Section 270A(9)(a) Penalty Cannot be Levied for Adhoc Disallowance of Expenditure

VDB Infra and Realty Private Limited Vs ITO (ITAT Bangalore)

In a recent case before the Income Tax Appellate Tribunal (ITAT) Bangalore, the issue of levying penalty under Section 270A(9)(a) of the Income Tax Act, 1961, for adhoc disallowance of expenditure was thoroughly examined. The case involved VDB Infra and Realty Private Limited versus the Income Tax Officer (ITO) and raised significant questions regarding the applicability of penalties for alleged misreporting of income.

The appeal was directed against the order of the National Faceless Appeal Centre (NFAC) for the assessment year 2017-18, where the assessee contested the penalty levied under Section 270A(9)(a) by the assessing officer (AO).

Facts of the Case:

VDB Infra and Realty Private Limited, engaged in real estate development, had claimed various expenditures during the assessment year amounting to Rs. 49,51,98,852/-. However, the AO disallowed a portion of the claimed expenses, amounting to Rs. 9,95,541/-, on an adhoc basis due to the inability of the assessee to provide specific details for certain expenses. Consequently, a penalty under Section 270A(9)(a) was initiated against the assessee for alleged misreporting of income.

Key Arguments and Observations:

During the proceedings, the assessee contended that all expenditures were supported by vouchers, recorded in the books of accounts, and payments were made through banking channels with the requisite TDS deductions. Despite this, the AO proceeded to make adhoc disallowance without conclusive evidence to suggest misrepresentation or suppression of facts by the assessee.

The ITAT observed that the penalty order initially mentioned Section 270A(9)(c) of the Act, but the CIT(A) confirmed the penalty under Section 270A(9)(a) without giving the assessee an opportunity to present its case under the relevant provision.

Further, the ITAT emphasized that adhoc disallowance, without concrete evidence to prove misreporting, cannot warrant the imposition of penalties under Section 270A(9)(a) or (c) of the Act. It highlighted that penalties should be imposed only when there is concrete evidence of misrepresentation or suppression of facts, which was lacking in this case.

Conclusion:

In a significant ruling, the ITAT upheld the appeal of VDB Infra and Realty Private Limited, emphasizing that adhoc disallowance of expenditure, without conclusive evidence of misreporting, does not justify the imposition of penalties under Section 270A(9)(a) or (c) of the Income Tax Act. This decision reaffirms the principle that penalties should be levied based on concrete evidence and not on mere estimation or adhoc disallowances. It provides clarity on the interpretation and application of penalty provisions under Section 270A and underscores the importance of procedural fairness in tax assessments and penalties.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal by assessee is directed against order of NFAC for the assessment year 2017-18 dated 6.10.2023 passed u/s 250 of the Income Tax Act, 1961 (in short “The Act”). The assessee has raised following grounds of appeal:

1. The Order of the Ld. Commissioner of Income Tax, (Appeals), NFAC, Delhi, is erroneous and is not based on facts and circumstances of the case. Hence the same is bad in law and the decision of Ld. Commissioner of Income Tax (Appeals), NFAC, Delhi.

2. The Ld. CIT (Appeals), NFAC, Delhi erred in upholding the Penalty order passed by the Ld. AO. The Ld. CIT(A), NFAC, Delhi failed to adjudicate on the correctness of applicability of Sec 270A(9) in respect of the additions made in the Assessment order.

3. The Ld. CIT(A), NFAC, Delhi failed to appreciate that the additions do not come within the purview of “under-reported income” on account of Sec 270A(6) of the Income Tax Act 1961.

4. The 1d. CIT(A), NFAC, Delhi failed to appreciate that the entire expenditure was subjected to TDS and there is no bogus expenditure

5. The 1d. CIT(A), NFAC, Delhi failed to appreciate that the expenditure which forms part of additions in the Asst. Order accounts for 2% of the total expenditure for which the details were sought. The 1d. CIT(A), NFAC, Delhi failed to appreciate that in the era of faceless assessment, uploading of all the bills and vouchers is not possible within the short time granted for scrutiny proceedings.

6. The appellant therefore prays the Hon’ble Income Tax, Appellate Tribunal to

i) Confirm that no penalty under Sec 270A is leviable in respect of additions which were made on the basis of estimation for disallowance of expenditure.

ii) Delete the Penalty levied by the ld. AO on the basis of additions made in the Assessment Order and confirmed by the Hon’ble CIT(A),

