stated that it was received from Managing Director of appellant company for safe keeping. Unaccounted cash Rs.55.28 Crores found during search is not recorded in books. The appellant explained source of unaccounted cash as inflation of marketing expenditure in books and cash received back from suppliers which is not again recorded in books. When there is primary evidence in the form of unaccounted cash found not recorded in books and sworn statement of Managing Director of appellant company giving details of unaccounted cash generated for each year'-after acknowledging primary evidence found during search, it is incorrect to say except statement of appellant there is no other evidence available with..the department.

7.3.9 The AO made enquiries during assessment proceedings with suppliers of gift articles to appellant company and some of the suppliers have agreed that the appellant company took back some cash from them (Para 2, page 8 of Assessment order). Copy of letter of one of suppliers of appellant company wherein supplier has agreed that he has withdrawn cash as required by appellant company available on assessment record is reproduced as under:

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7.3.10 Hence it is incorrect to say no evidence is available with AO with regard to inflation of expenditure hence false entry made in books of accounts by the appellant company. Since the appellant company has admitted undisclosed income in the return of Income filed, the AO has not expanded scope of enquiries once sufficient evidence regarding modus operandi was found. When unaccounted cash generated is not recorded in books and inflation of expenditure has not been disputed, the appellant can't argue its case do not attract 270A (9) (d).

7.3.11 Further I have come across cases where it is held that minor defect in the notice issued cannot be the basis of deletion of penalty levied or declaring the penalty proceedings as null and void some of which are as under.

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8.Jyothirmoy yamsani Vs DCIT ITA No 1519/Hyd/20l6

7.3.12 It is clear from.= penalty order that penalty of Rs.10,92,92,064/- has been levied on charge of "under-reporting of Income as a consequence of Misreporting of Income". The appellant company filed its objections to penalty vide letter dated 07-0§-2021 before the Assessing Officer (reproduced in penalty order) in which the appellant company has replied to both charges of 'Under-reporting of Income' and "Under- reporting of Income as a consequence of Misreporting of Income". The appellant company was of the view that though its case attracts 'under- reporting of Income' as per section 270A (2) (a) since assessed income u/s 143(3] rws 153A for the year is more than income determined u/s 143(1}, penalty is not leviable in view of sec 270A (6) (b) since amount of under-reported income is determined for the year is on estimate basis. Similarly, it has given detailed submissions as to how none of clauses u/s 270A (9) are not attracted in its case. Reply given by the appellant wrt 270A (3) and 270A (9) was considered by the AO before levying penalty for 'misreporting of Income', Hence, no prejudice has been caused to appellant. Therefore, on this part, I do not find any reason to allow these grounds of the appellant. Ground of Appeal No 3 is Dismissed.

7.4 Ground of appeal Ho 4 & 5:

7.4.1 The contention of appellant vide above grounds Is that the AO has not adjudicated applicability of provisions of section 270A (6) to the facts of case for the year and consequently incorrectly levied penalty @ 200%, The question to be determined is whether it was required on part of AO to verify applicability of 270A(6).

7.4.2 Section 270A(2) defines 'under-reported income'. Section 270A (6) spells out instances of exceptions to under-reporting of Income. Section 270A(9) defines 'misreporting of Income*. Verification of penalty order under consideration shows that the AO has clearly mentioned in the penalty order that it is a case of misreporting income and attracts clauses (c) & (d) of section 270A(9) vide page 14 of order . In this context it is

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relevant to refer to provisions of section 270A (8) which is reproduced as under:

(8) Notwithstanding anything contained in sub-section (6) or subsection (7), where under-reported income is in consequence of any misreporting thereof by any person, the penalty referred to in subsection (1) shall be equal to two hundred per cent of the amount of tax payable on under- reported income.

7.4.3 Therefore, provisions of section 270A (8) say that as far as a case where 'Misreporting of Income' is attracted, provisions of section 270A (6) do not apply. Hence, it is reasonable to conclude that having given a finding that facts of case attract 270A (9), the AO was under no obligation to verify whether facts of case attract 270A (6) or not as it is already held that it is not case of pure under-reporting.

7.4.4 While disposing appeal of appellant company against penalty u/s 271 (1) (c), I have already given a finding that undisclosed income admitted by appellant company on account of unaccounted cash for different years is not on estimate basis which is reproduced under:

"I have carefully examined the claim of appellant that the amount disclosed was estimated income in the tight of sworn statement of Managing Director of company Sri D. Kami Reddy recorded on 04-02- 2019.

