ITO Vs Sanjay Chandarana (ITAT Rajkot)
A Disallowed Political Donation Is Not Automatically “Misreporting”—200% Penalty Needs Proof of Falsehood, Not Merely a Failed Deduction
The Rajkot Bench of the ITAT has held that the mere disallowance of a deduction claimed for donation to a political party does not automatically establish misreporting of income u/s 270A, attracting penalty at 200% of the tax payable. Where the deduction was openly claimed in the return, the relevant particulars were disclosed, and the AO failed to establish that the assessee had furnished false particulars or suppressed material facts, the enhanced penalty could not be sustained.
The Revenue’s appeal was also dismissed because the tax effect was below the monetary limit prescribed by the CBDT for filing departmental appeals before the Tribunal.
The assessee, Sanjay Chandarana, filed his return for AY 2019-20 declaring a total income of ₹5,63,780. In the return, he claimed a deduction of ₹4 lakh u/s 80GGB/80GGC, as recorded in the order, in respect of a donation stated to have been made to a registered political party.
Subsequently, the Department received information from the Investigation Wing concerning alleged accommodation entries involving certain registered but unrecognised political parties. On the basis of this information, the assessee’s deduction of ₹4 lakh was disallowed and added back to his income.
Consequent to the quantum addition, the AO initiated penalty proceedings u/s 270A for under-reporting and misreporting of income. He ultimately treated the disallowed donation claim as misreported income and imposed a penalty of ₹1,66,400, computed at 200% of the tax payable on the amount in question.
The assessee challenged the penalty before the CIT(A), who accepted his case and deleted it. The Revenue thereafter approached the ITAT.
Before the Tribunal, the assessee raised a preliminary objection that the tax effect involved in the Revenue’s appeal was below the monetary threshold prescribed under the applicable CBDT circular/instructions. Since those instructions are binding upon the Department, it was argued that the appeal was not maintainable.
The assessee also contested the penalty on merits. It was submitted that the donation deduction had been claimed transparently in the return and that no particulars had been concealed. The AO had not produced material establishing that the assessee deliberately misrepresented the transaction, furnished inaccurate information or suppressed a relevant fact.
The assessee had accepted the disallowance and paid the consequential tax. However, it was argued that acceptance of the quantum addition could not, by itself, amount to an admission of misreporting. Quantum proceedings and penalty proceedings serve different purposes, and a disallowance does not mechanically justify penal consequences.
Reliance was placed upon the Supreme Court’s decision in CIT v. Reliance Petroproducts Pvt. Ltd., wherein it was held that merely making an unsustainable claim in law does not amount to furnishing inaccurate particulars when the particulars disclosed by the taxpayer are not shown to be incorrect or false.
The Revenue supported the penalty order and contended that the levy was justified.
The ITAT first accepted the assessee’s objection concerning monetary limits. It found that the tax effect involved was below the CBDT’s prescribed threshold for filing an appeal before the Tribunal. The Departmental instructions were binding, and the Revenue’s appeal was liable to be dismissed on that ground alone.
Nevertheless, the Tribunal also examined the penalty on merits.
It observed that the deduction had been claimed in the return itself and was duly disclosed. The mere fact that the claim was later disallowed did not establish that the assessee had misreported income within the meaning of s.270A.
The record contained no material demonstrating that the assessee furnished false particulars or suppressed material facts with the object of evading tax. The AO had apparently proceeded from the disallowance of the deduction to the imposition of penalty without independently establishing the ingredients of misreporting.
The ITAT further held that the assessee’s acceptance of the addition and payment of the resulting tax did not justify the inference that misreporting had occurred. An assessee may accept an addition for several reasons, including avoiding prolonged litigation. Such acceptance cannot substitute the AO’s obligation to establish the statutory conditions for penalty.
Applying the principle in Reliance Petroproducts, the Tribunal concluded that where the disclosed particulars were not proved to be inaccurate or false, an unsuccessful deduction claim could not, by itself, attract penalty.
The order of the CIT(A) deleting the penalty of ₹1,66,400 was accordingly upheld, and the Revenue’s appeal was dismissed both on account of low tax effect and on merits.
Author’s Comments
The decision reiterates that assessment and penalty are separate proceedings. Disallowance of a political-donation deduction determines the taxable income; it does not automatically determine whether the claim involved deliberate misreporting.
Section 270A itself distinguishes between ordinary under-reporting and the more serious category of misreporting. Penalty for under-reporting is generally 50% of the tax payable on under-reported income, whereas misreporting attracts 200%. The higher consequence requires the case to fall within the specified forms of misconduct, such as misrepresentation or suppression of facts, failure to record investments or receipts, recording a false entry, or claiming expenditure without evidence.
Accordingly, where the Department alleges that a political donation was merely an accommodation entry, it should bring transaction-specific material linking the assessee to the alleged arrangement. General investigation information concerning a political party may justify enquiry and even disallowance, but a 200% penalty should require evidence showing that the particular assessee knowingly participated in a sham transaction.
The reliance upon Reliance Petroproducts, which arose under the earlier penalty provision in s.271(1)(c), should be understood with caution. Section 270A contains its own definitions of under-reporting and misreporting. The principle that a rejected claim is not automatically penal remains relevant, but the statutory categories under s.270A must still be independently applied.
The deletion here does not mean that penalty can never be imposed in bogus political-donation cases. If the Revenue establishes cash-back arrangements, fabricated receipts, false entries, or a deliberate accommodation-entry mechanism, the case may squarely involve misrepresentation or false recording.
Also, although the appeal was independently barred by the monetary limit, practitioners must verify whether any exception under the applicable CBDT instructions covers the particular departmental appeal.
The enduring principle is balanced: a deduction may fail for want of entitlement, but a 200% penalty cannot follow unless the claim is proved false in the manner contemplated by s.270A. Disallowance is a tax conclusion; misreporting is a charge that must be established.
Cases Discussed
- CIT v. Reliance Petroproducts Pvt. Ltd. (Supreme Court) — Relied upon for the principle that merely making an incorrect or unsustainable claim does not, without more, amount to furnishing inaccurate particulars where the particulars furnished by the assessee are not shown to be false or incorrect.
FULL TEXT OF THE ORDER OF ITAT RAJKOT
