ITAT Mumbai: Penalty Not Automatic on Disallowances – Major Relief in Depreciation Expense Claims

Quant Transactional Services Private Limited Vs DCIT (ITAT Mumbai)

ITAT Mumbai: Penalty Not Automatic on Disallowances – Major Relief in Depreciation Expense Claims

In this case, the ITAT Mumbai dealt with penalties levied under Section 271(1)(c) and Section 270A on disallowance of depreciation and expenses where the assessee had no active business operations.

The Tribunal held a clear distinction between “unsustainable claim” and “false claim”. It observed that mere disallowance of depreciation or expenses does not automatically lead to penalty, especially where all details were disclosed in books and returns.

For depreciation, the Tribunal accepted that claims were made on disclosed block of assets, and even if disallowed, they cannot be treated as furnishing inaccurate particulars. Similarly, routine expenses such as audit fees, ROC filing fees, legal and administrative expenses were held to be genuine claims for maintaining corporate existence, and not cases of misreporting.

However, an exception was made for foreign travel expenses, where no business nexus was established—penalty was upheld only to that limited extent.

The Tribunal also criticised mechanical levy of penalty, noting inconsistencies in computation and absence of independent findings of concealment or misreporting.

Final Outcome:

• A.Y. 2015–16: Penalty partly sustained (only for foreign travel)
• A.Y. 2016–17, 2017–18 & 2018–19: Penalty fully deleted

The ruling reinforces that penalty provisions require a higher threshold-clear evidence of concealment or misreporting, not just disallowance in assessment

FULL TEXT OF THE ORDER OF ITAT MUMBAI

These four appeals filed by the assessee are directed against the separate orders passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “CIT(A)”] under section 250 of the Income-tax Act, 1961[hereinafter referred to as “the Act”], confirming the penalties levied by the Assessing Officer under section 271(1)(c) for A.Ys. 2015-16 and 2016-17 and under section 270A for A.Ys. 2017-18 and 2018-19. Since common facts and identical issues are involved, these appeals were heard together and are being disposed of by way of this consolidated order for the sake of convenience.

2. Common Facts are such that the assessee is a company engaged in the business of Business Process Outsourcing (BPO), clearing business and acting as custodian of securities. However, during all the years under consideration, it was consistently noted by the Assessing Officer that the assessee could not carry out any business activity. The returns of income for the relevant assessment years were filed declaring losses or nil income. The cases were selected for scrutiny under CASS and statutory notices under sections 143(2) and 142(1) were issued from time to time. In response, the assessee furnished certain details and explanations, though in some years no effective compliance was made. A consistent feature emerging from the record is that the assessee itself admitted, as noted by the Assessing Officer, that its office premises, assets, books and records had been taken over or seized by Reliance Capital Ltd. and Quant Capital Pvt. Ltd. Further, it was also noted that no bank transactions were carried out in certain years and there was complete absence of business operations.

3. Despite the above position, the assessee claimed depreciation on plant and machinery and also claimed various expenses such as travelling expenses, legal and professional expenses and other administrative expenses in the profit and loss account. The explanation of the assessee before the Assessing Officer was that the assets were “kept ready for use” and therefore depreciation was allowable on the principle of passive use. It was further submitted that the expenses were incurred in the normal course of business. The Assessing Officer, however, rejected the explanation of the assessee on the ground that the assessee was not in possession of any assets and had not carried out any business activity during the relevant years. It was held that there was no question of assets being put to use, even passively, and therefore the claim of depreciation was not allowable. Similarly, other expenses were disallowed on the ground that the assessee failed to establish that the same were incurred wholly and exclusively for the purposes of business. In some years, partial disallowance of expenses was made, whereas in later years, entire expenses were disallowed. In A.Y. 2018-19, even the claim of write-off was disallowed for want of supporting evidence.

4. Consequent to the above disallowances, the Assessing Officer initiated penalty proceedings. For A.Ys. 2015-16 and 2016-17, penalty was initiated under section 271(1)(c) for furnishing inaccurate particulars of income. For A.Ys. 2017-18 and 2018-19, penalty was initiated under section 270A on the ground of under-reporting of income in consequence of misreporting, primarily on the basis that the assessee had claimed depreciation and expenses despite having no business activity and no assets in its possession.

