DCIT Vs L. Javerchand Jewellers Pvt. Ltd. (ITAT Bangalore)
The Income Tax Appellate Tribunal (ITAT) dismissed the Revenue’s appeal and upheld the order of the Commissioner of Income Tax (Appeals) deleting the penalty of ₹1,79,27,172 levied under Section 270A of the Income Tax Act, 1961.
The assessee, a closely held private limited company engaged in wholesale trading of gold jewellery, filed its original return of income for Assessment Year 2019-20 declaring total income of ₹1,08,17,950, which was processed under Section 143(1). Subsequently, search proceedings were conducted in connection with another group, during which incriminating documents were found relating to the assessee. During the search, the Managing Director stated under Section 132(4) that invoices were generally raised for only 70–75% of the value received through banking channels, while the balance was received in cash or old/damaged gold and remained unrecorded. Based on this, the assessee voluntarily admitted additional income by estimating undisclosed turnover at approximately 30% of the regular turnover and applying a gross profit rate of 3%, resulting in additional income of ₹2.88 crore.
After receipt of notice under Section 153C, the assessee filed a revised return declaring total income of ₹3,96,17,950, including the admitted additional income. The Assessing Officer completed the assessment under Sections 143(3) read with 153C by accepting the returned income without making any further additions. Simultaneously, the Assessing Officer initiated penalty proceedings under Section 270A for under-reporting of income in consequence of misreporting and later imposed penalty at 200% of the tax payable on the alleged under-reported income, amounting to ₹1,79,27,172. The Assessing Officer held that the assessee had suppressed facts, failed to disclose income voluntarily, and misreported income discovered only because of the search proceedings.
The CIT(A) deleted the penalty. It observed that the Assessing Officer had neither identified the specific clause of Section 270A(2) applicable to under-reporting nor specified which clause of Section 270A(9) constituted misreporting. The CIT(A) also noted that the additional income was determined on an estimated basis by applying a gross profit rate of 3% on estimated unaccounted turnover. Since the income was estimated and accepted without any further addition, it could not be treated as under-reported income attracting penalty under Section 270A. The CIT(A) further observed that there was no reference to seized material supporting the penalty and accepted the assessee’s contention that penalty under Sections 270A(8) and 270A(9) was not sustainable in such circumstances.
Before the Tribunal, the Revenue contended that the income was not estimated by the Assessing Officer but was admitted by the assessee based on incriminating material seized during the search. It argued that the Managing Director had admitted undisclosed sales and that the penalty was rightly imposed for misreporting of income under Sections 270A(1) read with 270A(9).
The assessee supported the CIT(A)’s order and submitted that the returned income filed under Section 153C had been accepted without any addition, all information and explanations had been furnished, and there was no case of under-reporting. It further argued that penalty cannot be levied where income is determined on an estimated basis and that the Assessing Officer had failed to identify the specific statutory limb of under-reporting or misreporting applicable to the case.
The Tribunal examined the statutory framework of Section 270A and held that the Assessing Officer must first establish that the case falls within one of the clauses of Section 270A(2) relating to under-reporting. Only after such determination can the assessee invoke the exclusions under Section 270A(6). If under-reporting is established, the Assessing Officer must then separately determine whether the case falls within any of the clauses of Section 270A(9) relating to misreporting. According to the Tribunal, the Assessing Officer cannot directly proceed to allege misreporting without first establishing under-reporting in accordance with Section 270A(2).
The Tribunal found that the assessment order, show-cause notice and penalty order merely referred to “under-reporting in consequence of misreporting” without identifying the specific clause of Section 270A(2) or Section 270A(9). It held that the Assessing Officer failed to communicate the precise statutory basis for the penalty, thereby violating the principles of natural justice and rendering the proceedings unsustainable.
The Tribunal further held that the additional income had been determined entirely on an estimated basis and accepted by the Assessing Officer without any further additions. It observed that a mere declaration of estimated additional income before completion of assessment does not automatically amount to under-reporting resulting in misreporting. It agreed with the CIT(A) that penalty under Section 270A cannot be levied where the assessed income is based on accepted estimation.
