Case Law Details
Yadava Reddy Appidi Vs DCIT (ITAT Hyderabad)
The assessee appealed before the Income Tax Appellate Tribunal (ITAT), Hyderabad, against the order of the Commissioner of Income Tax (Appeals) for Assessment Year 2022-23, which upheld a penalty imposed under Section 270A of the Income-tax Act. The assessee had filed the return of income declaring total income of ₹1,21,73,440, including capital gains from security transactions. The case was selected for scrutiny, and the Assessing Officer (AO) completed the assessment under Sections 143(3) read with 144B by making additions towards Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) arising from the redemption of mutual funds. Consequent penalty proceedings under Section 270A for underreporting of income were initiated.
During the penalty proceedings, the AO issued show cause notices asking the assessee to explain why penalty should not be levied for underreporting of income resulting from misreporting. The assessee submitted that the capital gains from redemption of mutual funds had not been reported because the Portfolio Management Service (PMS) provider’s transaction statement did not include those transactions. The assessee contended that he had voluntarily reported capital gains based on the PMS statement, admitted the omission during assessment proceedings, and paid the applicable taxes. Therefore, he argued that the case did not involve underreporting of income arising from misreporting for the purposes of Section 270A.
The AO rejected the explanation, holding that the assessee had underreported income relating to STCG and LTCG from redemption of mutual funds and had failed to satisfactorily explain the omission. The AO concluded that it was a case of underreporting of income resulting from misreporting and levied a penalty of ₹3,62,030, equivalent to 200% of the tax sought to be evaded.
The assessee challenged the penalty before the CIT(A). Although written submissions were filed, the appellate authority provided eight opportunities for hearing, but the assessee neither appeared nor submitted any further explanation. Based on the material available on record, the CIT(A) upheld the penalty, observing that the facts indicated suppression of information relating to redemption of mutual funds. The CIT(A) held that the assessee had failed to record receipts having a bearing on total income, attracting Sections 270A(9)(a) and 270A(9)(e) of the Act.
Before the Tribunal, the assessee argued that the addition of capital gains from redemption of mutual funds by itself did not establish underreporting resulting from misreporting. It was submitted that the omission occurred because the PMS transaction statement did not reflect the redemption transactions, and that the assessee accepted the addition and paid taxes once the omission was noticed during assessment. Reliance was placed on the Supreme Court decision in Price Waterhouse Coopers P. Ltd. v. CIT, contending that the omission was an inadvertent human error and should not attract penalty.
The Revenue supported the orders of the lower authorities, arguing that redemption proceeds were credited to the assessee’s bank account and were within the assessee’s knowledge. It was contended that the assessee ought to have considered the relevant bank entries while filing the return. Since the assessee admitted the underreported income and paid taxes only after detection, the penalty for underreporting resulting from misreporting was justified.
The Tribunal observed that there was no dispute regarding the additions made towards STCG and LTCG from redemption of mutual funds or the fact that the assessee had accepted those additions without filing any further appeal. It also noted that there was an admitted underreporting of income of ₹15,12,141. Referring to Section 270A, the Tribunal held that underreported income is determined by the difference between the returned income and the assessed income. It found that the assessee had failed to report proceeds from redemption of mutual funds in the return of income, amounting to failure to record receipts having a bearing on total income under Section 270A(9)(e).
The Tribunal distinguished the Supreme Court ruling in Price Waterhouse Coopers P. Ltd. v. CIT, observing that the cited case involved a disclosed gratuity provision omitted due to human error, whereas the present case involved non-reporting of income from redemption of mutual funds through non-disclosure in the return of income. Holding that the facts attracted Section 270A(9), the Tribunal concluded that the AO had rightly levied the penalty and that the CIT(A) had correctly upheld it. Accordingly, the appeal filed by the assessee was dismissed.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals), Hyderabad-11, dated 06.09.2025, and pertains to assessment year 2022-23.