"Q.No.17 While answering to Q.No,6, in your sworn statement recorded u/s 132(4) of the Income Tax Act, 1961 dated 09.12.2018, while asking the modus operandi of generating unaccounted cash, you have stated that will raise bogus bills for which you pay them through banking channels and receive cash from them. Please go through your statement and clarify about your generation of unaccounted cash,

Ans.: Sir, we have not raised any bogus bills from our suppliers of gift articles to generate unaccounted cash. However, we received back, one third of the invoice value on an average in the form of cash from our gift articles suppliers. Since this amounts to inflation of the expenditure in our books of accounts, we undertake to withdraw our claim towards expenditure m the respective -years,

Q.No.18 Please furnish the quantity of cash generated invoice-wise and party-wise with the details of suppliers?

Ans.: Sir, I don't have the invoice-wise and party-wise details of cash generated. However. lam hereby submitting the year-wise details of cash generated on this account as under:

S.No. Financial Amount (in Year Crores) 1 2014-15 16.39 2 2015-16 23.62 3 2016-17 15.79 4 2017-18 25.73 5 2013-19 32.46 Total 113.99

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I hereby offer this amount of Rs. 113.99 crores as the additional income in the hands of M/s.Enrica Enterprises Private Ltd. For the respective financial years as mentioned above."

It can be seen from above that nowhere Managing Director stated that he is offering income on estimate basis. He has clarity with regard to unaccounted cash generated by inflation of expenditure each year. Though he said he can't product invoice-wise cash generated, he is clear about total quantum of unaccounted cash generated each year. Amounts admitted for each year are not some random round figures. That itself shows that disclosure made by the appellant is not on estimate basis but basing on actual unaccounted cash generated each year, Shri D. Rami Reddy in his sworn statement dated 04-02-2019 while replying to question No: 17 stated that the appellant receives I/3rd of invoice value as cash back from suppliers. Therefore 1/3rd of invoice value of gift articles recorded as marketing expenses for the year would give unaccounted cash generated by the appellant

Coming to issue why entire unaccounted cash generated could not be found during search, the AO has mentioned in penalty order that unaccounted cash generated was admittedly used by appellant company to meet some inadmissible expenditure outside books.

7.4.5 In view of detailed discussion made above, I am of the opinion that appellant's case is not covered by 270A (6) and no fault can be found with AO for not verifying applicability of section 270A (6) in view of section 270A (8) having held that section 270A (9) is applicable. Accordingly, Grounds of appeal 4 & 5 are Dismissed.

7.5 Ground of appeal No.6:

7.5.1 Vide this Ground the appellant alleged that the AO has not tried to establish how clause (c) and (d) of 270 A (9) are attracted in the penalty order.

7.5.2 I have gone through penalty order. The AO vide para (b), page 10 of penalty order has discussed modus operand! of appellant. Vide para (e) held that since there is admitted inflation of expenditure by appellant, its case attracts clause (c) and (d) of 270 A (9).

7.5.3 It is a case where appellant company at the time of search itself has admitted inflation of expenditure under the head 'marketing expenses', receipt of 173rd cash back from suppliers of gift articles which is not recorded in books. These facts are never disputed at any stage. Hence, it is a clear-cut case of 'misreporting of income' u/s 270A (9) which does not require elaborate discussion by the AQ in the penalty order , need not to be established separately.

7.5.4 The appellant has time and again harping that no incriminating evidence was found during search. Incriminating, irrefutable evidence found during search was unaccounted cash which was not recorded in books. In order to explain source of such unaccounted cash generated out of books, appellant had to explain its modus operandi of inflation of expenditure in its books both of which attract different clauses of section 270A as discussed in preceding paragraphs. Accordingly > Ground of appeal 6 is Dismissed.

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7.6 Ground of appeal No.7:

7.6.1 The appellant vide above grounds raised issue that while computing penalty, AO has not followed provisions of section 270A (10).

7.6.2 Section 270A (10) details about tax payable in respect of 'under- reported income' for the year. It reads as under:

(10) The tax payable in respect of the under-reported income shall be —

(a) where no return of income has been furnished 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 fl) of section 143 or assessed/reassessed or recomputed in a preceding order is a toss, 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 —

(X-Y)

where,

X = the amount of tax calculated on the under-reported income as increased by the ""total income determined under clause (a) of subsection (1) of section 143 or total income assessed, 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.

7.6.3 The above section divides the cases into two categories,

7.6.4 Simply put, as per clause (c) of section 270A (10),

X= Tax on (under-reported income plus amount determined vide preceding order)

Y= Tax on preceding order

Clause (a) of Explanation (b) of section 270A(3) defines ( Preceding order) as under:

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(a) "preceding order" means an order immediately preceding the order during the course of which the penalty under subsection (1) has been initiated;

7.6.5 In the present case, penalty has been initiated vide order u/s 143(3) rws 153A. "Preceding order1 prior to order u/s 143(3) rws 153A is order u/s 143(1) dated 25.05.2018 vide which loss admitted by the appellant Rs.13,23,64,515/- has been accepted.

