Pallavi Sethi Vs ACIT/DCIT (ITAT Agra)
Clerical Error in F&O Loss Is Not Undisclosed Income: Agra ITAT Deletes Search Penalty
Summary: The Agra Bench of the Income Tax Appellate Tribunal (ITAT) has deleted a penalty under Section 271AAB(1A), holding that an inadvertent error in reporting futures and options losses did not qualify as “undisclosed income” under the provision.
In Pallavi Sethi v. ACIT/DCIT, Central Circle, Agra, ITA No. 597/Agr/2026, pronounced on 4 November 2026, the Tribunal deleted the ₹24,410 penalty imposed on an income adjustment of ₹40,688.
The assessee had herself brought the computational mistake to the Assessing Officer’s attention. The Tribunal distinguished such an error from a false expense entry discovered through search proceedings.
Background: Excess F&O Loss Reported in Return
The assessee filed her return for Assessment Year 2023-24 on 28 October 2023, declaring total income of ₹17,26,620.
A search under Section 132 had been conducted on 3 August 2022 at the residential and business premises of the Ghanaram and others Group of Jhansi. Subsequently, jurisdiction over the assessee was assigned to the DCIT, Central Circle, Agra.
During assessment proceedings, the assessee submitted a reply dated 19 February 2024, explaining that a clerical computation error had occurred in the return.
The F&O loss was reported as ₹19,50,335 instead of ₹19,09,647, resulting in an excess loss claim of ₹40,688.
She requested the officer to correct the computation while completing the assessment.
Assessing Officer Imposed Penalty at 60%
The Assessing Officer added ₹40,688 to the assessee’s total income in the assessment order dated 29 March 2024, treating it as suppressed income.
He also initiated penalty proceedings under Section 271AAB(1A).
A penalty notice was issued on 13 September 2024. The officer recorded that no reply had been furnished and imposed a penalty of ₹24,410, calculated at 60% of ₹40,688.
The assessee challenged the penalty, arguing that the correction did not concern income discovered through any seized document and did not satisfy the statutory definition of undisclosed income.
CIT(A) Relied on Post-Search Disclosure
The CIT(A)-4, Kanpur, upheld the penalty through an order dated 15 May 2026.
The appellate authority reasoned that the correction was made during post-search assessment proceedings rather than in the original return.
It therefore treated the adjustment as undisclosed income attracting the search-related penalty provision.
The CIT(A) also observed that deliberate concealment or mens rea was not essential once undisclosed income pertaining to search proceedings had been determined.
The assessee appealed to the Tribunal, disputing the foundational classification of the amount as undisclosed income.
Statutory Definition Was Central to the Dispute
The Tribunal examined the definition of undisclosed income reproduced in its order.
The definition covers specified income represented by money, valuables, entries, documents or transactions found during a search, subject to the prescribed non-recording or non-disclosure conditions.
It also covers income represented by an expense entry found to be false, where that falsity would not have been discovered without the search.
The Tribunal therefore considered whether the ₹40,688 adjustment fell within either category.
The fact that an addition arose during post-search assessment did not, by itself, answer that statutory question.
No Search Document Established the Excess Loss
The Tribunal noted that the Assessing Officer had not negated the assessee’s claim that the excess loss was not recorded in any document found during search.
Accordingly, the search-discovery limb of the definition was not attracted.
The correction originated from the assessee’s explanation that the return contained a clerical computational mistake.
The Tribunal also held that offering ₹40,688 to tax could not, on these facts, be equated with an expense entry established as false in the manner contemplated by the penalty provision.
It therefore rejected the basis on which the lower authorities had classified the adjustment.
False Entry and Inadvertent Mistake Are Different
The Tribunal acknowledged that the mistake might not have come to light without the search-related transfer of jurisdiction and subsequent scrutiny.
However, it held that this circumstance did not eliminate the distinction between a false expense entry and an inadvertent mistake voluntarily corrected.
That distinction remained relevant even where the correction occurred during post-search assessment proceedings.
The Tribunal treated the excess F&O loss claim as an inadvertent error rather than undisclosed income falling within the statutory definition.
Consequently, the necessary foundation for penalty under Section 271AAB(1A) was absent.
Penalty Deleted; Appeal Allowed
The ITAT deleted the ₹24,410 penalty and allowed the assessee’s appeal.
Its decision concerned the penalty; it did not reverse the ₹40,688 income adjustment arising from correction of the loss.
The ruling establishes that a post-search addition does not automatically attract Section 271AAB. The amount must first satisfy the provision’s definition of undisclosed income. Here, the absence of supporting search material and the Tribunal’s finding of an inadvertent computational error were decisive.