5. During the penalty proceedings, the assessee submitted that all claims were made on the basis of entries recorded in the books of account and that there was no concealment of income or furnishing of inaccurate particulars. It was contended that mere disallowance of a claim does not automatically lead to levy of penalty. Reliance was placed on the decision of the Hon’ble Supreme Court in CIT vs. Reliance Petroproducts Pvt. Ltd. (322 ITR 158), wherein it has been held that making an unsustainable claim does not amount to furnishing inaccurate particulars of income. The Assessing Officer, however, rejected the explanation of the assessee. It was held that the assessee had made incorrect claims knowingly, despite being aware of the fact that it was not carrying out any business activity and was not in possession of assets. In A.Ys. 2017-18 and 2018-19, the Assessing Officer further held that the case fell within the category of “misreporting of income” as per section 270A(9), particularly on account of claiming expenditure without substantiating the same with evidence. Accordingly, penalties were levied at 100% of tax sought to be evaded under section 271(1)(c) for A.Ys. 2015-16 and 2016­17 and at 200% of tax payable on under-reported income under section 270A for A.Ys. 2017-18 and 2018-19.

6. Aggrieved by the penalty orders, the assessee carried the matter in appeal before the learned CIT(A). The assessee reiterated its submissions and contended that there was no concealment or furnishing of inaccurate particulars and that the claims were bona fide and based on the books of account.The learned CIT(A), however, confirmed the penalty orders for all the years. It was observed that the assessee had claimed depreciation and expenses despite absence of business activity and lack of evidence regarding ownership and use of assets. The appellate authority also noted that similar disallowances had been confirmed in earlier years and held that the assessee had furnished inaccurate particulars of income or misreported income, as the case may be.

7. Year-wise factual details are tabulated as under:

8. Being further aggrieved by the orders of CIT(A), the assessee is now in appeal before us raising following grounds of appeal:

I. On the facts and in the circumstances of the case and in law, The learned Commissioner of Income tax Appeals (NFAC) has erred in law and on facts in confirming the penalty of Rs. 14,52,870/ – levied under section 271(1)(c) of the Income-tax Act, 1961, which is bad in law, unjustified and liable to be deleted.

II. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income tax Appeals (NFAC) has failed to appreciate that the Appellant has neither concealed the particulars of income nor furnished inaccurate particulars thereof and therefore the basic conditions for levy of penalty under section 271(1)(c) are not satisfied.

III. On the facts and in the circumstances of the case and in law, The Commissioner of Income tax Appeals (NFAC) has erred in confirming the penalty merely on the basis of disallowance of depreciation and foreign travelling expenses without appreciating that a mere disallowance of a claim does not ipso facto attract penalty under section 271(1)(c).

IV. On the facts and in the circumstances of the case and in law, the
learned Commissioner of Income tax Appeals (NFAC)has erred in law and on facts in holding that the claim of depreciation amounted to furnishing of inaccurate particulars without appreciating that the claim was made on the basis of assets duly reflected in the books of account and was a bona fide claim based on the Appellant’s understanding of law.

V. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income tax Appeals (NFAC) has erred in confirming the penalty in respect of foreign travelling expenses, without appreciating that the claim was duly recorded in the books of account and supported by primary details and that at best the disallowance was on account of alleged insufficiency of evidence, which cannot be equated with furnishing of inaccurate particulars.

VI. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income tax Appeals (NFAC) has failed to properly appreciate and apply the ratio laid down by the Hon’ble Supreme Court in the case of CIT vs. Reliance Petro products Pvt. Ltd. (322 ITR 158), wherein it has been held that making an unsustainable claim in law does not amount to furnishing inaccurate particulars of income.

VII. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income tax Appeals (NFAC) has erred in law in not appreciating that penalty proceedings are separate and distinct from assessment proceedings and that the findings in assessment proceedings cannot be mechanically adopted for levy of penalty.

VIII. Without prejudice, the learned CIT(A) has erred in confirming the penalty without bringing on record any material to establish that the Appellant had acted deliberately, dishonestly or in conscious disregard of law.