X= Tax on {under-reported income plus amount determined vide 143(1) order)

Y= Tax on amount determined vide 143(1) order

Hence, tax payable u/s 270A (10)(c) r.w.s 270A (3) should have been calculated by AO before levying penalty at 200% of tax as per Sec. 270A(8). However, it appears that the AO has computed tax on income admitted u/s 132(4) for the year Rs.15,79,00,000/- and levied 200% of penalty on such tax computed. The AO is directed to compute tax payable on '*under reported income' for the year u/ s 270A( 10) (c) before levying penalty as per Sec. 270A(8), Needless to say that the appellant gets relief to the extent of excess penalty levied vide order under appeal. Accordingly, Ground of appeal 7 is partly allowed.

submitted that the Ld.CIT(A) is erred in confirming the action of the AO in

levying penalty u/s.270A(9) of the Act, without appreciating the fact that

the assessee neither ‘under reported income and such under reporting as

a consequence of misreporting of income’. The Ld. Counsel for the

assessee referring to show cause notice issued u/s.274 r.w.s.270A of the

Act, submitted that the notice has been issued in a routine manner

without referring under which limb of Sec.270A of the Act, the assessee is

liable for penalty. Although, the AO has levied penalty u/s.270A(9) of the

Act, for ‘under reporting of income and under reporting as a consequence

of misreporting of income’, but no such ground was specified in the show

cause notice issued u/s.274 r.w.s.270A of the Act. Therefore, he

submitted that order passed by the AO imposing penalty u/s.270A(9) of

ITA Nos.1166 & 1167/Chny/2023 :: 24 ::

the Act, consequent to vague notice is invalid, unlawful and liable to be

quashed. The Ld. Counsel for the assessee further submitted that levy of

penalty u/s.270A of the Act, is not mandatory in every case, where, there

is difference between assessed/re-assessed income and the return of

income. This is very important, if you go by the wording in Sec.270A of

the Act, where the expression used is ‘may’. Therefore, the AO is vested

with the power either to levy or not to levy penalty u/s.270A of the Act.

Therefore, before issuing penalty, the AO is required to arrive at a clear

satisfaction to the effect that under which limb the assessee is charged for

tax evasion i.e. it is for ‘under reporting of income and under reporting as

a consequence of misreporting of income’. In the present case, if you go

by the findings of the AO, there are no findings with regard to ‘under

reporting of income and under reporting as a consequence of misreporting

of income’. Further, show cause notice issued by the AO is also not clear

under which limb, the AO is proposed to initiate penalty u/s.270A of the

Act. Therefore, he submitted that penalty levied by the AO as a

consequence of vague or incorrect notice cannot be sustained under law.

In this regard, he relied upon certain judicial precedents, including the

decision of the Hon’ble Supreme Court in the case of CIT v. SSA’s

Emerald Meadows reported in [2016] 73 taxmann.com 241 (SC).

proceedings and penalty proceedings are two different proceedings. The

findings in the assessment proceedings cannot be considered as

ITA Nos.1166 & 1167/Chny/2023 :: 25 ::

conclusive and final for the purpose of imposing penalty. Therefore,

before levying penalty, the AO should independently ascertain the facts

with regard to nature of tax evasion. If you go by the additions made

towards additional income offered by the assessee, there is no separate

addition in the assessment order and the AO has simply accepted income

returned by the assessee in response to notice issued u/s.153A of the Act.

The AO further observed in the assessment proceedings that after

considering relevant details, income admitted by the assessee towards

estimated disallowance of proportionate marketing expenses, is found to

be in order and accepted. Form the above, it is very clear that the AO

has not made out a case of ‘under reporting of income and under

reporting as a consequence of misreporting of income’ and thus, the

question of levy of penalty u/s.270A(9) of the Act, does not arise. In this

regard, he relied upon certain judicial precedents, including the decision

of the Hon’ble High Court of Delhi in the case of Prem Brothers

Infrastructure LLP v. NFAC reported in [2022] 288 Taxman 768 (Delhi).

order of the Ld.CIT(A), submitted that there is no merit in the arguments

of the Ld. Counsel for the assessee, with regard to issuance of show

cause notice u/s.274 r.w.s.270A of the Act, because, there is no such

requirement under law before levying penalty u/s.270A of the Act, for

‘under reporting of income and under reporting as a consequence of

misreporting of income’. Further, the AO has clearly spelt out ‘under

ITA Nos.1166 & 1167/Chny/2023 :: 26 ::

reporting of income and under reporting as a consequence of misreporting

of income’ on the basis of findings recorded in the assessment order,

where, the additions has been made towards additional income offered

during the course of search on estimated disallowance of marketing

expenses. During the course of search, the Department has found huge

unaccounted cash which resulted in generation of unaccounted cash by

inflating marketing expenses, and this fact has been gathered during the

course of search, which is evident from the statement recorded from the

Director of the assessee company, where, they have clearly admitted

inflation of expenditure under the head ‘marketing expenses’. Further,

during the course of assessment proceedings, enquiries are conducted

with suppliers of ‘gift articles’, where, they have confirmed, refund of 1/3rd of amount of supplies to the assessee in cash at times. Form the

above, it is very clear that the assessee has ‘under reporting of income

and under reporting as a consequence of misreporting of income’ in

respect of marketing expenses, and thus, the case of the assessee clearly

falls under sub-clauses (c) & (d) of Sec.270A(9) of the Act, and thus, the

AO has rightly levied penalty u/s.270A of the Act, and their orders should

be upheld.