2. The brief facts of the case are that the assessee filed his return of income (RoI) for AY 2022-23 on 30.07.2022, declaring total income of Rs.1,21,73,440/-, which includes capital gains from security transactions. The case was selected for scrutiny and the assessment has been completed u/s.143(3) r.w.s.144B of the Income Tax Act, 1961 (in short “the Act“) on 22.03.2024 by making addition towards Short Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) derived from ‘redemption of Mutual Funds’. Accordingly, penalty proceedings u/s.270A of the Act for ‘underreporting of income’ has been initiated. During the course of penalty proceedings, a show cause notice (SCN) dated 07.06.2024 & 06.08.2024 was issued requesting the assessee to explain ‘as to why’ order imposing penalty u/s.270A of the Act shall not be levied for ‘underreporting of income, is in consequence of misreporting of income thereof’. In response, the assessee vide letter dated 22.08.2024 submitted that addition made towards STCG/LTCG towards ‘redemption of Mutual Funds’ is not a case of ‘underreporting of income is in consequence of misreporting of income thereof’, because, the assessee has voluntarily reported capital gains in respect of security transaction on the basis of statement from the PMS Portfolio Management Service provider where the ‘redemption of Mutual Funds’ was not reported. However, subsequently during the course of assessment proceedings, the assessee admitted lapse and also paid relevant taxes, therefore, he claimed that it is not a case of underreporting of income for levy of penalty u/s.270A of the Act.
The AO after considering the relevant submissions of the assessee observed that the assessee has ‘underreported of income’ in respect of STCG/LTCG derived from ‘redemption of Mutual Funds’ and the same has not been explained to the satisfaction of the AO. Therefore, observed that it is a case of ‘underreporting of income is in consequence of misreporting of income thereof’ and levied penalty of Rs.3,62,030/-, which is equivalent to 200% tax to be evaded.
3. Aggrieved by the penalty order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee has filed written submissions which have been reproduced at Para No.5 at Page No.4 of the Ld.CIT(A)’s order. During the appellate proceedings, the Ld.CIT(A) has provided ‘8’ opportunities to the assessee but no response from the assessee. The assessee neither appeared nor submitted any explanation. Therefore, the Ld.CIT(A) on the basis of material available on record, upheld the penalty levied by the AO u/s.270A of the Act by holding that the facts would clearly indicating the suppression of certain facts in respect of ‘redemption of Mutual Funds’ which is evident from the reasons given by the AO, where assessee has failed to record any receipt in books of accounts having a bearing of total income by which the provisions of Sec.270A(9)(a) & 270A(9)(e) of the Act are squarely attracted.
4. Aggrieved by the order of the Ld.CIT(A), the assessee is now in appeal before this Tribunal.
5. The Ld. Counsel for the assessee, Mr.B. Satyanarayana Murthy, CA, submitted that the Ld.CIT(A) erred in sustaining penalty levied u/s.270A(9)(a) of the Act, without appreciating the fact that mere addition of STCG/LTCG towards ‘redemption of Mutual Funds’ doesn’t leads to a conclusion that the assessee has ‘underreporting of income is in consequence of misreporting of income thereof’. The Ld. Counsel for the assessee further referring to various documents submitted that the assessee is into security transaction and has reported capital gains derived from purchase and sale of shares as per statement provided by PMS providers. However, the assessee has not reported capital gains derived from ‘redemption of Mutual Funds’, because he was not aware of the transactions at the time of filing RoI. But, at the time of assessment proceedings, after noticing the fact that ‘redemption of Mutual Funds’ transaction has not been reported, the assessee has admitted additions made by the AO and paid taxes, therefore, he submitted that mere admission of addition towards capital gains can’t be considered ‘underreporting of income is in consequence of misreporting of income thereof’ for the purpose of Section 270A of the Act. Therefore, he submitted that penalty levied by the AO should be deleted. In this regard, relied upon the decision of the Hon’ble Supreme Court in the case of Price Waterhouse Coopers P. Ltd v. CIT reported in [2012] 348 ITR 306 (SC).