IX. On the facts and in the circumstances of the case and in law, the impugned order is bad in law as the learned CIT(A)(NFAC) has failed to properly consider the explanations and submissions filed by the Appellant, thereby violating the principles of natural justice.

X. Without prejudice to the above grounds, the penalty levied and confirmed is excessive, arbitrary and unjustified under the facts and circumstances of the case.

XI. The appellant craves to add, amend or alter the grounds of appeal at the time of or before the hearing of appeal.

In ITA No. 9329/Mum/2025 for A.Y. 2016-17

I. On the facts and in the circumstances of the case and in law, The learned Commissioner of Income tax Appeals (NFAC) has erred in law and on facts in confirming the penalty of Rs. 11,20,767/ – levied u/ s. 271(1)(c) of the Income-tax Act, 1961, which is bad in law, unjustified and liable to be deleted.

II. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income tax Appeals (NFAC) has failed to appreciate that the Appellant has neither concealed the particulars of income nor furnished inaccurate particulars thereof and therefore the basic conditions for levy of penalty under section 271(1)(c) are not satisfied.

III. On the facts and in the circumstances of the case and in law, The Commissioner of Income tax Appeals (NFAC) has erred in confirming the penalty merely on the basis of disallowance of depreciation without appreciating that a mere disallowance of a claim does not ipso facto attract penalty under section 271(1)(c).

IV. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income tax Appeals (NFAC) has erred in law and on facts in holding that the claim of depreciation amounted to furnishing of inaccurate particulars without appreciating that the claim was made on the basis of assets duly reflected in the books of account and was a bona fide claim based on the Appellant’s understanding of law.

V. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income tax Appeals (NFAC) has failed to properly appreciate and apply the ratio laid down by the Hon’ble Supreme Court in the case of CIT vs. Reliance Petro products Pvt. Ltd. (322 ITR 158), wherein it has been held that making an unsustainable claim in law does not amount to furnishing inaccurate particulars of income.

VI. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income tax Appeals (NFAC) has erred in law in not appreciating that penalty proceedings are separate and distinct from assessment proceedings and that the findings in assessment proceedings cannot be mechanically adopted for levy of penalty.

VII. Without prejudice, the learned CIT(A) has erred in confirming the penalty without bringing on record any material to establish that the Appellant had acted deliberately, dishonestly or in conscious disregard of law.

VIII. On the facts and in the circumstances of the case and in law, the impugned order is bad in law as the learned CIT(A) (NFAC) has failed to properly consider the explanations and submissions filed by the Appellant, thereby violating the principles of natural justice.

IX. Without prejudice to the above grounds, the penalty levied and confirmed is excessive, arbitrary and unjustified under the facts and circumstances of the case.

X. The appellant craves to add, amend or alter the grounds of appeal at the time of or before the hearing of appeal.

In ITA No. 9331/Mum/2025 for A.Y. 2017-18

I. On the facts and in the circumstances of the case and in law, The learned Commissioner of Income tax Appeals (NFAC) has erred in law and on facts in confirming the penalty of Rs. 19,98,796/ – levied u/ s. 270A of the Income-tax Act, 1961, which is bad in law, unjustified and liable to be deleted.

II. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income tax Appeals (NFAC) has failed to appreciate that the Appellant has neither concealed the particulars of income nor furnished inaccurate particulars thereof and therefore the basic conditions for levy of penalty u/ s. 270A are not satisfied.

III. On the facts and in the circumstances of the case and in law, The Commissioner of Income tax Appeals (NFAC) has erred in confirming the penalty merely on the basis of disallowance of depreciation and Other expenses without appreciating that a mere disallowance of a claim does not ipso facto attract penalty u/ s. 270A.

IV. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income tax Appeals (NFAC) has erred in law and on facts in holding that the claim of depreciation amounted to furnishing of inaccurate particulars without appreciating that the claim was made on the basis of assets duly reflected in the books of account and was a bona fide claim based on the Appellant’s understanding of law.

V. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income tax Appeals (NFAC) has erred in confirming the penalty in respect of Other expenses, without appreciating that the claim was duly recorded in the books of account and supported by primary details and that at best the disallowance was on account of alleged insufficiency of evidence, which cannot be equated with furnishing of inaccurate particulars.

VI. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income tax Appeals (NFAC) has failed to properly appreciate and apply the ratio laid down by the Hon’ble Supreme Court in the case of CIT vs. Reliance Petro products Pvt. Ltd. (322 ITR 158), wherein it has been held that making an unsustainable claim in law does not amount to furnishing inaccurate particulars of income.

VII. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income tax Appeals (NFAC) has erred in law in not appreciating that penalty proceedings are separate and distinct from assessment proceedings and that the findings in assessment proceedings cannot be mechanically adopted for levy of penalty.

VIII. Without prejudice, the learned CIT(A) has erred in confirming the penalty without bringing on record any material to establish that the Appellant had acted deliberately, dishonestly or in conscious disregard of law.

IX. On the facts and in the circumstances of the case and in law, the impugned order is bad in law as the learned CIT(A)(NFAC) has failed to properly consider the explanations and submissions filed by the Appellant, thereby violating the principles of natural justice.

X. Without prejudice to the above grounds, the penalty levied and confirmed is excessive, arbitrary and unjustified under the facts and circumstances of the case.

XI. The appellant craves to add, amend or alter the grounds of appeal at the time of or before the hearing of appeal.

In ITA No. 9332/Mum/2025 for A.Y. 2018-19

I. On the facts and in the circumstances of the case and in law, The learned Commissioner of Income tax Appeals (NFAC) has erred in law and on facts in confirming the penalty of Rs. 28,34,068/- levied u/ s. 270A of the Income-tax Act, 1961, which is bad in law, unjustified and liable to be deleted.

II. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income tax Appeals (NFAC) has failed to appreciate that the Appellant has neither concealed the particulars of income nor furnished inaccurate particulars thereof and therefore the basic conditions for levy of penalty u/ s. 270A are not satisfied.

III. On the facts and in the circumstances of the case and in law, The Commissioner of Income tax Appeals (NFAC) has erred in confirming the penalty merely on the basis of disallowance of depreciation and Other expenses without appreciating that a mere disallowance of a claim does not ipso facto attract penalty u/ s. 270A.

IV. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income tax Appeals (NFAC) has erred in law and on facts in holding that the claim of depreciation amounted to furnishing of inaccurate particulars without appreciating that the claim was made on the basis of assets duly reflected in the books of account and was a bona fide claim based on the Appellant’s understanding of law.

V. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income tax Appeals (NFAC) has erred in confirming the penalty in respect of Other expenses, without appreciating that the claim was duly recorded in the books of account and supported by primary details and that at best the disallowance was on account of alleged insufficiency of evidence, which cannot be equated with furnishing of inaccurate particulars.

VI. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income tax Appeals (NFAC) has failed to properly appreciate and apply the ratio laid down by the Hon’ble Supreme Court in the case of CIT vs. Reliance Petro products Pvt. Ltd. (322 ITR 158), wherein it has been held that making an unsustainable claim in law does not amount to furnishing inaccurate particulars of income.

VII. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income tax Appeals (NFAC) has erred in law in not appreciating that penalty proceedings are separate and distinct from assessment proceedings and that the findings in assessment proceedings cannot be mechanically adopted for levy of penalty.

VIII. Without prejudice, the learned CIT(A) has erred in confirming the penalty without bringing on record any material to establish that the Appellant had acted deliberately, dishonestly or in conscious disregard of law.

IX. On the facts and in the circumstances of the case and in law, the impugned order is bad in law as the learned CIT(A)(NFAC) has failed to properly consider the explanations and submissions filed by the Appellant, thereby violating the principles of natural justice.

X. Without prejudice to the above grounds, the penalty levied and confirmed is excessive, arbitrary and unjustified under the facts and circumstances of the case.