2. All the above grounds are with regard to levy of penalty u/s 271A of the Act.

 2.1 Facts of the case are that the assessee is carrying on real estate development business. During the previous year it has converted its own 2 acres prime Bangalore site into 117 flats (18 floors high rise building with 3 floors underground parking) and achieved a turnover of Rs. 50,85,11,249/-. It claimed various expenditure of Rs. 49,51,98,852/- including depreciation, incurred wholly and exclusively for business. This was subjected to Tax audit u/s 44AB and the audit report was filed along with the return of income. The case was selected for scrutiny. During the course of scrutiny assessment, the ld.AO asked the assessee to produce bills for Rs. 6,52,936/- claimed as Farm work expenses paid to individuals. All the payments are through Bank and were subject to TDS. As the assessee has not produced the bills this was added to the returned income. Further, the AO found expenses for the installation charges of Rs. 99,55,404/- was paid to various entities. All the payments are through Bank and were subject to TDS. AO has asked for the bills of the same. However, assessee was unable to provide all the bills in respect of the expenses claimed. Hence, Rs. 9,95,541/- (being 10 percent of Rs. 99,55,404) was disallowed and added to the total income of the assessee. Thus, the assessment was completed on 30.12.2019 with the total addition of Rs. 16,48,477/- and it has resulted into a demand of Rs. 7,34,829/-. This the assessee has paid without opting to go in appeal. The Id. AO has proposed a sec. 270A penalty. Now the AO of NFAC has issued a show cause notice on 27.7.2021 and a reminder on 7. 10.2021. Further, a draft penalty SCN was issued on 3.1.2022. The assessee replied objecting to apply / levy the penalty on 4.1.2022. Finally, the sec. 270A penalty was levied on 17.1.2022. It is treated as is reporting of income and the 200 percent of the tax on the addition was levied as penalty which resulted into a demand of Rs. 10,18,758/-. Aggrieved to the above the assessee filed appeal before ld. CIT(A).

2.2 On appeal, ld. CIT(A) observed that the reason of misunderstanding or misinterpreting of any particular provisions of the Act cannot form the basis of the explanation in a statutory proceeding simply because such a presumption cannot be established by evidences. Misinterpretation of the law does not give the assessee immunity from the repercussions of breaking it. During the course of assessment proceedings, the assessee could not able to substantiate expenditure with concrete evidence. The two expenses pointed out by the AO were labour oriented charges. Only on technical grounds they are being disallowed.

2.3 He further observed that it is clear that the assessee made a claim of expenditure not substantiated by any evidence. The assessee was not able to substantiate its expenses with concrete evidences and it is clear that these expenses were wrongly claimed to evade tax. Therefore, its case falls within the purview of sec. 270A(9)(a) of the Act.

2.4 In view of the above, levying penalty of Rs. 10,18,758/- u/s 270A(9) of the Act for misreporting of income was upheld by the ld. CIT(A) and he dismissed the appeal of the assessee.

3. We have heard the rival submissions and perused the materials available on record. The contention of the ld. A.R. is that the ld. AO has passed penalty order levying penalty u/s 270A(9)(a) of the Act stating that there is a mis-representation or suppression of the facts, thereby misreporting of income. However, in assessment order, he mentioned that levy of penalty u/s 270A(9)(c) of the Act. The ld. CIT(A) has confirmed the penalty u/s 270A(9)(a) of the Act, which was not the case of ld. AO. On the other hand, case of the ld. AO was the levy of penalty u/s 270A(9)(c) of the Act. According to the assessee, all expenses are supported by vouchers recorded in the books of accounts of the assessee and payment through banking channels and due TDS has been made and the books of accounts of the assessee were duly audited by statutory/tax auditors. According to the ld. A.R., adhoc disallowance was made by ld. AO for the reason best known to him cannot qualify for levy of penalty u/s 270A(9)(a) or (c) of the Act. He submitted that all the details for the purpose of assessment i.e. bills, vouchers, receipts, etc. were produced by the assessee. At the time of assessment, the ld. AO without specifying the specific discrepancies in the books of accounts of the assessee, he disallowed 10% of the expenditure mentioning that assessee was unable to provide all details in respect of expenses claimed. The assessee has furnished full details of expenses i.e. Form Fire Safety Expenses at Rs.6,52,936/- and Tor Steel Rolling expenses at Rs.9,95,541/- with the name, dates, mode of payment, TDS, PAN, etc. before ld. CIT(A)/NFAC. However, they overlooked the details furnished by assessee and confirmed the penalty u/s 270A(9)(a) of the Act. According to the ld. A.R., the discrepancy found by the ld. AO as confirmed by the ld. CIT(A) do not come within the purview of under reporting of income and penalty cannot be levied. For this purpose, he relied on the judgement in the case of “Jai Balaji Business Corporation Pvt. Ltd. Vs. ACIT in ITA No.840/Pune/2022 dated 10.02.2023, wherein held that “Sec. 270A of the Act provides for imposition of penalty for under-reporting and misreporting of income. Sub-s. (2) enlists certain circumstances of under­reporting of income. Sub-s. (3) deals with the determination of underreported income, which, in our context, is by reducing the income returned by the assessee from the amount of income finally assessed. Sub­s. (6) is relevant for our purpose which states that under-reported income for the purpose of this section shall not include certain items. Cl. (b) of sub-s. (6) refers to: “the amount of under-reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the A O.” It is ostensible from the language of sub-s. (6) that an addition made on the basis of estimation cannot provide foundation for under-reported income for the purpose of imposition of penalty under s. 270A of the Act. As the only basis of the addition is the estimate made by the DVO, we hold that the penalty cannot be sustained. We, therefore, order to delete the same.”