record and gone through orders of the authorities below. The AO levied

penalty u/s.270A of the Act, for both the assessment years on the ground

that the assessee has ‘under reporting of income and under reporting as a

ITA Nos.1166 & 1167/Chny/2023 :: 27 ::

consequence of misreporting of income’. The AO invoked provisions of

clauses (c) & (d) of Sec. 270A(9) of the Act, which deals with claim of

expenditure not substantiated by any evidence and recording of any false

entry in the books of accounts. The AO has arrived at the above

conclusion on the basis of findings in the assessment order, where income

admitted by the assessee in the return of income filed in response to

notice u/s.153A of the Act, has been accepted. In the revised return filed

u/s.153A of the Act, the assessee has admitted taxable income of

Rs.2,55,35,485/- which is higher than the last return filed u/s.139(1) of

the Act. According to the AO, the assessee has ‘under reporting of

income and under reporting as a consequence of misreporting of income’

in respect of marketing expenses, which is clearly evident from

information gathered during the course of search coupled with statement

recorded from the Director of the assessee company and also enquiries

conducted with suppliers of ‘gift articles’ during the course of assessment

proceedings. The AO further observed that had search was not taken

place u/s.132 of the Act, ‘under reporting of income and under reporting

as a consequence of misreporting of income’ would not have come to

light. Therefore, the AO opined that it is a clear case of ‘under reporting

of income and under reporting as a consequence of misreporting of

income’ which attracts provisions of Sec.270A(9) of the Act, and thus,

levied penalty for both the assessment years for ‘under reporting of

income and under reporting as a consequence of misreporting of income’.

ITA Nos.1166 & 1167/Chny/2023 :: 28 ::

course of search on 6-12-1018 was not disputed. It is also an admitted

fact that the assessee company has offered additional income of Rs.16.39

Crs. & Rs.23.62 Crs. towards disallowance of estimated marketing expenses @ 1/3rd of total expenses incurred under the head ‘marketing

expenses’ for both the assessment years. The cash seized during the

course of search was telescoped against additional income offered by the

assessee towards estimated disallowance of marketing expenses. The

assessee has filed return of income in response to notice u/s.153A of the

Act, for both the assessment years and offered additional income

admitted during the course of search in respect of disallowance of

marketing expenses and paid taxes. The AO has also accepted return of

income filed by the assessee in response to notice u/s.153A of the Act,

without any further addition and also recorded a clear finding in the

assessment order that after going through the circumstances in its

entirety, the income offered by the assessee, including estimated

disallowance of portion of marketing expenses, is found to be in order and

accepted. In other words, there is no separate addition towards marketing

expenses, but the assessment has been completed by accepting

additional income offered by the assessee towards estimated disallowance

of marketing expenses for both the assessment years.

passed by the AO imposing penalty u/s.270A(9) of the Act, it is necessary

ITA Nos.1166 & 1167/Chny/2023 :: 29 ::

to refer to provisions of Sec.270A of the Act, and the reasons given by the

AO to impose penalty u/s.270A(9) of the Act. The provisions of Sec.270A

of the Act, deals with penalty for ‘under reporting of income and under

reporting as a consequence of misreporting of income’. Sub-section 1 to

6 of Sec.270A of the Act, deals with ‘under reporting of income and under

reporting as a consequence of misreporting of income’, has been specified

in sub-section 7 of Sec.270A of the Act. Sub-section 8 & 9 deals with

‘under reporting of income and under reporting as a consequence of

misreporting of income’ thereof by any person and such cases of

‘misreporting of income’ referred to in sub-sec.8 has been specified in sub

sec.9 of Sec.270A of the Act. From the above, it is manifestly clear that

provisions of Sec.270A of the Act, has two limbs or two charges for which

penalty can be levied. The first limb or first charge is ‘under reporting of

income and such under reporting of income’ has been specifically referred

to in sub-section 2 to 6 of Sec.270A of the Act. In the present case,

these provisions are not relevant, because, the AO has not invoked under

reporting of income. The second limb or charge is ‘under reporting of

income as consequence of misreporting of income’ thereof and in the

present case, the AO invoked second limb of provisions of Sec.270A of the

Act. Admittedly, these provisions have been substituted by the Finance

Act, 2016 w.e.f.01.04.2017 and applicable for AY 2017-18 onwards. Prior

to insertion of Sec.270A of the Act, a similar provision was existed in the

statue by way of sec.271(1)(c) of the Act, for concealment of particulars

ITA Nos.1166 & 1167/Chny/2023 :: 30 ::

