Podar Literacy and Education Trust Vs DCIT (ITAT Mumbai)
Summary: The Mumbai Bench of the Income Tax Appellate Tribunal allowed the appeal of Podar Literacy and Education Trust against the order dated 19.05.2025 passed by the Commissioner of Income Tax (Appeals)-47, Mumbai, confirming a penalty of ₹37,61,672/- levied under section 270A of the Income-tax Act, 1961. The Tribunal held that the essential foundation for levy of penalty under section 270A was absent because the assessee’s returned and assessed income remained Nil and the disallowance of depreciation did not result in any taxable income, reduction of a declared loss or conversion of loss into income. The order was pronounced on 09.12.2025.
The assessee was a public charitable trust registered under section 12AA(1)(b)(i) and approved under section 10(23C)(vi) of the Act. For the assessment year under consideration, it filed its return declaring total income at Nil. A search under section 132 and survey under section 133A were conducted on the Podar Education Group on 09.01.2018, pursuant to which the assessee filed a return under section 153A, again declaring Nil income.
The assessment was completed under section 143(3) read with section 153A vide order dated 27.12.2019, determining total income at Nil. During the assessment, however, the Assessing Officer disallowed depreciation of ₹2,19,21,165/- claimed by the assessee. The disallowance was based on section 11(6), as the acquisition cost of the relevant assets had already been treated as application of income in earlier years. The provision restricts a further depreciation claim where the acquisition cost of the asset has already been claimed as application of income. TaxGuru has also discussed the operation of section 11(6) in relation to charitable trusts in its Income Tax Exemptions for registered charitable & religious Trust reference.
Despite the depreciation disallowance, the assessed income continued to remain Nil. There was consequently no positive income assessed, no reduction of a declared loss and no conversion of loss into income. Nevertheless, the Assessing Officer recorded that the assessee had under-reported income of ₹2,19,21,165/- and initiated penalty proceedings under section 270A. The assessee submitted that its depreciation claim was bona fide, that there was no concealment or misrepresentation, that its income was otherwise exempt under section 11 and that no tax advantage had accrued to it.
The Assessing Officer rejected the explanation and, by order dated 21.06.2023, levied penalty under section 270A at 50% of the alleged tax payable on the purported under-reported income, amounting to ₹37,61,672/-. The CIT(A) confirmed the penalty, holding that the impermissible depreciation claim under section 11(6) resulted in overstatement of application of income and consequently under-reporting of income within section 270A(2)(a).
Before the Tribunal, the issue was not merely whether the depreciation claim was allowable under section 11(6), but whether making the claim, in the factual circumstances of the case, resulted in “under-reporting of income” so as to attract section 270A. The Tribunal emphasised that penalty under section 270A is not automatic. There must first be “under-reported income”, and that income must fall within one of the situations specified in section 270A(2) before the penalty mechanism can operate.
The Tribunal noted that the assessee’s income was Nil both in the return and in the assessment. The assessee was a charitable trust whose income, subject to fulfilment of the statutory conditions, was exempt under section 11. Even after the depreciation disallowance, the assessment resulted in Nil income. Thus, there was no income brought to tax as a consequence of the disallowance.
The Tribunal held that “under-reporting of income” under section 270A could not be considered in isolation from the charging and exemption provisions of the Act. Where the assessee’s income remained exempt and Nil even after the disallowance, it was difficult to hold that the assessee had under-reported income in the statutory sense.
The Tribunal further observed that an impermissible claim or inadmissible deduction does not, by itself, translate into under-reporting of income for penalty purposes, particularly where the claim does not result in any tax advantage, reduction of tax liability or deferment of tax. The assessee had also furnished material showing that it had not availed any benefit of carry forward or set-off of any loss arising from the relevant assessment year in subsequent years.
According to the Tribunal, this was neither a case where the assessment reduced a loss nor one where a loss was converted into income. Nor had the assessee obtained any present or future tax advantage. The Tribunal therefore found the essential ingredient of under-reported income absent.
The Tribunal also specifically examined section 270A(2)(a), which covers a situation where the income assessed is greater than the income determined in the return. In the present case, the income determined in the return was Nil and the income assessed was also Nil. Accordingly, the condition precedent for invoking section 270A(2)(a) was not satisfied. TaxGuru has separately explained the framework governing penalty for under-reporting and misreporting of income under section 270A.
