The Income Tax Appellate Tribunal (ITAT), Pune Bench, has recently, in an appeal filed before it, held penalty under Section 270A cannot be levied on estimated disallowance.
The aforesaid observation was made by the Pune ITAT, when an appeal was preferred before it by the Assessee, as directed against the order of the Commissioner of Income Tax (Appeals), Pune, dated 10.08.2022, emanating from penalty order dated 20.01.2021 for the A.Y.2017-18.
The ground of the assessee’s appeal being that on the facts and circumstances of the case and in law the CIT(A)-11, Pune, erred in confirming the levy of penalty under section 270A (9), as levied by the ACIT, Central Circle Kolhapur, on the disallowance of interest under Section 36(l)(iii), as the said disallowance was on estimation and on an agreed basis, the assessee thus added that the penalty levied on account of ‘misrepresentation of facts’, is therefore incorrect.
The brief facts of the case were that the assessee had filed his return of income for the A.Y. 2017-18 electronically, on 14.02.2018, declaring the total income at Rs.23,25,390/-. The case was selected for scrutiny through CASS. And accordingly, a notice dated 18.08.2018 under section 143(2), was served to the assessee on 18.08.2018. And, the Assessing Officer (AO), then passed the assessment order under section 143(3) on 29.11.2019.
During the assessment proceedings, the AO observed that the assessee had given various advances without charging interest, and therefore, asked the assessee to explain why the interest expenses shall not be proportionately disallowed as these were non-business advances. The AO also observed in the assessment order that the assessee had paid a total interest of Rs.26,59,606/-.
The AO had also mentioned in the assessment order that the assessee failed to submit the details and merely claimed that the said advances were given out of capital, non-interest-bearing funds. However, the AO held that since the assessee failed to establish that non-interest-bearing funds were utilized for the above-mentioned advances, the AO disallowed an interest amount of Rs.6,87,222/- out of the total interest expenses of Rs.26,59,606/- on the basis of interest charged by State Bank of India (SBI) which was 13.05%.
The AO then initiated a penalty under section 270A for misrepresentation of the fact. And, accordingly, after giving opportunity to the assessee, levied penalty under section 270A, of Rs.4,30,700/- invoking section 270A (9) and 270A (2) of the Income Tax Act.
The AO also levied a penalty under section 270A, for underreporting of income, which was in consequence of misreporting. And being aggrieved by this order of the AO, the assessee filed an appeal before the ld.CIT(A).
The CIT(A) however upheld the order passed by the AO. And, it is being aggrieved by this order of the CIT(A), that the assessee has filed the present appeal before the Tribunal.
Hearing the opposing contentions of both sides, as presented by Shri Pramod Shingte, the AR on behalf of the assessee and by Shri M.G. Jasnani, the DR, on behalf of the Revenue, as well as perusing the materials available on record, the ITAT observed:
“In this case, one fact is established that the expenses were disallowed on an estimate basis. The penalty has been levied on these disallowances of estimated expenses. Section 270A of the Income Tax Act provides for the imposition of penalties for under-reporting and misreporting of income. Sub-section (2) enlists certain circumstances of under-reporting of income. Sub-section (3) deals with the determination of under-reported income, which, in our context, is by reducing the income returned by the assessee from the amount of income finally assessed. Sub-section (6) is relevant for our purpose which states that under-reported income for the purpose of this section shall not include certain items. Clause (b) of subsection (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 Assessing Officer ….’. It is ostensible from the language of sub-section (6) that an addition made on the basis of estimation cannot provide a foundation for under-reported income for the purpose of imposition of penalty under Section 270A of the Income Tax Act.”
Thus, the ITAT Panel of S.S Godara, the Judicial Member and Dr Dipak P, Ripote, the Accountant Member held:
“In this case, the penalty has been levied on estimated disallowance. Hence, the penalty is not sustainable. Accordingly, the AO is directed to delete the penalty levied under section 270A of the Income Tax Act. Accordingly, grounds of appeal raised by the assessee are allowed. In the result, the appeal of the assessee is allowed.”
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