of income or furnishing of inaccurate particulars of income. Provisions of

Sec.271(1)(c) of the Act, was also having two limbs or two charges i.e. i)

for concealment of particular of income and ii) furnishing of inaccurate

particulars of income. If you go by provisions of Sec. 271(1)(c) of the Act

& Sec.270A of the Act, and wordings therein both provisions are similar

and para materia to each other. Although, the term ‘tax evasion’ has

been redefined by way of ‘under reporting of income and under reporting

as a consequence of misreporting of income’ but it is synonymous to

concealment of particular of income or furnishing of inaccurate particulars

of income. Therefore, it is necessary to examine whether penalty

proceedings u/s.270A of the Act, is mandatory in nature and further, such

penalty can be invoked without providing an opportunity to the assessee

as required u/s.274 of the Act.

order u/s.246A of the Act before the First Appellate Authority. If penalty

u/s.270A of the Act, has been mandatory, there have not been any

provision of appeal u/s.246A of the Act. Since, the order imposing

penalty Sec.270A of the Act, is an appealable order, then, it cannot be

said that penalty u/s.270A of the Act, is not mandatory in nature. Since,

penalty u/s.270A of the Act, is not mandatory in nature, the AO is

required to give an opportunity to the assessee to show cause ‘as to why’

penalty should not be levied in terms of sec.274 of the Act. Admittedly,

the AO issued notice u/s.274 r.w.s.270A of the Act. Sec.274 of the Act

ITA Nos.1166 & 1167/Chny/2023 :: 31 ::

deals with the procedure for levy of penalty, wherein, it directs that no

order imposing penalty shall be made unless the assessee has been heard

or has been given a reasonable opportunity of hearing. Thus, it is evident

that the penalty u/s.270A of the Act, cannot be imposed unless the

assessee has given a reasonable opportunity and the assessee is being

heard. Once, the AO is bound to act to hear the assessee and give

reasonable opportunity to explain its case, then, there is no mandatory

requirement of imposing penalty, because the opportunity of hearing is

not a mere formality, but it is to adhere to the principle of natural justice.

Therefore, in our considered view, the penalty u/s.270A of the Act, is not

mandatory and it is based on the facts and merits placed before the AO.

r.w.s.270A of the Act. We have gone through notice u/s 274 r.w.s. 270A

of the Act dated 26.07.2021, wherein, the AO has stated that ‘under

reporting of income and under reporting as a consequence of misreporting

of income’. From the notice, it is not discernable whether penalty has

been initiated for ‘under reporting of income’ as per section 270A (1) to

(6) or ‘misreporting of income’ as per section 8 & 9 of Sec.270A of the

Act. The AO issued a notice in a routine manner without specifying under

which clause of Sec.270A of the Act, the assessee is liable for penalty.

Though, the AO while passing the impugned order has imposed penalty

u/s.270A(9) of the Act, but no such ground was specified in the show

cause notice dated 26.07.2021. In our considered view, notice u/s.274

ITA Nos.1166 & 1167/Chny/2023 :: 32 ::

r.w.s.270A of the Act, is not a valid notice for the reason that the AO did

not specify the satisfaction as to whether assessee had either ‘under

reporting of income’ or ‘misreporting of income’. In absence of proper

notice, which is mandatory, the AO cannot impose penalty, because, it is

a clear violation of principles of natural justice, because, issuing a vague

notice without specifying the charge under which limb the proposed

penalty proceedings is initiated, would vitiate the entire proceedings,

because, the assessee was not given an opportunity to explain its case on

specific charge. Therefore, in our considered view, penalty levied on the

basis of invalid or vague notice is invalid and void ab initio.

income’ are two different charges with very clear boundaries. As we have

already discussed in earlier part of this order, sub-section 2 to 6 of sec

Sec.270A of the Act, deals with concept of ‘under reporting of income’ and

for this, separate rate of penalty is provided. Sub-sec.9 deals with

concept of ‘misreporting of income’ and for this, separate rate of penalty

is provided. Therefore, ‘under reporting of income’ and ‘misreporting of

income’ shall not be used interchangeably nor are they synonymous, but

each operates under strict definition and do not overlap each other.