The Tribunal also observed that Section 270A(1) uses the word “may”, indicating that levy of penalty is discretionary and not automatic. It held that the Revenue bears the primary burden of establishing that the assessee falls within the specific statutory provisions authorising penalty. Since the Assessing Officer failed to satisfy these statutory requirements and the assessee had disclosed all material facts during assessment, the Tribunal upheld the deletion of the penalty and dismissed the Revenue’s appeal.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal at the instance of the Revenue is directed against the order of ld. CIT(A)-2, Panaji dated 26.12.2023 vide DIN: ITBA/APL /M/250/2023-24/1059014514(1) passed under section 250 of the Income Tax Act, 1961 ( in short “The Act”) for the assessment year ( in short “AY”) 2019-20.
2. The Revenue has raised the following grounds of appeal:
3. Before leaping straightway to the penalty proceedings, it is very much pertinent here to discuss with regard to the assessment proceedings for ease of understanding and appreciating the real facts which leads to the initiation of penalty proceedings.
4. Brief facts of the case are that the assessee is a closely held private limited company engaged in the wholesale business of trading in gold jewellery. The assessee company filed its return of income on 31.10.2019 for the AY 2019-20 declaring total income of 1,08,17,950/-. The return was processed u/s. 143(1) on 02.12.2019 accepting the return income of Rs. 1,08,17,950/-.
4.1 Thereafter, warrant in this case has been issued primarily in the case of M/s. City Fashion Gold Jewellery group and search action conducted, as the assessee is one of the major suppliers to M/S Sultan Gold group of concerns and M/S City Gold Fashion jewellery and certain incriminating documents were found.
4.2 On admission of the undisclosed income by the assessee, the observation of AO in the Para 6 of the assessment order are reproduced below for the ease of reference and convenience:
“6. Admission of undisclosed income
6.1 During search, a statement u/s. 132(4) was recorded on 28.06.2019 from Mr. Vinod Kumar Jain, Managing Director who in reply to Q. No. 15 stated that customers come with queries and when billing is done, the invoice is raised only for 70-75% of the value which is paid by RTGS or cheque and balance is paid for by cash or old gold/damaged gold which is unrecorded in the regular books of accounts. The assessee stated that they had made a declaration of the earlier year’s undisclosed income in the IDS scheme 2016 and hence sought to voluntarily admit additional income for the FY 2017-18 onwards on account of the findings of search as above.
6.2 The declaration of additional income has been worked out on GP of 3% as per the declared gross profits for the last two years on the undisclosed turnover which was estimated as being around 30% of the regular turnover reflected in the financial statements and declared to tax in the ITR”
4.3 Accordingly, the additional income on account of undisclosed turnover is quantified during the course of search proceeding for the AY 2019-20 and admitted at the rate of 3% of undisclosed turnover amounting to Rs. 2,88,00,000/-. Subsequent to the notice u/s. 153C of the Act, the assessee filed a return of income for the AY 2019-20 on 26.03.2021 declaring a total income of Rs. 3,96,17,950/- as admitted during the course of assessment proceedings. Thereafter, the assessment was completed on 27.07.2021 on a total assessed income of Rs. 3,96,17,950/- u/s. 143(3) r.w.s. 153C of the Act.
4.4 On or before the completion of assessment proceedings u/s. 143(3) r.w.s. 153C of the Act, the AO initiated penalty proceedings with the following observation:
“Penalty notice u/s. 274 read with 270A is directed to be issued for underreported income in consequence of misreporting of income.”
4.5 The AO, thereafter issued notice dated 27.07.2021 u/s. 274 r.w.s. 270A of the Act for the AY 2019-20 directing the assessee to show cause as to why an order imposing a penalty should not be made u/s. 270A of the Act for under-reporting of income in consequence of mis-reporting.
4.6 Considering the penalty reply submitted by the assessee filed on 25.03.2022, the AO levied the penalty with the following observation which are reproduced below for the ease of reference and record:
“8. Conclusions drawn on the basis of material facts
The case was selected for scrutiny consequent upon search action for the specific purpose of examining evidences found during the course of search. This is also clearly a case of failure to record correct expenses and claiming substantiated expenses in the books of account and accounting correct income thereof apart from the fact that there is suppression of facts. But for search and consequent scrutiny of the case, there would have been no chance of detecting material evidences which resulted in declaration of undisclosed income for so many years.
