KERALA STATE CO-OPERATIVE BANK LTD,THIRUVANANTHAPURAM vs. DCIT,CIRCLE-1(1), THIRUVANANHAPURAM

This is an appeal filed by the assessee challenging the order of the NFAC, Delhi dated 08/01/2024 in respect of the penalty imposed u/s. 270A of the Act for the A.Y. 2018-19.

The brief facts of the case are that the assessee is an Apex co- operative bank and they filed their return of income on 30/10/2018. Subsequently, the case was selected for scrutiny and the AO issued notices u/s. 143(2) and 142(1) for which the assessee filed their response. In the said notices, the AO had pointed out that the assessee had not deducted TDS on interest payments made from 20 branches and therefore sought for the details along with the TDS amount deducted thereon. The assessee submitted that during the year they paid interest to co-operative banks, scheduled banks, reserve fund from co-operative banks, savings bank and ACS fund (to other co-operative societies) and therefore they need not deduct TDS and in respect of the balance payment of Rs. 39,40,47,888/- the assessee submitted because of the merger and the technical error in the system they are not able to get the details. The AO proposed to disallow 30% of the interest payments u/s. 40(a)(ia) of the Act. Similarly, the AO had proposed to disallow the claim made u/s. 36(1)(viia) of the Act on the provision made for bad and doubtful debts. The assessee explained that due to merger of 13 district co-operative banks with the assessee from 29/11/2019, there is a change in the software and therefore the complete datas could not be retrieved for the financial year 2017-18. The assessee further filed the details of the interest on the fixed deposits maintained by the individuals, PF trust and other co-operative societies. The assessee further submitted that after deducting the above said amounts, the balance interest payment comes about Rs. 1,30,37,207/-. The assessee further submitted that further details of declaration filed in form 15G/15H and the name of the depositors and the full details could not be collected in order to give explanations to the proposal because of the technical error in the system.

In respect of the deduction claimed for the provision made for the bad and doubtful debts, the assessee explained that the auditor in their audit report for the year ended 31/03/2018 had observed that the assessee is having a qualification for the deduction to be claimed u/s. 36(1)(viia) and 36(1)(viii) of the Act so that the tax liability could be reduced. Thereafter only, the assessee decided to claim the deduction for which they are entitled, and initiated process for complying with the condition to claim the said deduction. But unfortunately, the assessee was not able to reopen the audited accounts and create the necessary provision in the accounts for claiming the deduction. The assessee further submitted that the reason for disallowing the above said claim by the AO that the assessee is not having any rural branches is also not correct. The assessee also relied on the amendment made in the year 1986, to claim the deduction u/s. 36(1)(viia) of the Act, it is not mandatory to have rural branches but only the deduction rate would vary i.e. 10% advances made by rural branches and 8.5% for other branches. The assessing officer without considering the submissions had mechanically disallowed the 30% of the interest payments for not deducting the TDS u/s. 40(a)(ia) of the Act. In the said order, the AO had also stated that penalty proceedings u/s. 270A(1) of the Act would be initiated separately. The AO had not specifically mentioned under which limb underreporting was done by the assessee in view of the above said facts and circumstances of the case. The AO further disallowed the deduction claimed u/s. 36(1)(viia) of the Act for the reason that the assessee has no rural branches. The AO finally came to the conclusion that the assessee has not furnished the details of the rural branches and therefore the assessee is not qualified for deduction u/s. 36(1)(viia) of the Act and also for the reason that the assessee had not created the provisions. The AO also observed that penalty proceedings u/s. 270A(1) r.w.s. 270A(9)(a) of the Act will be initiated for misreporting / underreporting of income. While making the above said observation, the AO had not specifically stated under which limb of section 270A(2), the underreporting would come in order to treat the same as misreporting u/s. 270A(9) of the Act.

Thereafter, the AO initiated proceedings to levy penalty u/s. 270A(1) and 270A(9) of the Act vide notice dated 24/02/2021 which is reproduced hereunder for easy reference.

The assessee explained the reasons for not deducing the tax at source and also submitted that reasons for not having a provision in the accounts for claiming the deduction u/s. 36(1)(viia) of the Act. The assessee also relied on some judgments and orders in support of their case and prayed to drop the penalty proceedings initiated. The AO in the proceedings dated 23/03/2022 had confirmed the penalties u/s. 270A(2) of the Act and 270A(9) of the Act. In the proceedings, the AO had not mentioned under which limb of 270A(2), underreporting has been done by the assessee and also under which limb of 270A(9) of the Act the underreporting of income was made which is in consequence of misreporting.

Before proceeding further, we will first go through the provisions which deals with the two occasions in which the respective penalties can be imposed. “Penalty for under-reporting and misreporting of income. 270A. (1) The Assessing Officer or 95[the Joint Commissioner (Appeals) 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. (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:

From the reading of the above provision, the penalty u/s. 270A(1) could be imposed if any person has underreported his income. The sub- section (2) of section 270A explains the circumstances which are all classified as underreported. There are 7 occasions available under sub- clause (2) to attract the underreporting of income. Similarly, in order to attract the penalty under sub-clause (8) of 270A of the Act, the provision mandates that there should be an underreported income in consequence of any misreporting thereof. Therefore because of the misreporting of any income there should be an underreported income, to attract the penalty u/s. 270A(8) of the Act. The sub-clause (9) of 270A also deals about the six occasions of misreporting of income and because of that the underreporting of income was made. Therefore both the provisions of sub-section (2) as well as sub-section (9) of section 270A gave different types of underreporting as well as misreporting of income. Inspite of this, the AO had not specifically stated under which limb of the above said sub-sections, the underreporting as well as the underreporting in consequence of misreporting were made. As against the said proceedings, the assessee filed an appeal before the Ld.CIT(A) but the Ld.CIT(A) had dismissed the appeal without considering the provisions properly. Therefore the assessee had approached this Tribunal with the following grounds: “

We have heard the arguments of both sides and perused the materials available on record.