6. The Ld.SR-AR for Revenue, on the other hand, supporting the order and submitted that it is a clear case ‘underreporting of income is in consequence of misreporting of income thereof’ which is evident from the additions made by the AO towards STCG/LTCG towards ‘redemption of Mutual Funds’. ‘Redemption of Mutual Funds itself in the knowledge of the assessee as redemption comes to the bank account of the assessee. The assessee while filing RoI ought to have considered relevant bank entries. Further, the assessee admitted ‘underreporting of income’ and also paid taxes. The AO after considering relevant facts has rightly levied penalty for ‘underreporting of income is in consequence of misreporting of income thereof’ and thus, the order of the Ld.CIT(A) should be upheld.
7. We have heard both the parties, perused the materials available on record and had gone through orders of the authorities below. There is no dispute with regard to the fact that the additions made by the AO towards computation of STCG/LTCG towards ‘redemption of Mutual Funds have been accepted by the assessee and no further appeal has been preferred before the appellate authorities. The only argument of the assessee is that mere addition towards capital gains is not a case of ‘underreporting of income is in consequence of misreporting of income thereof’. The assessee explained that due to inadvertent mistake, ‘redemption of Mutual Funds’ was not considered by the assessee while filing return and the said mistake was due to the fact that PMS has furnished statement of transaction for the year under consideration which doesn’t include ‘redemption of Mutual Funds’. Except this, the assessee never disputed the fact that the transaction of ‘redemption of Mutual Funds’ was not reported in ITR filed for the year under consideration and also not disputed the fact that there is ‘underreporting of income’ to the extent of Rs.15,12,141 in respect of STCG/LTCG.
8. The concept of underreporting of income has been explained in Section 270A of the Act and as per Section 270A of the Act, the amount of ‘underreporting of income’ shall be difference between the RoI and the assessed income. In the present case, there is no dispute with regard to the fact that there is a difference between RoI and assessed income in respect of additions made by the AO towards STCG/LTCG. The above ‘underreporting of income is in consequence of misreporting of income thereof’ which is evident from the relevant reasons given by the AO, where the AO brought out clear reason to the effect that the assessee has failed to record proceeds received from ‘redemption of Mutual Funds’ in the RoI. Therefore, in our considered view, failure to record ‘redemption of Mutual Funds’ and consequence reporting of capital gains is a clear case of misreporting of income referred to in section 270A(9)(e) the Act i.e. failure to record any receipts in books of accounts having bearing on total income. Therefore, we are of the considered view that the AO has rightly levied penalty u/s.270A for the Act for ‘underreporting of income is in consequence of misreporting of income thereof’. In so far as the case law, relied upon by the assessee in the case of Price Waterhouse Coopers P. Ltd vs. CIT(Supra), in the above case, it was the argument of the assessee that the assessee has furnished particulars of payment of gratuity and the same has been reported by the auditor. The assessee failed to add said provision to the total income. Under those facts, the Hon’ble Supreme Court came to conclusion that it is only a human error and prone to happen in every case but not a case of furnishing of inaccurate particulars of income. In the present case, it is a clear case not reporting income derived from ‘redemption of Mutual Funds’ which is evident from the non-disclosure of relevant facts in the ITR filed for the year under consideration. Therefore, in our considered view, the above case law relied upon the by the assessee is not applicable and thus rejected.
9. In this view of the matter and considering the facts and circumstances of the case, we are of the considered view that the AO has rightly levied penalty u/s.270A(9) of the Act in respect of additions made towards STCG/LTCG derived from ‘redemption of Mutual Funds’, because, assessee has failed to record the receipt of ‘redemption of Mutual Funds’ in the books of accounts which squarely falls under sub-section 9 of section 270A of the Act. The Ld.CIT(A) after considering relevant facts has rightly upheld the penalty levied by the AO and thus, we are inclined to uphold the findings of the Ld.CIT(A) and dismiss the appeal filed by the assessee.
10. In the result, appeal filed by the assessee is dismissed.
Order pronounced on the 19th day of June, 2026, in Hyderabad.
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