Case Law Details
Mehul Ratilal Shah Vs DCIT (ITAT Bangalore)
The Bangalore ITAT in the case of Mehul Ratilal Shah dealt with levy of penalty u/s 270A (₹32.24 lakh) arising from additional income offered during assessment based on Form 64C (AIF income reconciliation).
Although the assessee had:
- Voluntarily revised computation during scrutiny,
- Paid taxes on additional income,
the AO treated the case as “misreporting of income” and levied 200% penalty.
The Tribunal, however, did not go into merits and instead focused on a fundamental legal defect:
- The show cause notice and assessment order did not specify the exact limb of “misreporting” under section 270A(9),
- The specific charge (i.e., misrepresentation/suppression) was mentioned only in the penalty order,
- Thus, the assessee was never made aware of the precise allegation during proceedings.
Relying on Delhi High Court rulings (GE Capital, Schneider Electric) and consistent tribunal precedents, the ITAT held that:
- Failure to specify the exact limb of section 270A(9) vitiates penalty proceedings,
- Assessee must be clearly informed of the precise charge to defend itself.
The Revenue’s reliance on contrary rulings was distinguished, especially since jurisdictional principles require clear notice of charge.
Accordingly, the ITAT deleted the entire penalty, holding it to be invalid in law.
The appeal was allowed in favour of the assessee.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal is filed by the assessee/appellant for the assessment year 2022-23 against the appellate order passed by the National Faceless Appeal Centre, Delhi (NFAC) [ld. CIT(A)] dated 12.08.2025 wherein the appeal filed by the assessee against the penalty order passed by the Assessment Unit of the Income Tax Department dated 23.9.2024 levying penalty of Rs.32,24,478 was dismissed.
2. The assessee has raised the following grounds of appeal :-
“1. The Assessment Unit, National Faceless Penalty Centre (referred to as ‘AO’) erred in passing penalty order under section 270A of the Act in the manner passed by it and the National Faceless Appeal Centre, Delhi (referred to as `CIT(A)) (collectively referred to as `lower authorities’) erred in confirming the levy of penalty vide order under section 250 of the Act. The orders so passed are bad in law and liable to be quashed.
2. Grounds relating to levy of penalty under section 270A of the Act
2.1 The learned AO erred in levying penalty under section 270A(9) amounting to Rs.32,24,478 on the grounds that that the Appellant had mis-reported income and the learned CIT(A) erred in confirming the same, without appreciating the facts of the case and submissions made by the Appellant.
2.2 The learned CIT(A) erred in upholding the levy of penalty under section 270A(9)(a) without appreciating that:
(a) the Appellant had voluntary rectified inadvertent mistakes in return of income,
(b) the corrected computation furnished by Appellant was duly considered and found satisfactory by the learned AO, and
(c) Appellant did not mis-represent or suppress facts in the return of income or during the course of assessment proceedings,
(d) the Appellant had discharged the applicable taxes on the rectified income during the assessment proceedings itself and had no intention of mis-reporting income.
(e) and characterizing the appellant’s conduct as deliberate misreporting
2.3 The learned CIT(A) erred in concluding that had there been no scrutiny of the assessment, the misreporting/misrepresentation of income would not have been discovered.
2.4 The learned CIT(A) erred in stating that the specific limb of section 270A under which the penalty was being imposed was mentioned in the SCN, wherein fact the notice made a generic allegation of “under-reported income in consequence of misreporting” without specifying the precise limb of misreporting.
2.5 The learned CIT(A) erred in not appreciating the penalty proceedings is deemed to have been initiated with the issue of notice under section 270(A) and that the said notice should specifically state the reasons for levy of penalty, which in the present case was absent.
2.6 The lower authorities erred in levying penalty merely by stating that condition (a) of section 270(A)(9) is attracted without substantiating the same with the facts of appellant’s case.
2.7 The learned CIT(A) erred in placing reliance on PCIT vs Thakur Prasad Sao and Sons Pvt. Ltd. (2024) 163 taxmann.com 449 (Calcutta) and MAK Data Pvt. Ltd. vs CIT (2013) 358 ITR 593 (SC), which are distinguishable on facts and circumstances of the case.
2.8 The lower authorities erred in denying immunity under section 270AA without appreciating that facts of case and judicial precedents warrant grant of immunity under section 270AA of the Act.
2.9 On facts and circumstances of the case and law applicable, the penalty levied under section 270A of the Act is bad in law and liable to be deleted in its entirety.
3. Grounds relating to request for directions by Jt. Commissioner under section 144A
3.1. The learned AO erred in concluding that the provisions of section 144A are not applicable to penalty proceedings despite a formal request made by the Appellant.
