ITAT Quashes Section 270A Penalty as AO Failed to Specify Misreporting Charge

Dowson Technology Pvt. Ltd. Vs DCIT/ ACIT (ITAT Dehradun)

The assessee appealed against the order of the Commissioner of Income Tax (Appeals), NFAC, confirming levy of penalty under Section 270A of the Income-tax Act for Assessment Year 2023-24. The Assessing Officer (AO) had originally imposed penalty under Section 270A on the ground of under-reporting of income in consequence of misreporting. The CIT(A) upheld the levy of penalty but changed the charge from “under-reporting in consequence of misreporting” under Section 270A(9) to “under-reporting of income” under Section 270A(3), thereby reducing the penalty from 200% to 50% of the tax on under-reported income.

The assessee had filed its return declaring a business loss of ₹1,52,97,649. During scrutiny, the AO observed that although the return reflected business loss after accounting for various disallowances and depreciation, the schedules for carry forward of losses showed that the assessee had carried forward the entire loss instead of restricting the business loss after separating unabsorbed depreciation. The AO also disallowed ₹5,01,734 under Section 36(1)(va) relating to delayed payment of employees’ contribution to PF/ESI, as reported by the tax auditor but not disallowed in the return. Penalty proceedings under Section 270A were initiated, and penalty of ₹10,63,566 was imposed at 200% of the tax sought to be evaded on under-reported income of ₹15,21,817.

Before the Tribunal, the assessee submitted that the excess carry forward of business loss resulted from a technical utility error and that no benefit of such excess carry forward had been claimed in subsequent assessment years. It also contended that the omission to disallow the delayed PF/ESI contribution was inadvertent. The principal argument was that neither the assessment order nor the penalty notice specified which clause of Section 270A(9) relating to misreporting had been invoked. The assessee further submitted that its application for immunity under Section 270AA had been rejected solely because the penalty had been initiated for misreporting. Since the CIT(A) ultimately treated the matter as one of under-reporting and not misreporting, the assessee argued that it became entitled to immunity under Section 270AA.

The Revenue supported the penalty, contending that the incorrect carry forward of business loss and failure to disallow delayed PF/ESI contributions constituted under-reporting in consequence of misreporting and that immunity under Section 270AA was unavailable where penalty was levied under Section 270A(9).

The Tribunal examined the provisions of Section 270A and observed that while under-reporting of income is governed by the circumstances specified in Section 270A(2), misreporting requires satisfaction of one of the specific situations listed in clauses (a) to (f) of Section 270A(9). It found that the AO had failed to identify, determine, or communicate either in the assessment order or in the penalty notice the specific clause under Section 270A(2) or Section 270A(9) applicable to the assessee’s case. According to the Tribunal, such failure deprived the assessee of an effective opportunity to defend the charge and violated the principles of natural justice.

Relying on the decision of the Delhi High Court in Schneider Electric South East Asia (HQ) Pte Ltd. v. ACIT, the Tribunal held that failure to specify the applicable limb of Section 270A rendered the penalty proceedings legally untenable. It concluded that the omission to identify and communicate the precise statutory charge invalidated the penalty proceedings, and accordingly quashed the penalty imposed under Section 270A.

The Tribunal further held that the assessee’s application for immunity under Section 270AA had been rejected solely because the penalty was initiated under Section 270A(9). Since the CIT(A) had itself held that the case involved only under-reporting of income and not misreporting, the assessee also became entitled to immunity under Section 270AA. On this ground as well, the assessee succeeded. Accordingly, the appeal was allowed.

FULL TEXT OF THE ORDER OF ITAT DHERADUN

The present appeal is filed by assessee against the order dated 10.02.2026 passed by Ld. Commissioner of Income Tax (A), NFAC, Delhi [“Ld. CIT(A)”] passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of penalty order dated 10.07.2025 passed u/s 270A of the Act pertaining to Assessment Year 2023-24.