Since, ‘under reporting of income’ and ‘misreporting of income’ are two

concepts and separate charges, the AO before initiating penalty

proceedings should specifically arrive at a satisfaction to the effect that,

for which charge, he has initiated penalty Sec.270A of the Act. In the

ITA Nos.1166 & 1167/Chny/2023 :: 33 ::

present case, if you go by the assessment order passed by the AO, there

is no satisfaction in respect of initiation of penalty proceedings u/s.270A

of the Act, whether it is for ‘under reporting of income and under

reporting as a consequence of misreporting of income’ thereof which is

clearly evident from the assessment order passed by the AO, where, the

AO simply referred to initiation of penalty proceedings u/s.270A of the

Act. Further, said lapse is even continued while issuing show cause notice

u/s.274 r.w.s.270A of the Act, where, the AO simply specified ‘under

reporting of income and under reporting as a consequence of misreporting

of income’, without specifying for which charge the assessee is directed to

pay penalty u/s.270A of the Act. There is no whisper as to which limb of

Sec.270A of the Act, is attracted and how the ingredients of sub-sec.9 of

Sec.270A of the Act are specified. In absence of such particulars, the

mere reference to the word ‘misreporting of income’ in the assessment

order or in the show cause notice makes the impugned order manifestly

arbitrarily. Therefore, we are of the considered view that show cause

notice issued by the AO u/s.274 r.w.s.270A of the Act, without specifying

the charge under which penalty is proposed u/s.270A of the Act, is a clear

case of non-application of mind at the time of issuing show cause notice

and thus, in absence of specific charge against the assessee, the assessee

is not in a position to counter the show cause notice issued by the AO as

well as cogent reply to the show cause notice. In view of vague notice

without any whisper as to which limb of section 270A of the Act is

ITA Nos.1166 & 1167/Chny/2023 :: 34 ::

attracted and how ingredients of sub-section 9 is specified, initiation of

penalty u/s.270A of the Act for ‘misreporting of income’ is not only

erroneous, but also arbitrary and thus, penalty proceedings cannot be

sustained. This legal position is strengthened by the decision of the

Hon’ble Delhi High Court in the case of Prem Brothers Infrastructure LLP

(supra), where the Hon’ble Delhi High Court by following the earlier

decision in the case of Schneider Electric South East Asia (HQ) Pte Ltd. v.

ACIT, International Taxation in WP (C) No.5111 of 2022 dated

28.03.2022, held that in view of vague notice without any whisper as to

which limb of section 270A of the Act is attracted and how ingredients of

sub-section 9 is specified, initiation of penalty u/s.270A of the Act for

‘misreporting of income’ is not only erroneous, but also arbitrary and

bereft of any reason and consequently, penalty order passed by the AO,

cannot be sustained. The relevant findings of the Hon’ble Delhi High Court

are as under:

“6. Having perused the impugned order dated 9th March, 2022, this Court is of the view that the Respondents’ action of denying the benefit of immunity on the ground that the penalty was initiated under Section 270A of the Act for misreporting of income is not only erroneous but also arbitrary and bereft of any W.P.(C) 7092/2022 Page 4 of 6 reason as in the penalty notice the Respondents have failed to specify the limb - "underreporting" or "misreporting" of income, under which the penalty proceedings had been initiated.

ITA Nos.1166 & 1167/Chny/2023

:: 35 ::

the Petitioner to buy peace and avoid litigation, which fact has been duly noted and accepted in the assessment order as well and consequently, there is no question of any misreporting.

Madras High Court in the case of Babuji Jacob v. ITO reported in [2021]

430 ITR 259 (Madras), where the Hon’ble High Court has dealt with the

issue of show cause notice u/s.274 r.w.s.271(1)(c) of the Act, and after

considering its earlier decision in the case of Sudaram Finance Ltd. v.

ACIT reported in [2018] 93 taxmann.com 250, held that issuing a printed

form of notice without striking inapplicable portion in the notice and not

charging the assessee for particular evasion vitiates the entire penalty

ITA Nos.1166 & 1167/Chny/2023 :: 36 ::

proceedings, including the order passed by the AO imposing penalty

u/s.271(1)(c) of the Act. A similar view has been taken by the Hon’ble

Karnataka High Court in the case of CIT v. Manjunatha Cotton & Ginning

Factory reported in [2013] 359 ITR 565, where the issue of show cause

notice and consequent penalty proceedings has been dealt in detail and

held that penalty proceedings consequent to vague and invalid notice

becomes invalid and liable to be quashed. The Hon’ble Supreme Court

has upheld the decision of the Hon’ble Karnataka High Court in the case

of CIT v. SSA’s Emerald Meadows reported in [2016] 73 taxmann.com

satisfaction of the AO should be discernable from the show cause notice

issued by the AO u/s.274 r.w.s.270A of the Act. In absence of any

particular charge for which, the assessee is directed to pay penalty u/s

270A of the Act, entire penalty proceedings becomes invalid and liable to

be quashed.

the Hon’ble Supreme Court and various High Courts referred to

hereinabove, we are of the considered view that show cause notice issued

by the AO u/s.274 r.w.s.270A of the Act, is vogue, non specific to charge

and thus, is illegal and liable to be quashed. Thus, we quashed the order

passed by the AO imposing penalty u/s.270A(9) of the Act.

assessment proceedings and penalty proceedings are two separate

ITA Nos.1166 & 1167/Chny/2023 :: 37 ::

proceedings. The findings in the assessment proceedings cannot be

considered as conclusive and final for the purpose of imposing penalty.