8.1 The assessee did not voluntarily disclose the income and only after a search action and detection of material evidences, additional income was brought to tax. This is also clearly a case of misreporting due to suppression of facts while filing returns of income. But for search proceedings followed by scrutiny of the case there would have been no chance of detecting undisclosed income for any of these years.
8.2 During the course of assessment proceedings, penalty proceedings under section 270A was initiated. From a cursory glance of issues and sequence of events as noted above, it is very clear that the assessee has not furnished correct particulars of income and intended to evade taxes by devising dubious methods to mislead the department by making false entries of accounts. It is very clear from the above that the assessee has been deliberately furnishing details with the view to make wrongfull claims in the returns and evade taxes. Undisclosed income was detected in the assessee after search action. The assessee has deliberately attempted to evade tax dues of the department.
8.3 The contentions of the assessee with regard to non applicability of clause (a) to (e) below section 270A(8) is therefore required to be rejected in total for the detailed reasons mentioned above. Accordingly the case of assessee clearly fall under the purview of “Misreporting” and accordingly the assessee is liable for penalty u/s. 270A of the Income Tax Act 1961.
8.4 In view of the discussion as above, and also considering the facts and circumstances of the case, it is very well established that the assessee has miss reported income with the view to evade taxes and hence made himself liable for penalty under section 270A(1) r.w.s. 270A(8) of the Income Tax Act, 1961. Subject to the above penalty proceedings under section 270A of the act, is disposed. Accordingly, I have no hesitation in levying penalty u/s. 270A(1) and Rs. 1,79,27,172 (200% of undisclosed tax of Rs. 89,63,586) is hereby levied as penalty for misreporting of income as per provisions of section 270A(1) read with section 270A(9) of the Income tax Act, 1961.”
5. Aggrieved by the penalty order passed u/s 270A of the Act dated 30.03.2022, the assessee had preferred an appeal before the ld. CIT(A).
6. The Ld. CIT(A) allowed the appeal of the assessee by deleting the penalty levied u/s 270A of the Act by AO amounting to Rs. 1,79,27,112/- mainly on the following grounds /observations:-
6.1 The ld. CIT(A) could not find any specific reference to the applicability of clause (a) to (g) of Sec 270A(2) to the present case. Further, when the AO invoked sub-section (8) of section 270A, he did not point out the specific clause in section 270A(9) that applies to the action of the appellant. Without making a reference to section 270A(9) or the clauses (a) to (f) of section 270A(9), the AO determined that there was under-reporting of income which is in consequence of mis-reporting.
6.2 Further, ld. CIT(A) examined the case on merits to check if the impugned order is otherwise sustainable and noted that sec. 270A(2)(a) is applicable as the income return u/s. 153C which was assessed and accepted, is greater than income determined u/s. 143(1).
6.3 The CIT(A) was also of the opinion that in order to prove that this is a case of mis-representation or suppression of facts, the AO ought to have brought out relevant search records to the extent of addition made or the penalty levied. On the contrary, there was no semblance of any reference to seized material
6.4 The assessee voluntarily admitted GP of 3% of the entire estimated unaccounted turnover of Rs. 96 crores. If 270A(9) were to be applied, the addition on suppression of sales should have been made entirely on the basis of the seized material found. In the present case, income have been offered and tax on an estimation basis that whenever the appellant sells the jewellery, it approximately takes 30% of the consideration in cash and 70% through Banking channel and that the appellant has offered 3% as income being estimated gross profit on the basis of gross profit earned by the Appellant over the period of various past years, it is improper and illogical to impose penalty u/s. 270A(8) r.w.s. 270A(9).
6.5 The ld. CIT(A) held that the argument of the assessee is reasonable and acceptable. It is quite clear that when the income has been determined based on an estimate, the same cannot be considered to be under-reported income and accordingly deleted the penalty u/s 270A of the Act.
7. Aggrieved by the order of the ld. CIT(A)-2, Panaji dated 26.12.2023, the Revenue has filed the present appeal before this Tribunal. The assessee has filed the paper book comprising 58 pages containing various documents filed/produced before the Authorities below along with the list of citations relied upon by the assessee which are comprised of 69 pages.
