Section 270A Penalty Quashed as Vague Notice Failed to Specify Exact Charge: ITAT Chandigarh

Kamaljeet Singh Vs ACIT (ITAT Chandigarh)

AO Mixes Up the Charge and the Section: ₹32.40 Lakh Penalty Quashed

An Incorrect Claim Does Not Excuse an Incorrect Penalty Notice

The Chandigarh Bench of the Income Tax Appellate Tribunal quashed a penalty of ₹32,39,679 under Section 270A because the notices failed to communicate the precise statutory charge against the assessee. The subsequent show-cause notice referred indiscriminately to under-reporting and/or misreporting, while its annexure asked why penalty under Section 271A should not be imposed.

The Tribunal held that these defects demonstrated non-application of mind. The assessee’s surrender of certain claims during assessment could not sustain penalty proceedings founded on fundamentally defective notices.

The Assessment and the Disputed Claims

The assessee, an individual engaged in real estate business and renting immovable properties, filed his return on 31 July 2017, declaring a loss of ₹19,48,544. Following scrutiny, the Assessing Officer completed the assessment under Section 143(3) on 12 December 2019, determining total income at ₹2,53,61,458.

The principal adjustment concerned an exemption of ₹2,54,78,798 claimed under Section 54B. During assessment, the assessee surrendered this claim, explaining that it had been made under a bona fide misunderstanding of law, although the property sold was commercial in nature.

The AO also disallowed legal fees of ₹8,85,000 relating to a court dispute over car parking and 50% of the interest expenditure, amounting to ₹9,46,204. The assessee agreed to surrender the latter amount.

Consequently, the AO imposed penalty under Section 270A at 50% of the tax payable. The CIT(A), NFAC, upheld the penalty, leading to the appeal before the Tribunal.

The Challenge Was to the Validity of the Notices

Before the Tribunal, the assessee raised a legal objection concerning the notices dated 13 December 2019 and 19 May 2021. His contention was that they failed to specify the relevant statutory clause under Section 270A and did not adequately identify the default alleged.

The Revenue defended the penalty by pointing to the improper Section 54B claim and the failure to fully substantiate business expenditure. However, the Tribunal examined whether the assessee had first been given a legally sufficient opportunity to answer a clearly identified charge.

This distinction mattered. The existence of assessment additions and the validity of penalty proceedings were separate questions.

Under-reporting and Misreporting Cannot Be Used Interchangeably

The Tribunal found that the subsequent show-cause notice vaguely referred to income arising from “under-reporting and/or misreporting”.

These are distinct categories under Section 270A, carrying substantially different consequences. Under-reporting attracts penalty at 50%, whereas misreporting attracts penalty at 200%, of the relevant tax.

The AO was therefore required to convey the exact limb of default so that the assessee could prepare an effective defence. A notice leaving both possibilities open did not satisfy that requirement.

The Tribunal treated clarity of charge as part of the assessee’s reasonable opportunity of defence, rather than a dispensable drafting formality. An assessee must know the allegation he is required to meet before the authority decides whether penalty should follow.

Section 270A in the Notice, Section 271A in the Annexure

The more conspicuous defect appeared in the annexure accompanying the notice dated 19 May 2021. Although the notice concerned proceedings under Section 270A, the annexure required the assessee to explain why penalty under Section 271A should not be imposed.

Section 271A deals with failure to keep or maintain books of account as required under Section 44AA. That was not the default involved in these proceedings.

The Tribunal regarded this contradiction as clear evidence that the notice had been issued routinely and mechanically, without application of mind. Read together with the unspecified charge under Section 270A, the mistake was held to be a fundamental defect.

Precedents Relied Upon and the Result

The Tribunal relied on GE Capital US Holdings Inc. v. DCIT, 163 taxmann.com 146, in which the Delhi High Court stressed the requirement of a precise penalty charge.

It also referred to DCIT v. Chakradhar Contractors & Engineers (P.) Ltd., 171 taxmann.com 133, and Divya Burman v. Assessment Unit, ITA No. 4673/Del/2024, for the principle that failure to identify the applicable statutory clause under Section 270A(2) or Section 270A(9) invalidates the proceedings.

Following these authorities, the Tribunal quashed the penalty order dated 28 February 2022 and allowed the assessee’s appeal.

Author’s Comments

The decision reinforces that accepting an addition does not dispense with a valid penalty notice. The Department must identify the statutory default and provide a meaningful opportunity to respond.

An important factual nuance is that the original notice reproduced in the order did mention under-reported income. The defects considered by the Tribunal included the failure to specify the relevant clause, the subsequent ambiguous reference to both categories, and the contradictory invocation of Section 271A. The decision should therefore be understood in that complete factual setting.

Equally, the Tribunal did not decide that the Section 54B claim was bona fide or that the disallowed expenses were allowable. The relief rested on defective penalty proceedings. Assessment surrender and penalty liability remain distinct issues; here, the AO’s failure to frame a clear and consistent charge proved decisive.