FULL TEXT OF THE ORIGINAL ORDER OF ITAT AGRA
This appeal is directed against the impugned order dated 15.05.2026 passed in appeal No. CIT(A)-IV/KNP/10026/2022-23 by the ld. Commissioner of Income Tax (Appeals), Kanpur-4 [hereinafter referred to as the “CIT(A)] u/s. 250(6) of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) for the A.Y. 2023-24, wherein ld. CIT(A) has dismissed assessee’s appeal.
2. Brief facts of the case: The assessee filed her return of income on 28.10.2023 declaring total income of Rs.17,26,620/-. The AO noted that a search and seizure action was conducted u/s. 132 of the Act on 03.08.2022 at the residential and business premises of Ghanaram & others Group of Jhansi. Consequently, the jurisdiction over the assessee was assigned to the DCIT, Central Circle, Agra. During the course of assessment proceedings, the assessee in her reply dated 19.02.2024 to the AO stated that due to clerical computation error in the Income-tax Return filed, the F&O loss was reported as Rs.19,50,335/- instead of actual loss of Rs.19,09,647/- resulting in addition of Rs.40,688/- to the total income of the assessee and requested the AO to rectify the same while passing the order u/s. 143(3) of the Act. In this regard, the relevant submission of the assessee as noted by the AO in the assessment order is reproduced as under:
“ 6. Vide reply dated 19.02.2024 submitted in compliance of the notice issued u/s 142(1) of the Act, the Assessee has submitted that:
“ While preparing the above computation, it is noticed that Loss from intraday and interest paid to parties was inadvertently wrongly reported due to oversight which is corrected in the above computation due to clerical computational error, wherein in the ITR filed, the F&O loss was reported as Rs. 1950,335/- instead of actual loss of Rs. 19,09,647/- resulting in addition of Rs. 40,688/- to the total income of the assesse, which we request may be rectified while passing order u/s 143(3)”.”
2.1 On the basis of the above submission, the AO noted that the assessee had wrongly claimed loss from intraday and interest paid to parties and suppressed income and added the same to the total income of the assessee vide assessment order u/s 143(3) of the Act dated 29.03.2024. The AO also initiated penalty proceedings u/s. 271AAB(1A) of the Act in respect of the above addition of Rs 40,688/-.
2.2 Subsequently, the AO initiated proceedings u/s. 271AAB of the Act and issued a penalty notice dated 13.09.2024. The AO noted that the assessee did not file any reply and levied a penalty @ 60% of the undisclosed income as per provisions of section 271AAB(1A) of the Act at Rs.24,410/-.
2.3 Aggrieved with the said order, the assessee filed an appeal before the learned CIT(A). The assessee submitted before the learned CIT(A) that the above addition of Rs.40,688/- was neither found in any document during the search u/s. 132 of the Act nor by the AO in the assessment proceedings and therefore, does not qualify as undisclosed income as per the definition of undisclosed income given in section 271AAB(1A) of the Act. However, the learned CIT(A) did not agree with the same and noted that the disclosure was not suo moto in the original return, but it was only in post search assessment proceedings and it partakes the character of undisclosed income within the meaning of section 271AAB(1A) of the Act. The learned CIT(A) also noted that the legislature intended stringent consequences in search cases. Unlike section 271(1)(c) of the Act, the requirement of proving deliberate concealment or mens rea is not essential once undisclosed income pertaining to search is determined. Accordingly, the learned CIT(A) confirmed the penalty order.
3. Aggrieved with the said order, the assessee is in appeal before us on the following grounds of appeal:
“ 1. BECAUSE in any view, the Ld. C.I.T. (Appeals)-4, Kanpur vide Order dt.15.05.2026 has Grossly erred by Dismissing the Appeal and Confirming the “Penalty imposed of Rs.24,410/- (on so called being 60% of Undisclosed Income of Rs.40,688/-) u/s 271AAB(1A) of the I.T. Act” vide Order dt.28.09.2024 which is Wrong, Illegal, Without Reasonable Opportunity of being heard, Bad in Peculiar Facts & Law.
2. BECAUSE in any view, the Addition of impugned Amount of Rs.40,688/-being solely on the basis of Excess Loss in F & O inadvertently shown in the Calculation in ITR was requested by the Appellant himself in the Peculiar Facts cannot be characterized as “Undisclosed Income” as defined under Explanation (C) to Section 271AAB of the I.T. Act.
3. BECAUSE in any view, the so called Addition of Rs.40,688/- is of F & O Loss was reported in ITR at Rs.19,50,335/- instead of Actual Loss of Rs.19,09,647/-.
Brought to the Notice of the A.O. by the Appellant himself in a Ist Submission on 19.02.2024 even before issuing Notice u/s 142(1) dt.05.03.2024 alongwith the Payment of Rs.7,120/- on 19.02.2024 itself.