The Hon’ble Supreme Court in the case of CIT v. Anwar Ali, reported in

[1970] 76 ITR 696 (SC) observed that the findings in assessment

proceedings may constitute evidence in the penalty proceedings, but it

does not follow that penalty is mandatory whenever addition or

disallowance is made. Further, the jurisdictional High Court in the case of

CIT v. Gem Granites reported in [2013] 86 CCH 160 (Madras), observed

that merely because, the assessment proceedings namely the quantum

assessment having been confirmed, cannot automatically lead to the

conclusion that the penalty proceedings are justified. In other words,

there should be an independent finding from the AO regarding under

reporting of income or misreporting of income in the penalty proceedings

which alone can lead to conclusion that it is a fit case for levy of penalty.

the Act, is sustainable on merits. Admittedly, during the course of search,

except unaccounted cash found in the residential premise of the appellant

Company Director and other persons, no other evidence was with the AO

to allege that the assessee has inflated marketing expenses and

generated unaccounted cash and said unaccounted cash pertains to

specified previous year. Although, the director of assessee company

admitted in a statement recorded u/s.132(4) of the Act, that the assessee

has inflated marketing expenses and also explained modus operandi of

ITA Nos.1166 & 1167/Chny/2023 :: 38 ::

generation of cash by way of inflation of expenditure and received back

cash from the supplier, but there is no specific reference to any material

unearthed during the course of search which shows the amount of cash

received back by the assessee from any supplier. Further, cash seized

during the course of search could not be identified with a particular

assessment year either by the assessee or the investigation Team and

further, the additional sum of Rs.58.72 Crs. (Rs.113.99 Crs. – Rs.55.27

Crs.) offered by the assessee was not identified with any Financial Year.

This amount was estimated figure which did not belong to any year nor

was it represented by asset or income that was unearthed in the search

proceedings. Although, the department found unaccounted cash during

the course of search in the residential premises of the directors and their

associates, said cash was not directly linked to assessee and its business

with any evidence. Assuming for a moment said cash belongs to appellant

Company, but it was found during the course of search and at best it can

be linked to year of search. However, it cannot be extrapolated or

estimated to any other years without any reference to incriminating materials. The allocation of 1/3rd of marketing expenses on estimated

basis is purely on the basis of admission of the assessee company in the

statement recorded u/s.132(4) of the Act, but such admission was not

corroborated by any evidences found during the course of search.

Although, the AO referred to investigation carried out during the course of

assessment proceedings with suppliers of ‘gift articles’, but on perusal of

ITA Nos.1166 & 1167/Chny/2023 :: 39 ::

one reply received from a supplier of ‘gift articles’ which has been

reproduced in assessment order clearly shows that the suppliers have

admitted to have supplied goods to the assessee and further stated that

at a times cash has been returned back to the assessee. We further

noted that there is no specific instance of any reference to bill on which

cash has been returned and also any reference to any financial year cash

has been refunded to the assessee. Further, the AO has also not made

out any case of under reporting of income consequent to inflation of

expenditure under the head ‘marketing expenses’ with reference to

replies received from suppliers qua total amount of purchases made from

them and year of such purchase. This is further fortified by the findings

of the AO in the assessment order, where the AO expressed complete

satisfaction of income admitted without any reservations/adverse

comments. Further allocation of amount over the years was only on ad

hoc basis and there was no evidence with the AO as regards with

accuracy. Further, it could be seen from the assessment order that there

is no observation of ‘under reporting of income and under reporting as a

consequence of misreporting of income’ either in the assessment order or

in the show cause notice u/s.274 r.w.s.270A of the Act specifying the limb

of misreporting of income. The addition in the assessment is purely

based on sworn statement u/s.132(4) of the Act, but nothing else. Form

the above, it is undisputedly clear that the AO has not made out a case of

‘under reporting of income and under reporting as a consequence of

ITA Nos.1166 & 1167/Chny/2023 :: 40 ::

misreporting of income’, which falls under Clauses (c) & (d) of sub-section

9 of sec.270A of the Act.

