No Specific Charge, No Penalty: Mumbai ITAT Cancels Section 270A Levy for Defective Notice

Anshul Specialty Molecules Pvt. Ltd. Vs DCIT (ITAT Mumbai)

No Specific Charge, No Penalty: Mumbai ITAT Cancels Section 270A Levy for Defective Notice

The Mumbai ITAT quashed a penalty of ₹5.57 lakh levied under section 270A against Anshul Specialty Molecules Pvt. Ltd., holding that the Assessing Officer had failed to specify the exact clause under which the assessee was alleged to have under-reported income. The penalty arose from a disallowance made under section 14A read with Rule 8D in respect of exempt dividend income.

The assessee contended that while initiating penalty proceedings, the Assessing Officer merely referred to “under-reporting of income” without identifying which of the specific clauses of section 270A(2) was attracted. It was argued that such a vague notice deprived the assessee of a meaningful opportunity to defend itself and rendered the penalty proceedings invalid.

The Tribunal examined the penalty notice and found that the Assessing Officer had indeed failed to specify the precise limb of section 270A applicable to the assessee’s case. Relying on the decisions of the Rajasthan High Court in G.R. Infraprojects Ltd. and the Delhi High Court in Schneider Electric South East Asia (HQ) Pte. Ltd., the Tribunal observed that the Assessing Officer is duty-bound to clearly indicate the exact charge before imposing penalty. A mere generic reference to under-reporting or misreporting of income is insufficient in law.

The ITAT held that failure to specify the relevant clause of section 270A strikes at the root of the penalty proceedings and renders both the notice and the consequential penalty order invalid. Since the penalty itself was quashed on this legal ground, the Tribunal did not consider it necessary to adjudicate the merits of the disallowance under section 14A.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal is filed by the assessee, challenging the order of the Learned Commissioner of Income Tax (Appeals) [‘Ld. CIT(A)’ for short], National Faceless Appeal Centre (“NFAC” for short)passed u/s. 250 of the Income Tax Act, 1961 (‘the Act’), pertaining to the Assessment Year (‘A.Y.’ for short) 2019-20.

2. The assessee has raised the following grounds of appeal along with the additional grounds:

“1. On the facts and in the circumstances of the case, the learned Commissioner of Income tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi erred in confirming penalty under section 270A of the Act amounting to Rs.5,57,203/- levied by Assessment Unit, Income tax Department, particularly when neither the assessment order nor penalty order records Assessing Officer’s satisfaction which is mandatory condition as per section 14A(2) before invoking the Rule 8D and therefore penalty under section 270A is bad-in-law, illegal and ab-initio-void.

2. On the facts and in the circumstances of the case, the said learned Commissioner of Income tax has also erred in confirming penalty under section 270A of the Act, amounting to Rs.5,57,203/- without appreciating that no amount has been borrowed for the purpose of investment and investment was out of appellant’s own fund.

3. On the facts and in the circumstances of the case, the said learned Commissioner of Income tax has also erred in confirming penalty under section 270A of the Act, amounting to RS. 5,57,203/- without appreciating that out of total dividend of Rs.8,93,27,568/-, dividend of Rs.8,72,30,985/- is only from the appellant’s associated company, so there was no question of incurring any expense for earning the dividend income, hence the appellant has not claimed any expenditure.

4. On the facts and in the circumstances of the case, the said learned Commissioner of Income tax has also erred in confirming penalty under section 270A of the Act, amounting to Rs.5,57,203/-without appreciating that the appellant is in the business manufacturing specialty chemicals and its total revenue was Rs.105,06,80,333/-while total expenses were Rs.74,54,81,148/- is 71% and net profit after tax was Rs.25,11,35,705/- i.e. 24% and 5% was tax, so there was no expenditure for earning exempted income.

The appellant craves a right to add, to delete or to modify any of the main grounds of appeal mentioned hereinabove.”

Additional Grounds

“(a) On the facts and in the circumstances of the case, the said learned Commissioner of income tax NFAC (Delhi) erred in confirming the order of the Assessing Office under section 270A of the Income tax Act 1961, particularly when in order of the Assessing Officer it has not been mentioned under which clause /part of section 270A (2) of the Act, the appellant has under reported the income.

(b) On the facts and in the circumstances of the case the said learned Commissioner of Income tax has also erred in confirming the order of the Assessing Officer, in respect of penalty undersection 270A of the Act, particularly when, none of the clauses of sub section (2) of section 270A of the Act, is applicable to the appellant.”

3. As the additional grounds of appeal raised by the assessee are purely legal in nature, without requiring any further verification, we deem it fit to admit the same for adjudication in terms of the proposition laid down by the Hon’ble Apex Court in the case of National Thermal Power Corporation Vs. CIT (229 ITR 383 (SC).