The Appellant prays that directions be given to grant all such relief arising from the grounds of appeal mentioned supra and all consequential relief thereto. The grounds of appeal raised by the Appellant herein are without prejudice to each other. The Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal.
The Appellant prays accordingly.”
3. The brief facts of the case show that assessee is an individual, filed his return of income on 7.11.2022 declaring total income at Rs.33,53,900, same was revised on 22.2.2023 at the same income. The return of income was picked up for scrutiny and subsequently the assessment order was passed u/s. 143(3) r.w.s. 144B of the Income Tax Act, 1961 [the Act] on 23.3.2024 wherein the total income of the assessee was determined at Rs.178,47,320 wherein the variation of Rs.44,93,420 was made on the basis of revised computation submitted by the assessee after filing revised return admitting the additional income based on statements o/ certificates of alternative Investment funds in form No 64C of the IT Rules.
4. The brief facts of the addition made by the ld. AO show that assessee is a partner in Tools Engineering Company. The source of income of the assessee is income from partnership as well as earning commission income along with interest, dividend, capital gains, etc . The issue here is that assessee is also an investor in Alternate Investment Fund (AIF). The assessee originally declared income from AIF and subsequently the assessee filed a revised computation in accordance with Form 64C issued by the Alternate Investment Fund. This variation is arising even after filing revised return at Rs.1,33,53,900. The assessee considered the income from AIF Category I & II as exempt income. However, later on it was noted by the assessee that only income which has been declared as stated in Form 64C issued by the AIF could be claimed as exempt income. The assessee is a investor in Indiabulls Dual Advantage Commercial Asset Fund and booked dividend income of Rs.3,23,856, IIFL Special Opportunities Fund Series-2 with dividend of Rs.49,46,355 and Tata Capital Healthcare Fund II having interest income of Rs.1,08,492 in the original return of income. However, Form 64C was shown to the assessee and it was found that exempt income earned by the assessee which could be claimed as exempt from tax could only be on income distributed u/s. 115UB of the Act. As per Form 64C issued by Tata Capital Healthcare Fund II was Rs.1,26,931 on which tax is deducted of Rs.14,685. Further Form 64C issued by IIFL Special Opportunities Fund Series-2 has credited total income of Rs.16,53,999 by including non-taxable income of Rs.16,93,369 wherein indexation benefit of unlisted equity shares is available of Rs.91,396 resulted into gross income for the purpose of Form 64C was Rs.42,69,234. Thus on receipt of Form 64C the assessee revised its computation submitted the same before the ld. AO, paid due taxes thereon as per letter dated 16.8.2023.
5. In the assessment order the ld. AO computed total income as per return of income filed originally i.e. Rs.1,33,53,900, made an addition of Rs.44,93,420 and determined total income of Rs.178,47,320 which is exactly as per revised computation of income filed by the assessee. In the assessment order at para 3.4.3 the ld. AO specifically mentions that income of the assessee is assessed at above sum on account of computation of income filed by the assessee during the scrutiny proceedings and therefore penalty proceedings u/s. 270A of the Act were initiated for under-reporting of income in consequence of misreporting of income. The necessary notices on 23.3.2024 were also issued to the assessee u/s. 274 r.w.s. 270A of the Act stating that assessee has under-reported income which is in consequence of misreporting.
6. The facts show that this addition was not challenged and therefore the ld. AO proceeded with penalty proceedings. The ld. Ao specifically noted that difference of Rs.44,93,418 is arising out of short term capital gain, long term capital gain, interest from AIF as well as income from other sources received from AIF. There is adjustment of dividend income already offered by the assessee higher by Rs.2,85,826.
7. During the course of penalty proceedings, the assessee explained that assessee has given the complete details of the adjustment made in the revised computation of income on the basis of Form 64C issued by the Fund Manger of the AIF. The income stated to be exempt in Form 64C were also reconciled and therefore there is no misrepresentation of fact.
8. The ld. AO rejected all the contentions of the assessee and determined misreported income of Rs.44,93,420, computed tax thereon @ Rs.16,12,239 and levied 200% penalty @ Rs.32,24,478.
9. Penalty was challenged by the assessee before the ld. CIT(A), who confirmed the action of the ld. AO. The ld. CIT(A) was also shown that specific limb of misreporting u/s. 270A(9) of the Act was not mentioned by the ld. AO and therefore the penalty is required to be deleted. The ld. CIT(A) rejected this contention that it is pertinent to mention that clause (a) is applicable in case of the assessee for misrepresentation or suppression of the fact and relying on the decision of the Hon’ble Calcutta High Court in the case of PCIT v. Thakur Prasad Sao & Sons (P Ltd. [2024] 163 com449 (Calcutta), he dismissed this ground also. Therefore on merits as well as on the legal issue, the appeal of the assessee was dismissed.