8. Before us, the ld. JCIT-D.R. Sri V. Parithivel, fervently submitted that the ld. CIT(A) erred in law in not appreciating the fact that the AO has not at all resorted to any estimation and in fact the assessee has admitted and declared the said income which is based on the incriminating evidences seized during the search proceedings. Further, the ld. DR submitted that managing director of the assessee in his sworn statement admitted undisclosed sales @ 30% of total sales and accordingly admitted the additional income to the extent of 3% of the total undisclosed sales. Lastly, the ld. DR submitted that the penalty of Rs. 1,79,27,172/- was levied for mis-reporting of income as per provisions of sec. 270A(1) r.w.s. 270A(9) of the Act due to the suppression of sales and the AO while initiating the penalty in the assessment order clearly mentioned the term mis-reporting of income.
9. The ld. AR of the assessee on the other hand supported the order of the ld. CIT(A)-2, Panaji and reiterated the same grounds as placed before the lower authorities. Further, the AR submitted that no penalty for under-reporting can be imposed on the assessee in accordance with clause (a) of sub-section (6) of section 270A of the Act as the assessee had duly provided the details and explanations called for by the AO during the assessment proceeding and the return of income was accepted without any additions. Further AR of the assessee submitted that there are plethora of decisions in which it is held that penalty u/s. 270A cannot be levied when the income is arrived at based on estimation. Lastly, the AR submitted that the AO did not specify any specific limb under which under-reporting as well as mis-reporting of the assessee’s case falls which is a clear gross violation of principles of natural justice.
10. We have heard the rival submissions and perused the materials available on record. The AO has passed an assessment order u/s 143(3) r.w.s. 153C of the Act on 27.02.2021 by accepting the return income filed by the assessee on 26.03.2021 declaring total income of Rs. 3,96,17,950/- in response to notice u/s. 153C of the Act for the AY 2019-20. The AO initiated the penalty proceedings U/s 274 read with 270A of the Act with regard to under-reporting of income in consequence of misreporting of income. During the course of penalty proceedings the assessee submitted that there is no case of under-reporting of income in consequence of misreporting as contained under the provisions of section 270A(6) of the Act. Further, the assessee contention is that they had duly provided the details and explanations called for and the return was accepted and no addition was made to the return income. Further, the assessee has fully co-operated with the department for early completion of the assessment and all the taxes due has also been paid. Lastly, it was also submitted that the penalty for alleged under reporting of income cannot be imposed having regard to the provision of clause 270A(6)(b) and 270A(6)(c) of the Act as correct and complete income has been offered for taxation and no defect has been pointed out by the AO.
10.1 On going through the rationale in allowing the appeal of the assessee, we find that the ld. CIT(A)-2, Panaji is of the view that there is no specific reference to the applicability of clause (a) to (g) of section 270A(2) of the Act in the present case. Further, when the when AO invoked sub-section (8) of section 270A, he did not point out the specific clauses in section 270A(9) that applies to the action of the assessee. Without making a reference to section 270A(9) of the Act or the clauses (a) to (f) of section 270A(9) of the Act, AO determined that there was under-reporting of income which is in consequence of mis-reporting. The ld. CIT(A) further held that the argument of the assessee is reasonable and acceptable. It is quite clear that when the income has been determined based on an estimate, the same cannot be considered to be under-reported income and accordingly deleted the penalty u/s 270A of the Act.
10.2 For the purpose of evaluating the correctness of rival submissions addressed we deem it apposite to extract section 270A of the Act herein below:
270A. Penalty for under-reporting and misreporting of income.
(1)The Assessing Officer 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:
Provided that where under-reported income arises out of determination of deemed total income in accordance with the provisions of section 115JB or section 115JC, the amount of total under-reported income shall be determined in accordance with the following formula—
(A — B) + (C — D)
where,
A = the total income assessed as per the provisions other than the provisions contained in section 115JB or section 115JC (herein called general provisions);
B = the total income that would have been chargeable had the total income assessed as per the general provisions been reduced by the amount of under-reported income;
C = the total income assessed as per the provisions contained in section 115JB or section 115JC;
D = the total income that would have been chargeable had the total income assessed as per the provisions contained in section 115JB or section 115JC been reduced by the amount of under-reported income:
Provided further that where the amount of under-reported income on any issue is considered both under the provisions contained in section 115JB or section 115JC and under general provisions, such amount shall not be reduced from total income assessed while determining the amount under item D.