Clause-(c) speaks about misrepresentation or suppression of facts. If you

go by the facts, the assessee has admitted additional income in response

to return filed u/s.153A of the Act, for both the assessment years and in

the order passed u/s.153A of the Act, the AO accepted the returned

income without any additions/disallowance. Further, the quantification

made towards additional income was purely on ad hoc estimation basis

by taking into account statement recorded from the assessee and disallowed 1/3rd of total expenditure incurred under the head ‘marketing

expenses’. There is no finding in the assessment order to the effect that

the assessee had either ‘misreported income’ or ‘under reporting of

income’. Further, quantification of estimated disallowance was made on

the basis of regular books of accounts maintained by the assessee, but

not based on any unaccounted purchase bills etc,. Further, the assessee

has disclosed total expenditure incurred under the head marketing

expenses in the regular return of income filed for both assessment years.

From the above, it is undisputedly clear that the appellant has not

misrepresented facts with regard to marketing expenditure. Therefore, we

are of the considered view that it is not a case of misrepresentation or

suppression of facts based on any evidences, but admission of additional

income is purely on the basis of statement recorded u/s.134 of the Act,

ITA Nos.1166 & 1167/Chny/2023 :: 41 ::

without any reference to incriminating material found as a result of

search. Therefore, in our considered view, Clause-(C) of sub-sec.9 to

sec.270A, is not applicable.

which speaks about failure to record investment in the books of accounts.

In our considered view, it is not a case of any investment which is not

recorded in the books of accounts. Therefore, said Clause is not

applicable. In our considered view, the AO is completely erred in invoking

said section and levied penalty u/s.270A of the Act. As regards sub-

Clause (e) to section 270A(9) of the Act, invoked by the Ld.CIT(A), in our

considered view, there is no allegation from the AO regarding failure to

record any receipt in books of accounts of the assessee having a bearing

on total income in so far as estimated disallowance of proportionate

marketing expenses. The additional income has been quantified by the

Revenue on the basis of estimated disallowance of marketing expenses

and such estimation is ad hoc without there being any specific findings

with regard to year for which the assessee has inflated expenditure.

There cannot be any reasons for uniformity in inflation of expenditure for

all assessment years as alleged by the AO. Further, it cannot be uniformly 1/3rd of total expenditure incurred under the head was inflated and further, it cannot be the case of receipt of 1/3rd amount from all

suppliers. In absence of any findings as to quantification of inflated

expenditure qua each assessment year with reference to total purchase

ITA Nos.1166 & 1167/Chny/2023 :: 42 ::

from each party, amount of inflated expenditure, actual cash received

back by the assessee. in our considered view, merely because addition

was made on the basis of voluntary surrender of income by the assessee,

penalty for ‘under reporting of income’ or ‘misreporting of income’ cannot

be fastened on the assessee. Therefore, we are of the considered view

that even on merits, penalty levied by the AO u/s 270A of the Act, cannot

be sustained.

circumstances of the case, we are of the considered view that penalty

levied by the AO u/s.270A of the Act, is unsustainable in law on two

counts, i.e. for failure to specify in the notice issued u/s.274 r.w.s.270A of

the Act, as to under which limb of sub-section, 270A of the Act, penalty is

initiated, i.e. ‘under reporting of income’ or ‘misreporting of income’, the

penalty proceedings are initiated. Further, the AO accepted income

admitted by the assessee with categorical statement without any

allegation against the income admitted or incorrectness of the books of

accounts or evidence for the expenditure. In our considered view, income

voluntarily admitted by the assessee does not constitute ‘under reporting

of income’ or ‘misreporting of income’, and thus, in our considered view,

penalty levied u/s.270A of the Act is unsustainable in law on merits, and

thus, we quashed the order passed by the AO imposing penalty

u/s.270A(9) of the Act.

ITA Nos.1166 & 1167/Chny/2023 :: 43 ::

No.1166/Chny/2023 for AY 2017-18 is allowed.

ITA No.1167/Chny/2023 for AY 2018-19:

and issues which we had already been considered in ITA

No.1166/Chny/2023 for the AY 2017-18. The reasons given by us in the

preceding paragraphs Nos. 12 to 23 shall, mutatis mutandis, apply to

this appeal, as well. Therefore, for similar reasons, we quashed the order

passed by the AO imposing penalty u/s.270A(9) of the Act for Asst. Year

2018-19 also.

No.1167/Chny/2023 for AY 2018-19 is allowed.

No.1166/Chny/2023 & ITA No.1167/Chny/2023 for AYs 2017-18 & 2018-

19 are allowed.

Order pronounced on the 06th day of March, 2024, in Chennai.

Sd/- Sd/- (मनोमोहन दास) (मंजूनाथा. जी) (MANJUNATHA.G) (MANOMOHAN DAS) लेखा सद�/ACCOUNTANT MEMBER �ाियक सद�/JUDICIAL MEMBER चे�ई/Chennai, �दनांक/Dated: 06th March, 2024. TLN

ITA Nos.1166 & 1167/Chny/2023 :: 44 ::

आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 3. आयकरआयु�/CIT 5. गाड�फाईल/GF 2. ��यथ�/Respondent 4.िवभागीय�ितिनिध/DR