Neither in the knowledge of the A.O., Nor there was any Seized Material in this regard during the Search u/s 132(1) on 03.08.2022.
4. BECAUSE in any view, the Penalty Order dt.28.09.2024 passed u/s 271AAB(1A) of the I.T. Act & impugned Order dt.15.05.2026 of Ld. C.I.T. (Appeals)-4, Kanpur is without Reasonable Opportunity of being heard is against the “Principle of Audi Alteram Partem” & thus in Violation of “Principle of Natural Justice”.
5. BECAUSE in any view, in the peculiar facts there is No Mens-rea for impugned Penalty Proceedings u/s 271AAB(1A) of the I.T Act (which is Quashi- Criminal in Nature)
The impugned Penalty imposed u/s 271AAB is Wrong & Illegal.
6. BECAUSE in any view, the Penalty initiated & imposed u/s 271AAB(1A) of the I.T. Act is Wrong, Illegal & Void.
7. BECAUSE in any view, and without prejudice to the aforesaid Grounds, the Penalty Order passed, so called Show Cause Notice u/s 271AAB(1A), imposing Penalty of Rs.24,410/-, Confirmed by Ld. C.I.T. (Appeals)-4, Kanpur is without Proper Opportunity, Wrong, Illegal, Bad in Facts & Law.”
4. At the time of hearing, the learned AR relied upon the facts stated before the learned CIT(A) and submitted that the amount of Rs.40,688/- does not represent undisclosed income and therefore, the assessee is not liable for penalty u/s. 271AAB(1A) of the Act.
5. On the other hand, learned Sr. DR supported the orders of the authorities below.
6. We have heard both the parties and perused the material on record. In this case, as noted above, during the course of assessment proceedings, the assessee in her reply dated 19.02.2024 to the AO stated that due to clerical computation error in the income-tax return filed by the assessee, wherein the F&O loss was reported as Rs.19,50,335/- instead of actual loss of Rs.19,09,647/- resulting in addition of Rs.40,688/- to the total income of the assessee and requested the AO to rectify the same while passing the order u/s. 143(3) of the Act. The same was subsequently added by the AO in the assessment order by treating it as suppressed income of the assessee. During the penalty proceedings as well as the appellate proceedings, the AO as well as the learned CIT(A) have considered the amount of Rs.40,688/- as undisclosed income and accordingly the AO levied a penalty u/s 271AAB(1A) of the Act which was confirmed by the Ld. CIT (A). In this regard, undisclosed income has been defined in clause (c) of sub-sec. (3) of Section 271AAB of the Act, which is reproduced as under :
“Section 271AAB(3)(c):
(c) “undisclosed income” means—
(i) any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132, which has—
(A) not been recorded on or before the date of search in the books of account or other documents maintained in the normal course relating to such previous year; or
(B) otherwise not been disclosed to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner before the date of search; or
(ii) any income of the specified previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conducted.”
6.1 On perusal of the same, and after giving a thoughtful consideration, we are of the considered view that the addition of Rs. 40,688/- on account of clerical computation error in the income-tax return filed by the assessee, wherein the F&O loss was reported at Rs.19,50,335/- instead of actual loss of Rs.19,09,647/- will not fall under the term ‘undisclosed income’ as defined in clause (c) of sub-sec. (3) of Section 271AAB of the Act. In this regard, the claim of the assessee that the excess loss of Rs.40,688/- is not found recorded in any document found in the course of search has not been negated by the AO and therefore the provisions of clause (A) and (B) of section 271 AAB (3)(c)(i) of the Act will not be attracted. Further, the offer by the assessee to offer the sum of Rs. 40,688/- to tax cannot be termed as ‘false’ that would not have been found to be so had the search not been conducted as provided in clause (ii) of section 271 AAB (3)(c) of the Act. There may be some truth in the observations of the AO and the Ld. CIT(A) that the mistake of over reporting of F&O loses to the extent of Rs. 40,688/- would not have been detected had the search not been conducted in the case of Ghanaram & others Group of Jhansi and consequently, the jurisdiction over the assessee was not assigned to the DCIT, Central Circle, Agra and the case was not picked up for scrutiny. There is always a distinction between any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be ‘false’ and would not have been found to be so had the search not been conducted and an ‘inadvertent mistake’ which is suo moto offered by the assessee even in a post search assessment proceedings. In our view, the under reporting of F&O loses to the extent of Rs. 40,688/- in the present case is an inadvertent mistake which does not fall under the definition of undisclosed income as discussed above and therefore the penalty u/s 271AAB(1A) will not be leviable in this case. Therefore, the levy of penalty of Rs. 24,410/- u/s 271AAB(1A) of the Act is not sustainable in this case and the same is deleted.
7. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 04/11 /2026