It is an admitted fact that the assessee had explained that in view of the merger of the 13 District Coop Banks into the assessee bank and also in view of the non-recovery of datas from the system, the proper details could not be furnished before the AO. The said explanation given by the assessee was not controverted by the AO but simply the AO extracted the provision and confirmed the disallowance and consequently the AO had disallowed the 30% of the interest payments and consequently levied the penalty u/s. 270A(1) of the Act as underreporting. As already stated, the word used in section 270A(1) is, the assessing officer “may” impose penalty which means that there is no mandatory direction given by the statute to impose penalty under the provision. Further, sub-section (2) gave the details of the underreporting and therefore in order to attract the penalty u/s. 270A(1) of the Act, the assessing officer should point out under which limb of the section 270A(2), the underreporting occurs in order to impose the penalty. But in this case, the assessing officer had not mentioned anything about under which category or limb, the underreporting was done by the assessee while levying the penalty. It is a settled position of law that the levy of penalty is a quasi criminal proceedings and it cannot be levied simply for the reason that there is a provision for imposing. The AO may desist from imposing penalty when there is a technical breach. In this case, we find that the AO had not given any reasons including the circumstances under which this penalty has been imposed. We find from the show cause notice extracted above, the AO had not stated about the limb under which the penalty u/s. 270A(1) was imposed. In such circumstances, the Ld.CIT(A) ought to have set aside the penalty imposed u/s. 270A(1) of the Act but unfortunately had confirmed the penalty and gave his own findings in its order which in our opinion is not correct.

Similarly, in respect of the penalty levied u/s. 270A(8) of the Act, which speaks about the underreporting of income as a consequence of misreporting, the AO had not stated under which category / limb the underreporting as a consequence of misreporting was done by the assessee. As we discussed the issue of penalty levied u/s. 270A(1) of the Act, we have stated that the show cause notice issued by the AO dated 24/02/2021 does not contain any details about the underreporting of income as a consequence of misreporting of income. The conditions to impose the penalty u/s. 270A(8) of the Act is not as easy as penalty levied u/s. 270A(1) of the Act since the sub-clause (8) of the section says that there should be an underreporting of income as a consequence of misreporting of income. Therefore in order to attract the said provision, the AO should first make out a case that there was a misreporting of income by the assessee and consequently, there is an underreporting of income. First thing is that the AO should give a clear finding about the misreporting of income and the circumstances / limbs enumerated u/s. 270A(9) should be specifically averred in the show cause notice. Thereafter, after satisfying himself that there is a misreporting of income then the AO should find out under what category / limb of section 270A(2), the underreporting has been made by the assessee, in order to attract the penalty u/s. 270A(8) of the Act. Even though, the provision is very clear, the AO had not strictly followed the procedures contemplated under the said section but levied the penalty by saying that underreporting of income as a consequence of misreporting. This is not enough to impose penalty u/s. 270A(8) of the Act but something more is required to invoke the said provision. The AO had not adhered to the procedures provided in the Act before imposing the penalty u/s. 270A(8) of the Act. Unless and until, the AO had established that the underreporting was made as a consequence of misreporting of income by the assessee, the penalty imposed could not be sustained.

The assessee being a co-operative organisation is audited by the statutory auditors appointed by the Registrar of Co-operative Societies and in such circumstances, no motive can be attributed, to impose penalty, which being a quasi criminal proceedings. In similar circumstances, the Hon’ble Bangalore Bench of the Tribunal in the order dated 27/09/2024 in in the case of IIFL Samasta Finance Ltd. vs. DCIT in which the penalty levied u/s. 270A of the Act was deleted by following the judgement of Hon’ble Delhi High Court reported in 443 ITR 186 with the following findings: “5.12 We are of the opinion that the penalty by hereditary nature is always discretionary. The legislature has used the word “may” in section 270A(1) of the Act which clearly says that it is discretionary on the part of the AO to levy penalty or not. We are also of the opinion that penalty is not at par with the tax and interest and therefore, penalty should not be levied in a light hearted manner or in routine manner and not every additions/disallowances are liable for penalty. The primary onus is on the revenue to prove that assessee falls under particular limb of default. The AO have to bring the case in the four corners of the sections in order to levy penalty which in our opinion, the authorities below failed to do so. The authority below misdirected themself by citing various irrelevant decisions of Hon’ble Supreme Court without understanding the real issues involved in the case of assessee company. Therefore, we are of the opinion that the explanation offered by the assessee is bonafide and the assessee has disclosed all material facts to substantiate the explanation. With the above observations, we delete the penalty levied u/s 270A of the Act and allow the appeal of the assessee.”