XI. The appellant craves to add, amend or alter the grounds of appeal at the time of or before the hearing of appeal

9. During the course of hearing before us, the learned Authorised Representative (AR) reiterated the submissions made before the lower authorities and further furnished a detailed chart year-wise indicating the nature of expenses disallowed in the assessment proceedings and the corresponding quantum on which penalty has been levied. It was submitted that the disallowances made by the Assessing Officer across the years pertain primarily to depreciation and certain administrative or other expenses, and that the penalty has been levied merely on account of such disallowances without there being any independent finding of concealment of income or furnishing of inaccurate particulars. The AR drew our attention to the tabulated details placed on record to demonstrate the break-up of disallowances and the corresponding penalty computed thereon. The AR further submitted that these details clearly demonstrate that the penalty has been levied mechanically on the basis of additions made in the assessment, without appreciating the nature of claims and without establishing any element of concealment or misreporting as required under the respective provisions.

10. In respect of A.Y. 2015-16, the learned AR contended that the penalty proceedings are vitiated in law on account of a fundamental defect in the notice issued under section 274 read with section 271(1)(c), inasmuch as the Assessing Officer has not specified the exact limb under which the penalty is proposed, i.e., whether for concealment of income or for furnishing inaccurate particulars of income. It was submitted that the notice dated 24.02.2020 is in a standard format and does not clearly indicate the specific charge, thereby failing to make the assessee aware of the precise allegation. It was further submitted that even in the subsequent show cause notice dated 27.02.2021 and other communications, no such clarification has been provided, resulting in ambiguity in the entire penalty proceedings. According to the learned AR, such ambiguity goes to the root of the matter and renders the penalty proceedings invalid, as the assessee has been deprived of a fair opportunity to respond to a specific charge. It was thus contended that in absence of a clear and unambiguous charge at the stage of initiation, the penalty levied under section 271(1)(c) is liable to be quashed.

11. The learned Departmental Representative (DR), on the other hand, strongly supported the orders of the Assessing Officer and the learned CIT(A). It was submitted that the assessee had admittedly not carried out any business activity during the year under consideration and was also not in possession of the assets on which depreciation was claimed. In such circumstances, the claim of depreciation was clearly untenable in law and could not have been allowed. The learned DR thus submitted that the Assessing Officer was justified in disallowing the claim and in initiating penalty proceedings, and the learned CIT(A) has rightly confirmed the levy of penalty. Accordingly, it was argued that the penalty imposed under section 271(1)(c) deserves to be upheld.

12. We have carefully considered the rival submissions, perused the penalty orders, the orders of the learned CIT(A), the material placed in the paper book, including the year-wise chart furnished by the learned AR during the course of hearing, and the details of the expenses claimed and disallowed for the years under consideration.

13. At the outset, it is required to be noticed that the penalties for A.Ys. 2015-16 and 2016-17 have been levied under section 271(1)(c), whereas for A.Ys. 2017-18 and 2018-19 the penalties have been levied under section 270A. The common basis adopted by the Assessing Officer is that the assessee had no active business operations during the relevant previous years and, therefore, the claims of depreciation and other expenses were not allowable. On that foundation, the Assessing Officer proceeded to treat the claims as furnishing of inaccurate particulars or as misreporting, as the case may be. In our considered view, such an approach requires issue-wise examination. Every disallowance in the quantum proceedings does not automatically justify levy of penalty. The nature of the claim, the disclosure made in the return and financial statements, and whether the claim is ex facie false or merely unsustainable in law, are all material considerations.

A.Y. 2015-16

14. So far as A.Y. 2015-16 is concerned, the disallowance comprises depreciation of Rs. 45,80,565/- and foreign travelling expenses of Rs. 1,21,271/ -. The learned DR has strongly contended that since the assessee had no business activity during the year and was not in possession of the assets, the claim of depreciation itself was not allowable and, therefore, the Assessing Officer was justified not only in disallowing the same but also in initiating and levying penalty. We have carefully considered the said contention. In our considered view, the issue of allowability of depreciation in the quantum proceedings cannot be mechanically extended to justify levy of penalty. It is an undisputed position that the assessee has disclosed the fixed assets in its financial statements and the claim of depreciation has been made on such disclosed block of assets. Under the scheme of section 32, once an asset enters the block of assets and has been put to use in an earlier year, depreciation continues to be allowable on the written down value of the block, subject to statutory conditions. Therefore, the claim of depreciation, even if ultimately found to be not allowable on the peculiar facts of the case, cannot be regarded as a false claim or a claim made by suppressing particulars of income. The entire factual basis of the claim was duly disclosed in the return of income and accompanying financial statements. Thus, the disallowance of depreciation, at best, gives rise to a difference of opinion or legal inference in the assessment proceedings and does not, by itself, establish that the assessee has furnished inaccurate particulars of income. The contention of the learned DR, therefore, insofar as it seeks to justify levy of penalty on the disallowance of depreciation, cannot be accepted.