2. Brief facts of the case are that assessee is a company and filed its return of income on 23.09.2023, declaring loss of INR 1,52,97,649/-. The case of the assessee was selected for scrutiny. The AO observed that as per the ITR in Schedule BP-Ds assessee has disclosed total loss of Rs. 1,52,97,649/- after taking into account of disallowance made under various sections i.e. 36 136 43B of the Income Tax Act, 1961 and depreciation allowable as per Income Tax Act, 1961 of Rs. 10,20,083/. Thus, as per the AO the total loss from business comes to Rs.1,42,77,566/- and unabsorbed depreciation comes to Rs. 10,20,083/ -. However, from the Schedule CFL (Details of losses to be carried forward to future years) and Schedule UD (Unabsorbed depreciation and allowance under section 35(4), it is observed that assessee has carried forward business loss of Rs.1,52,97,649/- and unabsorbed depreciation of Rs. 10,20,083/-for setting off in future years. Therefore, the AO restricted the business loss carried forward at Rs. 1,42,77,566/ -. Further the AO has disallowed Rs. 5,01,734/- u/s 36(1)(va) of the Act being the delayed payment of employee’s contribution towards PF /36 ESI which was reported by the tax auditor and not disallowed in the return of income filed in the assessment passed u/s 143(3) r.w.s.144B of the Act dated 25.02.2025 and initiated the penalty proceedings u/s 270A for underreporting of income in consequence of misreporting if income. The AO thereafter, proceeded with pending penalty proceedings and imposed the penalty in terms of the order dated 10.07.2025 imposing the penalty of INR 10,63,566/- u/s 270A of the Act being 200% of the Tax sought to be evaded on under reporting of income of Rs. 15,21,817/ -. Against the said order appeal was filed before the ld. CIT(A) who vide order dt. 10.02.2026 though has confirmed the levy of penalty however, change the charge from “Under reporting in consequence to misreporting of income’ as per section 270A(9) to “under reporting of Income U/s 270A(3) of the Act and reduced the penalty from 200% to 50% of under reported income.

3. Against the said order, assessee is in appeal before the Tribunal by taking following grounds of appeal:

1. “That learned CIT Appeals has erred in law and on facts in upholding any part of the penalty levied under section 270A of I T Act 1961 at 50 percent of tax on under reporting income, whereas the penalty proceedings were originally initiated and levied by the Assessing officer specifically under category of Under reporting consequent to Misreporting as per Sec 270(9)(a) attracting a mandatory penalty of 200percent and such classification cannot be legally recategorized OR reduced to mere under reporting without addressing that the penalty has not been initiated under reporting clause. The reclassification is perverse and beyond jurisdiction as it alters the foundational 2 basis of the penalty levied by AO order.

3. The learned authorities failed to appreciate that the penalty category cannot be legally transformed from its original classification of Under Reporting consequent to Misreporting to a penalty for mere Under reporting as these are distinct categories under the Income Tax Act with different legal implications and penalty rates.

4. The rejection of immunity application under Sec 270AA solely on the ground of misreporting is unsustainable as both issues (EPF Disallowance and loss carry forward) fall within the ambit of under reporting simpliciter and not misreporting, rendering the penalty initiation invalid ab initio. The learned Commissioner ought to have quashed the penalty in toto instead of partially reducing it as due to wrong initiation, the immunity has not been granted to appellant which otherwise intended and applicable to appellant.”

4. Before us, Ld.AR for the assessee stated that at the time of filing of return it was submitted that the excess business loss carry-forward of Rs. 10,20,083/- was due to technical utility error and the assessee had no objection in restricting the loss to the correct figure. It was further stated that no benefit of the alleged excess carry-forward had been claimed in A.Y. 2024-25 or thereafter. Regarding disallowance u/s 36(1)(va), it was submitted that due to inadvertent error the same could not added back to the total income. Ld.AR submits that AO has imposed the penalty for under reporting of income as a consequence of mis-reporting as per clause (a) of section 270A(9) of the Act however, neither in the assessment order nor in the notice issued for initiation of penalty proceedings did not specify under which charge of clause (a) to (f) of sub-section 9 of section 270A the same was initiated. He therefore, submits that without specifying the charge, penalty levied u/s 270A(9) should be deleted.

5. AR further submits that the ld. CIT(A) has changed the charged from “Under reporting in consequence to misreporting of income’ as per section 270A(9) to “under reporting of Income” U/s 270A(3) of the Act and therefore the Ld. AR submits that the assessee has filed an application u/s 270AA of the Act for grant of immunity from levy of penalty u/s 270A which was rejected vide order dt. 30.04.2025 for the sole reason that the penalty proceedings were initiated for “Under reporting in consequence to misreporting of income’ as per section 270A(9) of the Act there fore as per sub section (3) of section 270AA, no immunity could be granted. Ld. AR submits that when the ld. CIT(A) has confirmed the penalty u/s 270A(3) of the Act, the assessee is entitled for the immunity u/s 270AA of the Act. He prayed accordingly.

6. On the other hand, Ld. Sr. DR for the Revenue vehemently supported the orders of the AO and submits that assessee has incorrectly claimed carry forward of unabsorbed business loss and also delayed payment of PF 86 ESI was not disallowed therefore, it is a clear case of under reporting as a consequence of mis-reporting. Ld. Sr DR further submits that the assessee has applied for the immunity from the levy of penalty u/s 270AA however, section 270AA(3) of the Act, no immunity could be granted for the penalty levied u/s 270A(9) of the Act and thus, requested for the confirmation of the penalty levied.