3.1 Further, he relied on the order of the Tribunal Chennai Bench in the case of Pallava Textiles Pvt. Ltd. Vs. ITO (2023) 37 NYPTTJ 352 (Chennai) (2023). Thus, he submitted that the addition made on estimate basis, penalty cannot be levied.

4. The ld. D.R. relied on the order of lower authorities.

5. We have heard the rival submissions and perused the materials available on record. In this case, the ld. AO has pointed out the defects in vouchers as follows:

“4. Disallowance on the Form. Fire. Safety etc expenses: Assessee company is engaged in the business of construction of apartment and flats and has claimed a sum of \ Rs.40647331/- as expenses on the various heads i.e (Form, fire, safety etc Expenses ) for the construction purpose. Assessee was asked to substantiate the said expenses with ledger and breakup along with the TDS reconciliation if any. Assessee has furnished the details for the same. On verification it is found that Expenses for the form work of Rs. 6529S6/- was paid to individual, however no details submitted for the genuineness for the same. Hence an amount of Rs. 652936A- is disallowed and added to the income of the assessee.

5: Disallowance on the Torsteel Rolling etc Expenses: It was noticed from the submission filed by the assessee that assessee has claimed a sum of Rs.48307977/- as expenses on the various heads i.e (Torsteel Rolling etc Expenses) for the construction purpose. Assessee was asked to substantiate the said expenses with ledger and breakup along with the TDS reconciliation if any. Assessee has furnished the details for the same. On verification it is found that Expenses for the installation charges of Rs. 9955404- was paid to various entity, however assessee was unable to provide the all details in respect of the expenses claimed. Hence 10% of the said amount expenses i.e Rs. 9,95,541/- (10% of Rs. 9955404) is disallowed and added to the income of the assessee.”

(Addition: Rs.9,95,541/-)

Penalty u/s 270A (9) (a) is initiated for misreporting of income.”

5.1 Consequently, he levied penalty u/s 270A(9)(c) of the Act since the assessee was not able to substantiate his expenses with concrete evidence. The facts are that the assessee produced the books of accounts, vouchers and the payment has been made through banking channels, the payments which are required to be subject to deduction of TDS, same has been deducted. Still, the ld. AO was of the opinion that the assessee has not produced the concrete evidence to support the payments. The NFAC/CIT(A) has agreed by the contention that there was no failure on the part of assessee to claim expenditure and it was admitted that assessee has substantiated the expenditure by evidence. On the other hand, he invoked the provisions of section 270A(9)(a) of the Act for misrepresentation or suppression of facts. In our opinion, even if he wants to change the head of levying of penalty u/s 270A o the Act after agreeing with the contention of the assessee that it not falls under the limb for which the ld. AO has levied the penalty, he should give a fresh notice to the assessee, so as to give an opportunity of hearing to explain the case of the assessee under the limb which the CIT(A) has invoked. Admittedly, the NFAC has not carried out this exercise. On this count, the penalty cannot be levied. Without prejudice to this, in our opinion, the disallowance of expenditure made by ld. AO on estimate basis though the assessee has filed all the necessary details of expenditure, which is not accepted by the ld. AO for the reason best known to him and as such, this case is not fit for levy of penalty u/s 270A(9)(a) or 270A(9)(c) of the Act. Further, in penalty order, the authorities proceeded merely on the basis of findings in the quantum proceedings and have not independently examined the matter for levy of impugned penalty. Even on this procedural count, penalty levied cannot be sustained. Though the addition was made on adhoc basis that by itself does not prove that there is any conclusive material to suggest that the assessee has not incurred this expenditure and penalty cannot be levied in this kind of situation, unless the claim of assessee was proved to be bogus or that any amount was not spent by assessee or received back by the assessee. In other words, the disallowance of expenditure by itself cannot be the reason to levy the penalty u/s 270A(9)(a) or 270(9)(c) of the Act. The addition is only on estimate basis and the ld. AO could not prove that there was non-incurring of this expenditure by assessee and there was no positive material to suggest that the assessee misrepresented or suppressed any facts either before ld. AO or before ld. CIT(A). Hence, in our opinion, this is not a fit case for penalty u/s 270A(9)(a) or 270A(9)(c) of the Act. Accordingly, we delete the penalty.

6. In the result, appeal of the assessee is allowed.

Order pronounced in the open court on 18^th Jan, 2024