15. However, the position stands on a different footing in respect of foreign travelling expenses of Rs. 1,21,271/ -. The assessee admittedly had no business operations during the year under consideration. No material has been brought on record to establish any nexus between the said expenditure and any business activity or any necessity arising out of preservation of business or corporate existence. Such expenditure cannot be equated with routine or statutory expenses such as audit fees, ROC filing charges or legal and professional expenses which may be incurred even in the absence of active business. In the absence of any justification or supporting material, the claim of foreign travelling expenses was clearly untenable and has rightly been disallowed by the Assessing Officer and confirmed by the learned CIT(A). In these circumstances, the levy of penalty relatable to this item is justified and calls for no interference.

16. Coming to the objection of the learned AR regarding the alleged defect in the notice, we find from the notice dated 29.04.2021 placed in the paper book at page 31 for A.Y. 2015-16 that the Assessing Officer has clearly specified the charge as “furnished inaccurate particulars of income”. Therefore, the contention that the limb under section 271(1) (c) has not been specified is factually incorrect. Once the statutory notice clearly indicates the specific charge, the plea of vagueness cannot be accepted.

17. In view of the foregoing discussion, we hold that penalty under section 271(1) (c) is not exigible in respect of disallowance of depreciation of Rs. 45,80,565/-; however, the penalty is sustainable in respect of foreign travelling expenses of Rs. 1,21,271/-. The Assessing Officer is directed to recompute the penalty accordingly. Thus, the appeal of the assessee for A.Y. 2015-16 is partly allowed.

A.Y. 2016-17

18. For A.Y. 2016-17, apart from depreciation of Rs. 36,27,078/-, the Assessing Officer disallowed 50% of other expenses amounting to Rs. 5,17,616/- out of aggregate expenses of Rs. 10,35,232/-. On perusal of the break-up, we find that these expenses include business promotion, bank charges, conveyance, interest, ROC filing fees, repairs and maintenance, rates and taxes, office expenses, petrol, legal and professional fees, printing and stationery, and travelling expenses. A substantial component is legal and professional fees, ROC filing fees, office expenses, printing and stationery, and similar outgoings which, by their very nature, are connected with preservation of corporate existence, statutory compliance, maintenance of records, legal representation, and keeping the company in readiness. Merely because there was no active revenue-generating business during the year, it does not follow that every such claim, if disallowed in quantum, becomes a false claim attracting penalty.

19. The penalty provision requires a higher threshold than a mere rejection of claim. No finding has been brought on record that these items were fictitious, bogus, or unsupported by primary entries in the books. Even the Assessing Officer himself disallowed only 50% of the expenses on an ad hoc basis, which itself shows that the matter was one of estimation and assessment of allowability rather than discovery of concealment or falsity. Such an ad hoc disallowance cannot ordinarily form a sound foundation for levy of penalty.

19. As regards depreciation for this year, for the reasons already recorded while dealing with A.Y. 2015-16, the claim cannot be treated as furnishing of inaccurate particulars when the fixed assets continued to be reflected in the books and the claim was made on the block of assets. The issue may support a quantum disallowance in the opinion of the Assessing Officer, but not a penalty for inaccurate particulars.

20. We, therefore, hold that the levy of penalty under section 271(1)© for A.Y. 2016-17 is unsustainable. The same is directed to be deleted in full.

A.Y. 2017-18

21. For A.Y. 2017-18, the Assessing Officer disallowed depreciation of Rs. 30,35,006/- and certain other expenses. The order itself records that, out of the total other expenses, the amount considered disallowable was Rs. 52,906/-, whereas penalty under section 270A has been computed by taking other expenses at Rs. 1,99,292/- and thereby arriving at total under­reported income of Rs. 32,34,298/-.