10. Aggrieved with the same, the assessee is in appeal before us.
11. The ld. AR on the factual aspects submitted a paperbook containing 222 pages and also submitted a legal compilation of several judicial precedents containing 534 pages. The ld. AR explained the issue involved in the appeal, but in the end relied on the fact that in the penalty notice issued by the ld. AO, he has failed to specify the limb of the under-reporting or misreporting of income, under which the penalty proceedings had been initiated, thus the penalty notice issued was erroneous and arbitrary. He relied on the decision of the Hon’ble Delhi High Court in the case of Schneider Electric South East Asis (HQ) Pte Ltd. v. ACIT [145 com665 (Delhi)]. He further referred to the decision of Hon’ble Delhi High Court in the case of GE Capital US Holdings Inc. v. DCIT [163 taxmann.com 146 (Delhi)] wherein it has been held that where the AO has issued a show cause notice u/s. 270A o the Act for initiation of penalty proceedings, but the ld. AO has failed to mention the specific limb of the penalty as provided in sub-section (9) of s.270A of the Act, penalty notice deserves to be quashed. The reason being that show cause notice has clearly failed to meet the test of specific limb as held by the Hon’ble Delhi High Court in the case of CIT v. Minu Bakshi [2022 SCC OnLine Delhi 4853] along with several other judicial precedents. He further referred to the decision of the Coordinate Bench in ITA No.1779/Bang/2024 dated 20.1.2025 wherein on this reason itself, penalty was deleted. Therefore his contention was that the penalty deserves to be deleted on this issue.
12. The ld. DR vehemently supported the order of the ld. lower authorities and submitted that the decision of Hon’ble Calcutta High Court (supra) as stated by the ld. CIT(A) squarely covers the issue in favour of the Revenue. The decision relied on by the ld. DR is with respect to penalty proceedings u/s. 271(1)(c) of the Act. The Hon’ble Calcutta High Court held that the Tribunal has committed a manifest error of law by setting aside the penalty order on the ground that grounds of imposition of penalty were not mentioned in the show cause notice u/s. 274 and thus based on the rule of liberal construction, the matter was remanded to ITAT to decide the issue on the merits. Indeed, the Hon’ble High Court in that case followed the decision of the Hon’ble Supreme Court in the case of D.M. Manasvi v. CIT [1973] (3) SCC 207 as well as Mak Data (P) Ltd. v. CIT p2013] 38 taxmann.com448 and distinguished the Hon’ble Karnataka High Court decision in the case of Manjunatha Cotton & Ginning Factory, 35 taxmann.com 250 as well as the Hon’ble Bombay High Court decision of Mohd. Farhan A Shaikh v. DCIT [2021] 125 taxmann.com 253 (Bom).
13. We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. The brief facts involved in this case show that assessee is an investor in the AIF. At the time of filing original return of income assessee did not offer the correct income and subsequently when the ld. AO questioned the assessee based on the details available in Form 26AS, the assessee furnished revised computation of income showing that the income claimed by him as exempt is not in consonance with Form 64C issued by AIF based on which income of the assessee would be exempt u/s. 115UB of the Act. This resulted into above addition to the returned income of the assessee, but the income is assessed at the exact same figure for which the assessee has furnished the revised computation. Therefore there is no difference between the revised computation of total income offered by the assessee and the assessed income, but definitely there is a difference between the returned income and the assessed income. The provisions of the penalty are applicable to the returned income only.
14. The ld. AO issued a show cause notice to the assessee u/s. 274 r.w.s. 270A of the Act on 23.3.2024 which is placed at page 195 of the PB, which shows that the ld. AO states that it appears to him that assessee has under-reported income which is in consequence of misreport thereof as per the details given in the assessment order. The assessment order para 3.4.3 also states that the total income is assessed at Rs.178,47,320 as declared by the assessee in the computation of income filed during the course of scrutiny proceedings and the penalty proceedings u/s. 270A of the Act are also proposed to be initiated for under-reporting of income in consequence of misreporting of income.