The Tribunal observed that penalty provisions, though civil in nature, have serious consequences and must be construed strictly. Penalty could not be imposed merely because a claim was disallowed where the disallowance did not result in taxable income or tax payable.
Accordingly, while the Tribunal accepted the position that the depreciation claim was impermissible under section 11(6), it held that this did not automatically lead to under-reporting of income under section 270A in the circumstances of the case. Since the assessee’s income remained exempt and Nil, there was no loss reduction or conversion into income and no carry forward or set-off benefit had been availed, the foundation for the penalty was absent.
The Tribunal therefore held that the penalty of ₹37,61,672/- levied under section 270A was unsustainable in law and deleted the same. The appeal of the assessee was allowed. The Tribunal’s reasoning concerned the statutory conditions for penalty under section 270A and did not disturb the underlying disallowance of depreciation under section 11(6).
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal is directed against the order dated 19.05.2025 passed by the learned Commissioner of Income Tax (Appeals)-47, Mumbai, whereby the penalty levied by the Assessing Officer under section 270A of the Income-tax Act, 1961 (“the Act”) amounting to ₹37,61,672/- has been confirmed. The assessee has challenged both the assumption of jurisdiction for levy of penalty and the confirmation thereof on merits, contending that the facts of the case do not give rise to any “under-reporting of income” within the meaning of section 270A of the Act.
2. The assessee before us is a public charitable trust, registered under section 12AA(1) (b)(i) of the Act and also approved under section 10(23C)(vi). It is regularly assessed to tax and its income, subject to fulfilment of statutory conditions, is exempt under section 11 of the Act.
3. For the assessment year under consideration, the assessee filed its return of income declaring total income at Nil. Subsequently, a search and seizure action under section 132 and a survey action under section 133A of the Act were carried out on the Podar Education Group on 09.01.2018, during which the assessee trust was also covered. Pursuant to the said action, the assessee filed its return of income under section 153A of the Act, once again declaring total income at Nil.
4. The assessment was completed by the Assessing Officer under section 143(3) read with section 153A of the Act vide order dated 27.12.2019, determining the total income at Nil. However, while completing the assessment, the Assessing Officer disallowed depreciation of ₹2,19,21,165/- claimed by the assessee. The basis for such disallowance was that the assessee had treated the acquisition cost of the relevant assets as application of income in earlier years and, in view of the provisions of section 11(6) of the Act, depreciation on such assets could not again be allowed, as that would amount to a double deduction.
5. It is pertinent to note that despite the aforesaid disallowance, the assessed income continued to remain Nil. There was no positive income assessed, nor was there any reduction of a declared loss or conversion of loss into income.
6. Nevertheless, the Assessing Officer recorded a finding in the assessment order that the assessee had under-reported income to the extent of ₹2,19,21,165/- and, on that basis, initiated penalty proceedings under section 270A of the Act. Notices were issued, to which the assessee filed detailed replies explaining that the claim of depreciation was bona fide, that there was no concealment or misrepresentation, that its income was otherwise exempt under section 11 of the Act, and that no tax advantage had accrued to it.
7. The Assessing Officer was not convinced with the explanation furnished. He proceeded to pass an order dated 21.06.2023 under section 270A of the Act, levying penalty at the rate of 50% of the alleged tax payable on the so-called under-reported income, amounting to ₹37,61,672/-.
8. On appeal, the learned CIT(A) confirmed the levy of penalty. The learned CIT(A), in his findings, held that the assessee had made a claim of depreciation which was impermissible in law, being in clear violation of section 11(6) of the Act. According to the learned CIT(A), the claim of depreciation on assets whose acquisition cost had already been treated as application of income amounted to an impermissible deduction, leading to overstatement of application of income and, consequently, under-reporting of income. On this reasoning, the learned CIT(A) concluded that the case squarely fell within section 270A(2)(a) of the Act and, therefore, confirmed the penalty.