22. At the threshold, this inconsistency pointed out by the learned AR is well founded. If, in the assessment order, the disallowance on account of non-business expenditure is only Rs. 52,906/-, the penalty cannot be levied on a larger figure of Rs. 1,99,292/- by treating the entire claim as under-reported income. This itself shows non-application of mind in quantification of the penalty base.

23. Even otherwise, on merits, the nature of the expenses claimed in this year, namely audit fees of Rs. 20,000/-, business promotion of Rs. 480/-, conveyance of Rs. 1,701/-, ROC filing fees of Rs. 25,200/-, office expenses of Rs. 15,585/-, other expenses of Rs. 250/-, petrol expenses of Rs. 41,431/-, legal and professional fees of Rs. 85,600/- and telephone expenses of Rs. 9,044/-, does not justify the conclusion that the assessee misreported income. Several of these items are routine administrative and compliance-related expenses which a company may incur even during a dormant phase to maintain its legal status, records, regulatory filings and minimal office infrastructure. Their allowability in quantum may be disputed wholly or partly, but the claims cannot, on these facts, be elevated to the level of misreporting.

24. The same conclusion follows in respect of depreciation. As already observed, once the company continued to reflect the fixed assets in its balance sheet and the claim was made on the block of assets, the claim could not be characterised as a false claim. There is no material to show any suppression of facts, false entry, or non-disclosure. Therefore, the essential ingredients for levy of penalty under section 270A on the footing of misreporting are absent. Accordingly, the penalty levied for A.Y. 2017-18 is directed to be deleted in full.

A.Y. 2018-19

25. For A.Y. 2018-19, the penalty has been levied in respect of depreciation of Rs. 18,39,539/-, other expenses of Rs. 1,47,324/-and deduction on account of written off of Rs. 26,00,171/-.

27. So far as the other expenses of Rs. 1,47,324/- are concerned, the break-up placed before us shows audit fees of Rs. 20,000/-, interest expenses of Rs. 30,660/-, ROC filing fees of Rs. 2,094/-, rates and taxes of Rs. 12,330/ -, office expenses of Rs. 21,240/- and legal and professional fees of Rs. 61,000/ -. These are, in substance, routine and compliance-oriented expenditures. Such expenses may well be incurred even where the company has no active turnover, for the purpose of maintaining statutory status, legal compliance, office administration, and corporate survival. Their disallowance in assessment cannot automatically justify branding the claim as misreporting of income. No false particulars have been demonstrated in relation to these items.

28. In respect of depreciation also, the same reasoning applies as recorded for the preceding years. The claim was made in the books on the disclosed block of assets and cannot be equated with misreporting.

29. The remaining item is deduction on account of written off of Rs. 26,00,171/-. The Assessing Officer disallowed the same for want of clarification and supporting evidence. This may justify a quantum addition; however, from the material placed before us, we do not find any finding that the claim was fictitious, fabricated, or based on suppressed facts. A claim which fails for want of adequate substantiation is not necessarily synonymous with misreporting, unless the circumstances show falsity or conscious suppression. No such distinct finding is available in the penalty order. The order proceeds mechanically from the quantum disallowance to penalty, without separately demonstrating how the case falls within the mischief of misreporting.

30. In these circumstances, we are of the considered view that the penalty under section 270A for A.Y. 2018-19 is also not sustainable. The same is directed to be deleted.

31. In the result:

– for A.Y. 2015-16, the penalty is confirmed only in respect of foreign travelling expenses of Rs. 1,21,271/- and is deleted in respect of depreciation of Rs. 45,80,565/-. The Assessing Officer shall recompute the penalty accordingly;

– for A.Y. 2016-17, the penalty is deleted in full;

– for A.Y. 2017-18, the penalty is deleted in full;

– for A.Y. 2018-19, the penalty is deleted in full.

32. Thus, the appeal for A.Y. 2015-16 is partly allowed, whereas the appeals for A.Ys. 2016-17, 2017-18 and 2018-19 are allowed.

Order pronounced in the open court on 20.04.2026.