Explanation.—For the purposes of this section,—
(a)”preceding order” means an order immediately preceding the order during the course of which the penalty under sub-section (1) has been initiated;
(b) in a case where an assessment or reassessment has the effect of reducing the loss declared in the return or converting that loss into income, the amount of under-reported income shall be the difference between the loss claimed and the income or loss, as the case may be, assessed or reassessed.
(4) Subject to the provisions of sub-section (6), where the source of any receipt, deposit or investment in any assessment year is claimed to be an amount added to income or deducted while computing loss, as the case may be, in the assessment of such person in any year prior to the assessment year in which such receipt, deposit or investment appears (hereinafter referred to as “preceding year”) and no penalty was levied for such preceding year, then, the under-reported income shall include such amount as is sufficient to cover such receipt, deposit or investment.
(5) The amount referred to in sub-section (4) shall be deemed to be amount of income under-reported for the preceding year in the following order—
(a) the preceding year immediately before the year in which the receipt, deposit or investment appears, being the first preceding year; and
(b) where the amount added or deducted in the first preceding year is not sufficient to cover the receipt, deposit or investment, the year immediately preceding the first preceding year and so on.
(6) The under-reported income, for the purposes of this section, shall not include the following, namely:—
(a) the amount of income in respect of which the assessee offers an explanation and the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered;
(b) the amount of under-reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, but the method employed is such that the income cannot properly be deduced therefrom;
(c) the amount of under-reported income determined on the basis of an estimate, if the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue, has included such amount in the computation of his income and has disclosed all the facts material to the addition or disallowance;
(d) the amount of under-reported income represented by any addition made in conformity with the arm’s length price determined by the Transfer Pricing Officer, where the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X, and, disclosed all the material facts relating to the transaction; and
(e) the amount of undisclosed income referred to in section 271AAB.
(7) The penalty referred to in sub-section (1) shall be a sum equal to fifty per cent of the amount of tax payable on under-reported income.
(8) Notwithstanding anything contained in sub-section (6) or sub-section (7), where underreported income is in consequence of any misreporting thereof by any person, the penalty referred to in sub-section (1) shall be equal to two hundred per cent of the amount of tax payable on under-reported income.
(9) The cases of misreporting of income referred to in sub-section (8) shall be the following, namely:—
(a) misrepresentation or suppression of facts;
(b) failure to record investments in the books of account;
(c) claim of expenditure not substantiated by any evidence;
(d) recording of any false entry in the books of account;
(e)f ailure to record any receipt in books of account having a bearing on total income; and
(f) failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.
(10) The tax payable in respect of the under-reported income shall be—
(a) where no return of income has been furnished or where return has been furnished for the first time under section 148 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 (1) of section 143 or assessed, reassessed or recomputed in a preceding order is a loss, 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—(XY) where,
X = the amount of tax calculated on the under-reported income as increased by 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 as if it were the total income; and
Y = the amount of tax calculated on the total income determined under clause (a) of subsection (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order.
(11) No addition or disallowance of an amount shall form the basis for imposition of penalty, if such addition or disallowance has formed the basis of imposition of penalty in the case of the person for the same or any other assessment year.
(12) The penalty referred to in sub-section (1) shall be imposed, by an order in writing, by the Assessing Officer, the Commissioner (Appeals), the Commissioner or the Principal Commissioner, as the case may be.
10.3 Further in the present case as we read the order of assessment, we find that the AO initiated the penalty proceeding u/s 270A for under reporting of income in consequence of misreporting of income. There is even no whisper of the alleged income that is misreported or under-reported. Therefore, we are of the opinion that penalty proceeding has been initiated in a routine and casual manner without recording of proper satisfaction. Further, on going through the show cause notice issued dated 27.07.2021, we find that the AO simply wrote “it appears to be underreporting of income in consequence of misreporting” without reference to any underreported or misreported income. Further, even the AO while passing the penalty Order had only mentioned that this is clear case of misreporting due to suppression of facts without discussing anything under which limb of 270A(2) & 270A(9) of the Act, penalty proceedings was levied. In other words the AO himself was not clear as to which limb penalty proceedings was sought to be levied.
10.4 Now coming to section 270A of the Act, on plain reading of the same, we are of the opinion that when a notice u/s 270A of the Act is issued the following stepladder should to be followed by the AO while levying penalty u/s 270A of the Act-
1. Underreporting – First the onus is on the AO to establish whether any of the contingency spoken of in clauses (a) to (g) of Section 270A(2) in the case of the assessee are attracted or not. If Yes, under which clause (limb) the assessee has underreported the income?