9. It is against this finding and confirmation that the assessee is in appeal before us.
10. We have carefully considered the rival submissions, perused the material placed on record, and examined the orders of the authorities below in the light of the statutory framework governing section 270A of the Act. The issue before us is not merely whether the claim of depreciation was legally admissible under section 11(6) of the Act, but whether the making of such a claim, in the admitted factual backdrop of the case, results in “under-reporting of income” so as to warrant levy of penalty under section 270A.
11. At the outset, it is necessary to emphasise that penalty under section 270A is not automatic. The provision first requires the existence of “under-reported income” and then mandates that such under-reported income must fall within one of the situations enumerated in sub-section (2). Only upon satisfaction of these jurisdictional conditions can the machinery of penalty be set in motion.
12. In the present case, the learned CIT(A) has proceeded on the premise that the assessee’s claim of depreciation, being impermissible under section 11(6), resulted in overstatement of application of income and thus constituted under-reporting of income within the meaning of section 270A(2)(a). While this line of reasoning may appear attractive at first blush, it does not withstand closer scrutiny when examined in the full factual and legal context of the case.
13. It is an admitted and undisputed position that the assessee’s income, both as returned and as assessed, is Nil. The assessee is a charitable trust whose income, subject to fulfilment of statutory conditions, is exempt under section 11 of the Act. Even after the disallowance of depreciation, the assessment does not result in any taxable income. The assessed income remains Nil. Thus, in substance and effect, there is no income which has escaped assessment or has been brought to tax as a result of the disallowance.
14. The concept of “under-reporting of income” under section 270A cannot be read in isolation or in abstraction. It must be understood in the context of the charging and exemption provisions of the Act. Where an assessee’s income is otherwise exempt under section 11, and the assessment, even after making the disallowance, results in Nil income, it is difficult to comprehend how the assessee can be said to have under-reported income in the statutory sense.
15. The learned CIT(A) has characterised the claim of depreciation as an impermissible deduction leading to under- reporting. However, an impermissible claim or an inadmissible deduction does not ipso facto translate into under-reporting of income for the purposes of penalty, particularly when such claim does not result in any tax advantage, reduction of tax liability, or deferment of tax.
16. Equally significant is the undisputed factual position that the assessee has categorically clarified, with supporting material, that it has not availed any benefit of carry forward or set-off of any loss arising from the impugned assessment year in subsequent years. The financial statements and the copies of ITR-7 for the relevant and subsequent assessment years placed on record demonstrate that no such benefit has been claimed. It has also been explained that the automated ITR utility itself did not permit any carry forward or set-off in the manner alleged.
17. Thus, this is not a case where the assessment has the effect of reducing a loss or converting a loss into income, nor is it a case where the assessee has secured any present or future tax advantage. In such circumstances, the essential ingredient of “under-reporting of income”, as contemplated under section 270A, is conspicuously absent.
18. The reliance placed by the learned CIT(A) on section 270A(2)(a) also does not advance the Revenue’s case. Clause (a) of sub-section (2) refers to a situation where the income assessed is greater than the income determined in the return. In the present case, the income determined in the return is Nil and the income assessed is also Nil. The numerical equality of returned income and assessed income remains undisturbed. Therefore, even on a plain reading of section 270A(2)(a), the condition precedent for invoking the said clause is not satisfied.
19. Penalty provisions, though civil in nature, have serious consequences and must be construed strictly. They cannot be invoked on the basis of assumptions or perceived revenue loss divorced from the actual statutory impact. The Act does not authorise levy of penalty merely because a claim is disallowed, particularly where such disallowance does not result in any taxable income or tax payable.
20. Viewed in this backdrop, we are unable to sustain the finding of the learned CIT(A) that the assessee’s claim of depreciation, though impermissible under section 11(6), automatically leads to under-reporting of income so as to trigger penalty under section 270A. The factual matrix clearly demonstrates that the assessee’s income remains exempt and Nil, there is no loss reduction or conversion into income, and no benefit of carry forward or set-off has been availed.
21. In our considered view, therefore, the very foundation for levy of penalty under section 270A is absent in the present case. The confirmation of penalty by the learned CIT(A), without appreciating these crucial aspects, cannot be sustained.
22. Accordingly, we hold that the penalty levied under section 270A of the Act amounting to ₹37,61,672/- is unsustainable in law and is hereby deleted.
23. In the result, the appeal of the assessee is allowed.
Order pronounced on 9th December, 2025.