7. Heard the contentions of both parties at length and perused the material available on record. It is observed that in the notice issued for initiation of penalty proceedings u/s 270A of the Act dated 14.03.2024, AO has not specified the charge as provided under clause (a) to (f) of sub-section (9) of section 270A of the Act for under reporting of income as a consequence of mis-reporting thereof. Before going further, we first refer the provisions of 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 under­reported 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 underreported 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 sub­section (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) failure 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 under­reported 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 sub­section (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.”

8. From the above, it is clear that for “under reporting of income”, the AO should satisfy the conditions defined in sub clause (a) to (g) of sub section (2) of section 270A of the Act. For “under reporting of income in consequence to misreporting of income” the conditions specify in clause (a) to (f) of sub section (9) of section 270A should be satisfied. In the instant case, it is observed that, the Ld. AO after having clearly analysed facts and circumstances of the case has dejectedly failed to identify or determined and then communicate either through assessment order or through notice, the specific circumstance or incidence i.e. specific clause (a) to clause (g) of s/s (2) of section 270 within which the case of the appellant falls so has to hold income as “under-reported” to trigger said penal provision. The failure continued further in identifying or determining and showcasing the specific action of the appellant in terms of clause (a) to clause (f) to sub-section (9) of section 270 within which such action of the assessee falls so as to jacket or categorise such under-reported income in consequence of mis-reporting.

9. Thus, non-identification or determination vis-a-vis communication of specific clause lineally from sub-section (2) or sub­section (9) would drastically obstruct an assessee from enforcing his right to dismantle the charge alleged against him, thus resulting into violation of principle of natural justice.

10. In the light of afore mentioned reasoning and discussion, we observed that, the notice initiating the penal proceedings is silent on the circumstance or incidence triggering the very initiation in this case. Further the order of penalty did neither mention the circumstance or incidence nor make a mention of alleged action in reaching the final imposition.

11. The Hon’ble Delhi High Court in the case of Schneider Electric South East Asia (HQ) Pte Ltd vs ACIT reported in [2022] 145 taxmann.com 665 (Delhi HC) has dealt the issue of satisfaction recorded at the time of levying the penalty u/s 270A of the Act, wherein, the Hon’ble Court has held as follows:

“6. Having perused the impugned order dated 09 March, 2022 to contend that the Petitioner is not entitled to the benefit of immunity under Section 270A of the Act for misreporting of income is not only erroneous but also arbitrary and bereft of any reason as in the penalty notice the Respondents have failed to specify the limb ­”underreporting” or “misreporting” of income, under which the penalty proceedings had been initiated.

7. This Court also finds that there is not even a whisper as to which limb of Section 270A of the Act is attracted and how the ingredient of sub-section (9) of Section 270A is satisfied. In the absence of such particulars, the mere reference to the word “misreporting” by the Respondents in the assessment order to deny immunity from imposition of penalty and prosecution makes the impugned order manifestly arbitrary.

8. This Court is of the opinion that the entire edifice of the assessment order framed by Respondent No.1 was actually voluntary computation of income filed by the Petitioner to buy peace and avoid litigation, which fact has been duly noted and accepted in the assessment order as well and consequently, there is no question of any misreporting.”

12. Thus, by respectfully following the judgement of Hon’ble jurisdictional High Court in the case of Schneider Electric South East Asia (HQ) Pte Ltd (supra), we are of the considered view that failure on the part of AO to identify and communicate the specific circumstance or incidence from clause (a) to (g) of sub-section (2) of section 270A or clause (a) to (f) of sub-section (9) of section 270A was determinant before imposing the impugned penalty has rendered the entire proceedings invalid and thus untenable in the eyes of law. Consequently, the penalty imposed u/s 270A of the Act being bad in law deserves to be quashed, ergo we order accordingly.

13. Further in the instant case, the assessee has applied for grant of immunity u/s 270AA of the Act, from the levy of penalty u/s 270A of the Act which was rejected for the sole reason that eh penalty was levied u/s 270A(9) of the Act however, when the ld. CIT(A) has held that it is a case of ‘under reporting of income’ and not of `misreporting of income’, assessee is also entitled for immunity granted under the Act for imposition of penalty u/s 270AA of the Act. Therefore, on this score also assessee succeeded.

14. In the result, the appeal of the assessee is allowed.

Order pronounced in the open Court on 03.06.2026.