15. Section 270A(9) of the Act lays down 6 incidents of misreporting of income. It is undisputed admitted fact that none of those clauses were mentioned either in the assessment order or in the show cause notice issued. When for the first time the assessee challenged the penalty order, the ld. CIT(A) states that in the case of assessee falls under clause (a) u/s. 270A(9) for misrepresentation or suppression of the facts. This is not the case mentioned by the AO either in the assessment order or in the show cause notice issued. In the penalty order passed the ld. AO has clearly invoked clause (a) of this sub-section and the assessee challenged that in the show cause notice or in the assessment order particular limb is not mentioned. Therefore it is clear that assessee came to know about the charge of misrepresentation or suppression of facts for the first time only on the basis of the penalty order. Thus the assessee was not at all aware either at the time of assessment or at the time of issue of show cause notice or even during the course of penalty proceedings that the AO is levying charge of misrepresentation or suppression of facts for invoking the penalty u/s. 270A(9) of the Act. The Hon’ble Delhi High Court had an occasion to deal with identical issue in the case of Schneider Electric South East Asis (HQ) Pte Ltd. v. ACIT [145 taxmann.com665 (Delhi)] and more precisely in GE Capital US Holdings Inc. v. DCIT [163 taxmann.com 146 (Delhi)] as well as in the case of CIT v. Minu Bakshi [2022 SCC Online Delhi 4853]. The Hon’ble High Court has categorically held in para 28 recording the fact that particular limb of sub-section (9) was neither returned nor recorded in the assessment order and further the show cause notice in terms of which action u/s. 270A came to be initiated also failed to specify whether the assessee was being tried on which limb. The Hon’ble High Court further noted that where the assessment order fails to base the direction of initiation of proceedings u/s. 270A(9) without mentioning the specific limb, penalty so imposed cannot be said to be in accordance with law.
16. The Coordinate Bench in ITA No.1779bang/2024 dated 22.1.2025 in the case of Natesan Sampath following the decision of Hon’ble Delhi High Court has held so. Similar view was also taken in ITA Nos.590 to 592/Bang/2025 dated 04.12.2025 wherein failure to mention a particular limb of section 270A(9) vitiated the penalty proceedings. The decisions of the Coordinate Bench at Mumbai in ITA No.4134/Mum/2023 dated 15.10.2024 (170 com792) and in DCIT v. Chakradhar Contractors and Engineers P. Ltd., [171 taxmann.com 133 (Pune)] also supports the above stand.
17. On the issue of the decision of Honourable Calcutta High court relied by the ld. DR, It is also true that in the decision of Hon’ble Delhi Court dated 28.3.2022 the above decision of Hon’ble Calcutta High Court could not have been brought to the notice. However, at the time of the decision of the Hon’ble Delhi High Court in the case of GE Capital US Holdings Inc. (supra) the above decision of Hon’ble Calcutta High Court dated 2.5.2024 would have been available, as the decision of Hon’ble Delhi High Court was rendered on 31.5.2024. It is also true that the Hon’ble Delhi High Court was not drawn attention to the above decision. However, in this case, the decision of the Hon’ble Karnataka High Court which is the jurisdictional High Court in the case of Manjunatha Cotton & Ginning Factory (supra) and SSA’s Emerald Meadows [2016] 73 taxmann.com 248 (SC) were also considered at para 38. In that decision, the Hon’ble Karnataka High Court held that assessee should know the grounds which he has to meet specifically. The Hon’ble Calcutta High Court held that the details of undisclosed concealed income have been based on the details available in Form 26AS have been well mentioned in the assessment order of the respondent assessee which the assessee is wholly aware of it. However, in the present case, the invocation of clause (a) of section 270A(9) came to the knowledge of the assessee only in the penalty order. Therefore the issue is squarely covered by the decision of the jurisdictional High Court, hence the decision relied on by the ld. DR is distinguishable.
18. Further the facts clearly show that in the case before the Hon’ble Calcutta High Court the concealed income of Rs.13.17.25.370 was detected on account of search in the form of under-invoiced sales, inflated expenditure and in the assessment order Explanation 5A was specifically invoked for levy of penalty.
19. Therefore respectfully following the decision of Hon’ble Delhi High Court and the Coordinate Benches, we hold that failure on the part of the AO to mention the specific limb of default as mentioned in sub-section (9) of section 270A of the Act would vitiate the penalty in the case of misreporting of income. We are also concerned that same cannot apply to under-reporting of income. Thus, in this case penalty has been levied for misreporting of income without mentioning any limb of sub-section (9), the penalty deserves to be deleted and therefore reversing the orders of the ld. lower authorities, we direct the ld. AO to delete the above penalty.
20. In the result, the appeal by the assessee is allowed.
Pronounced in the open court on this 27th day of April, 2026.
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