Cases Discussed

• GE Capital US Holdings Inc. v. DCIT, 163 taxmann.com 146 (Delhi High Court) — relied upon for the proposition that a penalty notice must clearly spell out the precise charge against the assessee.
• DCIT v. Chakradhar Contractors & Engineers (P.) Ltd., 171 taxmann.com 133 (ITAT Pune) — considered for the principle that failure to specify the exact statutory clause under Section 270A governing the alleged default invalidates the penalty proceedings.
• Divya Burman v. Assessment Unit, ITA No. 4673/Del/2024 (ITAT Delhi) — considered for the principle that failure to specify the exact statutory clause under Section 270A(2) or Section 270A(9) invalidates penalty proceedings ab initio.

FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, CHANDIGARH

1. This appeal preferred by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘Ld. CIT(A)’] dated 25.01.2026, which in turn arises out of a penalty order passed by the Assessing Officer (AO) under Section 270A of the Income-tax Act, 1961 (for short “the Act”) dated 28.02.2022. The penalty levied in this case stands at Rs.32,39,679/- for Assessment Year (AY) 2017-18.

2. Briefly stated, the facts of the case are that the assessee is an individual and engaged in the business of real estate and also providing service of Renting of immovable properties. The assessee filed his original Return of Income on 31.07.2017 declaring a total income of (-) Rs. 19,48,544/-. The return was selected for scrutiny and assessment under Section 143(3) of the Act was completed on 12.12.2019, determining the total income at Rs. 2,53,61,458/-.

3. In the course of assessment proceedings, the Ld. AO made three specific additions/disallowances:

• Exemption under Section 54B: Disallowed a claim of Rs. 2,54,78,798/- The assessee surrendered this claim during assessment, stating it was mistakenly claimed under a bonafide ignorance of law since the property sold was commercial in nature.
• Legal Fees: Disallowed Rs. 8,85,000/- incurred towards a court dispute regarding car parking.
• Interest Expense: Disallowed 50% of interest expenses, amounting to Rs. 9,46,204/- (out of total interest of Rs. 18,92,407/-), which the assessee agreed to surrender.

4. Consequent to these assessment additions, the Ld. AO initiated penalty proceedings under Section 270A of the Act and eventually passed an order levying a penalty of Rs.32,39,679/- @ 50% of tax payable. Aggrieved, the assessee filed an appeal before the Ld. CIT(A), who sustained the penalty vide order dated 25.01.2026.

5. Further aggrieved, the assessee has come up in appeal before us.

6. At the outset, the Ld. Authorised Representative (AR) appearing for the assessee assailed the penalty order on a jurisdictional and legal ground. The Ld. AR submitted that the penalty notice dated 13.12.2019 issued under Section 274 read with Section 270A, as well as the subsequent show-cause notice dated 19.05.2021, fail to specify the relevant clause under Section 270A of the I.T. Act, 1961.

7. On the other hand, the Ld. Departmental Representative (DR) relied on the orders of the lower authorities and submitted that penalty was rightly sustained as the assessee had improperly claimed deduction under Section 54B and failed to fully substantiate business expenses.

8. We have heard the rival contentions and perused the relevant material placed on record.

9. We perused the Notice dated 13.12.2019 issued U/s 274 r.w.s 270A of the Income Tax Act which is reproduced as under:-

10. We also perused the Show Notice for levy of penalty under section 270A dated 19.05.2021 which is reproduced as under :-

ANNEXURE

11. On examination of the statutory notices issued under Section 274 read with Section 270A of the Act, we find that the Ld. AO has failed to make specific charge against the assessee. The show-cause notice dated 19.05.2021 vaguely mentions that the assessee has reported sums in consequence of “under-reporting and/or misreporting of income”. Under Section 270A, ‘under-reporting’ and ‘misreporting’ are two distinct categories attracting different rates of penalty (50% and 200% respectively). It is a settled position of law that the AO must clearly convey to the assessee the exact limb of default he is charged with, so as to afford a reasonable opportunity of defense.

12. What is even more striking is that in the show-cause notice dated 19.05.2021, the Ld. AO directed the assessee to explain why penalty under Section 271A should not be levied. Section 271A governs penalty for failure to keep or maintain books of account under Section 44AA. This is clearly not the case here. This glaring contradiction confirms that the notice was issued in a routine, mechanical manner without any application of mind. This issue is no longer res integra. The Hon’ble Delhi High Court in GE Capital US Holdings Inc. vs. DCIT (163 Taxmann.com 146) has held that a penalty notice must clearly spell out the precise charge against the assessee. Similar views have been consistently taken by coordinate benches, including the Pune Bench in DCIT vs. Chakradhar Contractors & Engineers (P) Ltd. (171 Taxmann.com 133) and the Delhi Bench in Divya Burman vs. Assessment Unit (ITA No. 4673/Del/2024), holding that failure to specify the exact statutory clause under Section 270A(2) or Section 270A(9) invalidates the penalty proceedings ab initio.

13. Following the ratio laid down in the above precedents, since the notice issued by the Ld. AO suffers from fundamental fatal defects and non-application of mind, the penalty order passed under Section 270A of the Act dated 28.02.2022 cannot be sustained in the eye of law. We, therefore, quash the penalty order of Rs. 32,39,679/- levied under Section 270A.

14. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on 06.10.2026