4. Brief facts of the case are that the assessee company is engaged in manufacturing and selling of pharma intermediates, flavour, fragrance and chemicals catering both domestic and international market and is also engagedin investment activities and had filed its original return of income for the year under consideration dated 06.11.2019 declaring total income at Rs.20,30,62,240/- out of the income from profit and gains from business and income from Short Term Capital Gain (‘STCG’ for short) & Long Term Capital Gain (‘LTCG’ for short). The assessee’s case was selected for scrutiny and notices u/s 143(2) & 142(1) of the Act were duly issued and served upon the assessee. The Learned Assessing Officer (“Ld. AO” for short) observed that the assessee had received dividend income of Rs.8,93,27,568/- and had claimed the said income as exempt in its return of income. The Ld. AO further observed that the assessee has not bifurcated the expenditure claimed by it as those incurred for earning exempt income and for taxable income and hence the Ld. AO invoked the provisions of section 14A r.w.r 8D of the IT Rules thereby disallowing 1% of the annual average of the monthly average of the opening and closing balances of the total value of investment aggregating to Rs.38,26,982/- and passed the assessment order dated 30.09.2021 u/s 143(3) r.w.s. 144B of the Act thereby determining the total income at Rs.20,68,89,222/-. The Ld. AO also initiated penalty proceeding u/s 270A of the Act for under-reporting of income. Further, the Ld. AO passed the penalty order u/s 270A of the Act dated 21.03.2025 thereby levying penalty amounting to Rs.5,57,203/- towards under-reporting of income.

5. Aggrieved, the assessee was in appeal before the first appellate authority challenging the penalty levied by the Ld. AO. The Ld. CIT(A)upheld thepenalty levied on the ground that the assessee has failed to demonstrate that it had disclosed all relevant facts with supporting documentary evidences.

6. Aggrieved, the assessee is in appeal before us, challenging the order of the Ld. CIT(A).

7. The Learned Authorized Representative (“Ld. AR” for short) for the assessee commenced his arguments first challenging the penalty notice issued by the Ld. AO on the ground that the Ld. A.O. has failed to specify which clause of Section 270A(2) of the Act, the penalty has been initiated and levied. The Ld. ARfurther contended that it is the settled proposition of law where various decisions of the Hon’ble High Courts have held that penalty notice cannot be issued without specifying the relevant limb pertaining to under-reporting or misreporting of income. The Ld. AR relied on the order of the Hon’ble High Court of Delhi in the case of Schneider Electric South East Asia (HQ) Pte. Ltd. Vs. Asst. Commissioner of Income Tax and the Hon’ble High Court of Rajasthan in the case of G. R. Infra Projects Ltd Vs. ACIT and ors.

8. The Ld. Departmental Representative on the other hand controverted the said facts (“Ld. DR” in short) and contended that the Assessee has raised this ground by way of additional ground which is nothing but an afterthought where the Assessee has failed to challenge this issue before the Ld. CIT(A). The Ld. DR extensively relied on the decision of the Lower Authorities.

9. We have heard the rival submissions and perused the materials available on record. Before getting into the merits of the case, it is pertinent to decide the legal issues raised by the Assessee by way of an additional grounds. Though the Ld. DR had objected to the raising of the said ground, we deem it fit to admit the same and adjudicate, as the issue is of legal nature which goes to the root of the validity of the penalty notice. It is observed that the Ld. A.O. issued a Notice u/s 274 r.w. Section 270A of the Act dated 30/09/2021 for under-reporting of income and subsequent show cause notice dated 14/12/2021 and 07/11/2024. On perusal of the said notice, it is evident that the Ld. A.O. has failed to specify as to what was the actual charge as per Section 270A of the Act, for which penalty was initiated where in the said provision there are various Clauses from ‘a’ to ‘g’ which has categorized what would tantamount to under-reporting of income. The relevant provision is reproduced herein as under for ease of reference:

“A person shall be considered to have under-reported his income, if—(a)the income assessed is greater than the income determined in the return processed under clause (a) of sub-section (1) of section 143;(b)the income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished or where return has been furnished for the first time under section 148;(c)the income reassessed is greater than the income assessed or reassessed immediately before such reassessment;(d)the amount of deemed total income assessed or reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income determined in the return processed under clause (a) of sub-section (1) of section 143;(e)the amount of deemed total income assessed as per the provisions of section 115JB or section 115JC is greater than the maximum amount not chargeable to tax, where no return of income has been furnished or where return has been furnished for the first time under section 148;(f)the amount of deemed total income reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income assessed or reassessed immediately before such reassessment;(g)the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.”

10. We draw support from the decisions relied upon by the Ld. AR in the case of G. R. Infraprojects Ltd.(supra) where the Hon’ble High Court of Rajasthan has set aside the penalty order on the ground that neither in the assessment order nor in the subsequent show cause notice, the Ld. A.O. has specified under which part of sub-Section(9) of Section 270A of the Act the Assessee’s case would fall under. It further held that even in the impugned order, the same was not specified. Further the same has been reiterated in the decision of the Hon’ble High Court of Delhi in the Schneider Electric South East Asia (HQ) Pte. Ltd.(supra), where it has been held that with mere reference to the word misreporting without specifying which limb of the said provision, would render the penalty order invalid and non-est. Though both these cases were on the issue of seeking immunity from imposition of penalty u/s 270AA, the proposition laid down in these Judgments reiterates that the A.O. is duty bound to specify which of the limb, the Assessee case would fall under. Hence, we find justification in the contention raised by the Ld. AR that the Ld. A.O. has failed to specify the relevant limb u/s 270A of the Act as to which clause the Assessee’s case would fall under, failing which, we deem it fit to hold that the impugned notice and the consequential penalty order is treated to be invalid and therefore liable to be quashed. We therefore allowed the additional ground raised by the Assessee.

11. As we have decided the issue on the legal ground, the Grounds raised on the merits requires no further adjudication and are hereby rendered academic in nature.

12. In the result, appeal of the Assessee is hereby allowed on the above observation.

The following order is pronounced on 01/ 06/2026 as per Rule 34(5) of the Income Tax (Appellate Tribunal) Rules, 1963.