Summary: The ITAT Mumbai in Shree Balaji Chain v. ITO held that penalty under Section 270A cannot be sustained where the underlying addition is based solely on an estimated income after rejection of books of account and where the Assessing Officer fails to specify the precise statutory charge. In the present case, the Assessing Officer rejected the books and estimated profit at 3.5% of alleged out-of-books transactions, resulting in an addition of ₹47.06 lakh, followed by a penalty of ₹32.89 lakh under Section 270A. The Tribunal observed that no specific concealed income had been determined and the addition was purely on estimation. It further held that Section 270A distinguishes between under-reporting and under-reporting in consequence of misreporting, each requiring a specific charge. As neither the show-cause notice nor the penalty order identified the applicable limb of Section 270A(9), the penalty proceedings were held to be legally invalid. Accordingly, the Tribunal deleted the penalty and allowed the assessee’s appeal.
Core Issue: The central issue before the Tribunal was whether penalty under section 270A could be sustained when the underlying addition was made on an estimated basis after rejection of books of account and whether the penalty proceedings were valid when the Assessing Officer failed to specify the precise charge of under-reporting or misreporting of income contemplated under section 270A.
Facts: The assessee’s assessment for AY 2019-20 was completed under section 147 read with section 144B. The Assessing Officer alleged that the assessee had carried out out-of-books transactions aggregating to ₹13.44 crore. After rejecting the books of account, the Assessing Officer estimated income at 3.5% of such transactions and made an addition of ₹47.06 lakh. Based on this estimated addition, penalty proceedings under section 270A were initiated on the allegation of under-reporting of income in consequence of misreporting. Subsequently, penalty of ₹32.89 lakh was levied.
Findings of the AO and CIT(A): The Assessing Officer held that the assessee had under-reported income as a consequence of misreporting and accordingly levied penalty under section 270A. The CIT(A) did not examine the merits of the case and dismissed the appeal as non-maintainable on account of delay in filing.
ITAT Findings: The Tribunal observed that the addition itself was founded entirely on estimation after rejection of books of account. No specific concealed income was determined; rather, profits were estimated at a percentage of alleged out-of-book transactions. The Tribunal held that an estimated addition cannot, by itself, justify levy of penalty under section 270A.
The Tribunal further noted that section 270A creates two distinct defaults—under-reporting of income and under-reporting in consequence of misreporting of income—each carrying different penal consequences. Therefore, the Assessing Officer was required to clearly specify the exact charge and, in cases of misreporting, identify the applicable clause of section 270A(9). However, neither the show-cause notice nor the penalty order disclosed which specific limb of section 270A(9) was attracted. The penalty proceedings merely referred to under-reporting in consequence of misreporting without identifying the precise statutory default. Such a vague charge rendered the penalty proceedings legally unsustainable.
Cases Relied Upon: The Tribunal relied upon Schneider Electric South East Asia (HQ) Pte. Ltd. v. ACIT [2022 (3) TMI 1295 (Delhi High Court)], wherein it was held that failure to specify the applicable limb of section 270A makes the penalty notice arbitrary and invalid. Reliance was also placed on G.R. Infraprojects Ltd. v. ACIT [2024 (1) TMI 163 (Rajasthan High Court)], which held that initiation of penalty without identifying the relevant clause of section 270A(9) is non-est. The Tribunal further followed Hi-Tech Engineers v. ACIT [2025 (11) TMI 1387 (ITAT Mumbai)] and DCIT v. Chakradhar Contractors and Engineers Pvt. Ltd. [2024 (12) TMI 1552 (ITAT Pune),] which reiterated that a specific statutory charge is mandatory for valid penalty proceedings under section 270A.
Outcome: The Tribunal held that the penalty under section 270A was unsustainable both on merits and in law. Since the addition was based purely on estimation and the Assessing Officer had failed to specify the exact charge of under-reporting or misreporting under section 270A, the penalty of ₹32.89 lakh was deleted and the assessee’s appeal was allowed.
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