2. Now the onus shifted on the assessee to refute by establishing that the assessee falls within any of the clauses (a) to (e) of section 270A(6) of the Act & hence there is no underreporting of income & the proceedings end there. Section 270A(6) is a window given by the legislature to give a leave to the Assessee.
3. If the assessee is not able to controvert the charge of under reporting, the under reporting gets confirmed.
4. Once the charge of underreporting is confirmed, then the AO has to establish whether the underreporting is in consequence of any of the clauses (a) to (f) of Section 270A(9) of misreporting. If Yes, under which clause (limb) the assessee has misreported the income?
10.5 Therefore, we are of the considered opinion that without the charge of under reporting of income, the AO cannot straightaway jump with the charge of misreporting of income. In the present case the AO without even a whisper as to how the ingredient of subsection (2) of section 270A is satisfied, has also not specifically mentioned the exact limb of misreporting as per section 270A(9) of the Act.
10.6 By respectfully following the judgment of Hon’ble High court of Delhi in the case of Schneider Electric South East Asia (HQ) PTE Ltd. V. Commissioner of Income Tax (International Taxation) & Ors. (2022) 443 ITR 186, we are of the considered view that failure on the part of the AO to show cause which of the specific action of the assessee company from clause (a) to (f) of Section 270A(9) was determinant before imposing penalty u/s 270A of the Act has rendered the proceedings invalid and thus untenable in the eyes of law.
10.7 Therefore, it goes without saying that for the applicability of section 270A of the Act, the conditions stated therein must be strictly followed. A mere declaration of additional income which was estimated as being around 30% of regular turnover and even offered for taxation before the completion of assessment by itself will not amount to under reporting resulting in misreporting of income. We are of the opinion that penalty u/s 270A of the Act cannot be levied when the income was arrived at based on estimation. Further the return income was duly accepted by the AO as no other disallowance or additions were made to the returned income. Therefore we completely disagree with the argument of the ld. DR that AO has not resorted to any estimation since the additional income offered by the assessee which is solely based on estimation is utterly accepted by the AO. Eventually, the Income assessed u/s 143(3) of the Act r.w.s. 153C of the Act is nothing but acceptance of Income based on complete estimation. Who had estimated the income is irrelevant especially when such income is accepted by both the parties.
10.8 In the present case, the assessee company filed the return of income for the AY 2019-20 on 26.03.2021 declaring a total income of Rs. 3,96,17,950/- during the course of assessment proceedings. Thereafter, the assessment was completed on 27.07.2021 on the same total income declared by the assessee in its return of income amounting to Rs. 3,96,17,950/- u/s. 143(3) r.w.s. 153C of the Act. Considering the totality of the case, we are of the considered opinion that ld. CIT(A)-2, Panaji has rightly observed that no adverse findings / additions have been recorded by the AO with regard to income offered during the course of assessment proceedings. Further, we also agree with the view of the ld CIT(A)-2, Panaji that the AO dejectedly failed to identify or determine and then communicate either through assessment order or through notice of the specific circumstance or incidence i.e. specific clause (a) to clause (g) of s/s (2) of section 270A within which the case of the appellant falls so as to hold income as under-reported to trigger the said penal provisions. The failure continued further in identifying or determining the show casing the specific action of the assessee in terms of clause (a) to clause (f) of s/s (9) of section 270A within which the such action of assessee falls so as to jacket or categorize such under-reported income is in consequence of misreporting. We are of the view that unless the person has been communicated the specific incidence vis-à-vis action triggering the imposition of penalty, it would drastically obstruct an assessee from enforcing his right to dismantle the charge alleged against him thus resulting into a gross violation of the principles of natural justice. Therefore, the ladder as discussed in para-10.4 has to be followed strictly for levying the penalty u/s 270A of the Act.
10.9 We are further of the considered 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 very 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 AO failed to do so. 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 during the course of assessment proceeding and accordingly no addition was made in the assessment proceedings.
11. In view of the above, we sustain the order of the ld. CIT(A)-2, Panaji in deleting the penalty u/s 270A of the Act and accordingly dismiss the appeal of the Revenue.
12. In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the open court on 9th Jan, 2025
