Mumbai ITAT Deletes Section 270A Penalty on Estimated Income and Defective Show-Cause Notice

Balaji Chain Vs ITO (ITAT Mumbai)

Mumbai ITAT Deletes Section 270A Penalty on Estimated Income and Defective Show-Cause Notice

The Mumbai ITAT deleted a penalty of ₹32.89 lakh levied under Section 270A, holding that penalty cannot survive where the underlying addition is based merely on estimation of income. The Assessing Officer had alleged out-of-books transactions of ₹13.44 crore, rejected the books of account, and estimated profit at 3.5%, resulting in an addition of ₹47.06 lakh. The Tribunal observed that when income is ultimately determined on an estimated basis, it does not justify the levy of penalty for under-reporting or misreporting of income.

The Tribunal further held that the penalty proceedings were legally defective because the Assessing Officer failed to specify whether the penalty was for “under-reporting” or “misreporting” of income. Since these are distinct charges under Section 270A and the notice did not identify the specific limb or the applicable clause of Section 270A(9), the penalty proceedings were rendered invalid. Relying on the decisions of the Delhi High Court in Schneider Electric South East Asia (HQ) Pte. Ltd., the Rajasthan High Court in G.R. Infraprojects Ltd., and various Tribunal rulings, the ITAT held that absence of a specific charge vitiates the penalty proceedings. Accordingly, the penalty was deleted on both legal grounds and merits, and the assessee’s appeal was allowed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

1. Aforesaid appeal by assessee for Assessment Year (AY) 2019-20 arises out of an order of learned Commissioner of Income Tax (Appeals), NFAC [CIT(A)] dated 20.01.2026confirming penalty u/s 270A for Rs.32.89 Lacs as levied by Ld. AO vide penalty order dated 15.08.2025.

2. The Ld. AR advanced legal arguments as well as arguments on merits and referred to various case laws. The copies of show-cause notices issued during penalty proceedings have been placed on record. The Ld. Sr. DR, on the other hand, pleaded for confirmation of impugned penalty.

3. From case records, it emerges that an assessment was framed against the assessee u/s 147 r.w.s. 144B on 24.02.2025 wherein Ld. AO alleged that the assessee carried out out-of-books transactions for Rs.13.44 Crores. Accordingly, the books were rejected and assessee’s income was estimated @3.5% to make addition of Rs.47.06 Lacs. Consequently, penalty proceedings were initiated in the assessment order for under-reporting of income inconsequence of misreporting of income u/s 270A of the Act. During the course of penalty proceedings, show-cause notice was issued to the assessee on 24.02.2025. The assessee opposed levy of penalty, however, Ld. AO rejected the submissions of the assessee and levied impugned penalty of Rs.32.89 Lacs for under-reporting of income in consequence of misreporting of income. The Ld. CIT(A) held the appeal to be non-maintainable for want of condonation of delay of 104 days. Aggrieved, the assessee is in further appeal before us.

4. It clearly emerges that the quantum addition has been made on mere estimation only. The Ld. AO has rejected the assessee’s books of accounts and made allegations of out-of-book transactions. However, the income has finally been determined on mere estimation only which do not justify imposition of impugned penalty on the assessee. Another reason is that a specific charge has not been framed in the show-cause notice as well as in the penalty order. The penalty has been levied merely on the allegation of under-reporting of income in consequence of misreporting of income. These two terms carry different connotations. The instances of mis-reporting of income have been specified in sub-section (9) of Sec.270Awhich deal with unique situations as classified as clause (a) to (f). In our considered opinion, Ld. AO is bound to frame a specific charge against the assessee otherwise the penalty proceedings would be bad-in-law. This proposition finds support from the decision of Hon’ble High Court of Delhi in the case of Schneider Electric South East Asia (HQ) Pte. Ltd. (145 Taxmann.com 665) holding that wherein Ld. AO failed to specify limb of ‘underreporting’ or ‘misreporting’ of income, under which penalty proceedings had been initiated then in such a case the penalty notice would be erroneous and arbitrary and, thus, petitioner was to be granted immunity u/s 270A. The court, in para-7, also observed that there was not even a whisper as to which limb of Section 270A of the Act was attracted and how the ingredients of sub-section (9) of Section 270A were satisfied. In the absence of such particulars, the mere reference to the word “misreporting” in the assessment order to deny immunity from imposition of penalty and prosecution makes the impugned order manifestly arbitrary. This decision has subsequently been followed by Hon’ble High Court of Rajasthan in the case of G.R. Infraprojects Ltd. (158 Taxmann.com 80). The Hon’ble Court, in para-28, observed that while initiating the penalty proceedings, AO failed to specify that which part of sub-Section (9) of Section 270A was attracted and therefore, the initiation of penalty was non-est. Similar is the decision of Pune Tribunal in Chakradhar Contractors and Engineers (P) Ltd. (171 Taxmann.com 133) as well as the decision of Mumbai Tribunal in Hi-Tech Engineers(182 Taxmann.com 385) as cited by Ld. AR. The ratio of all these decisions squarely applies to the facts of present case before us. Therefore, we find substantial force in the argument of Ld. AR and delete the impugned penalty on legal grounds as well as on merits.

5. The appeal stand allowed.

Order pronounced on 18^th June, 2026