The Income Tax Appellate Tribunal (ITAT), Chennai Bench, has recently, in an appeal filed before it, held that income tax penalty under Section 270A of the Income Tax Act, 1961 cannot be levied, when disallowance is made on estimate basis.
The aforesaid observation was made by the made by the Chennai ITAT, when, an appeal was filed before it by the assessee, as directed against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [NFAC], Delhi, dated 05.07.2022, relevant to the assessment year 2017-2018, in confirming the levy of penalty under section 270A of the Income Tax Act.
The facts of the case, in brief, were that the assessee company had filed its return of income for the assessment year 2017-18 on 27.10.2017, declaring a total income at ₹.19,25,62,355/-. The return filed by the assessee was processed under Section 143(1) of the Income Tax Act.
Subsequently, the case of the assessee, was selected under CASS, for complete scrutiny, and notice under Section 143(2) of the Income Tax Act was issued calling explanation from the assessee. After considering the explanations of the assessee and verifying the records, the assessment was completed under Section 143(3) of the Act .
However, in the assessment order, while scrutinizing the profit and loss account of the assessee, the Assessing Officer noted that the assessee had claimed a sum of ₹1,01,64,738/- on account of repairs and maintenance. And, while going through the same, it was also noted that the expenditure incurred towards repair and maintenance, contains certain capital items of expenditure to the extent of ₹20,32,948/- for which the assessee had not offered satisfactory explanation, and therefore, the sum of ₹20,32,948/- was disallowed and added to the returned income of the assessee.
Subsequently, the Assessing Officer initiated penalty proceedings under Section 270A of the Income Tax Act, by issue of a show-cause notice dated 06.12.2019. And, after considering the replies filed by the assessee, the Assessing Officer finalized the penalty proceedings and passed an order dated 18.09.2021, thereby levying a penalty of ₹5,70,222/, under Section 270A of the Income Tax Act, for under-reporting of income in respect of the repair & maintenance expenses of ₹.20,32,948/- subjected to the disallowance in the assessment order. And, on appeal, the CIT(A) confirmed the penalty levied under Section 270A of the Income Tax Act.
And, it is by being aggrieved by the same, that the assessee has preferred the instant appeal before the Chennai ITAT.
It was submitted by Advocate Shri S. Sridhar, the Counsel for the assessee has that the total expenditure incurred by the assessee was ₹1,01,64,738/, and that the Assessing officer has disallowed 20% of the expenditure on estimated basis.
He further submitted that therefore, the penalty under Section 270A of the Income Tax Act, for ₹.5,70,222/- cannot be levied, thus praying for deleting the penalty confirmed by the CIT(A).
However, on the other hand, Shri D. Hema Bhupal, JCIT, the DR, strongly supported the orders of authorities below.
Hearing the opposing contentions of either sides and thereby perusing the materials availale on record, the Chennai ITAT commented:“We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. In this case, the Assessing Officer has initiated penalty proceedings under section 270A of the Act for under-reported income. The Assessing Officer issued show cause notice under section 274 r.w.s. 270A of the Act calling explanations from the assessee as to why penalty cannot be levied for under-reporting the income. The assessee has submitted that all the details before the Assessing Officer and also expenditure incurred by the assessee.”
“Therefore, the Assessing Officer, on estimated basis, disallowed an amount of ₹.20,32,748/- and no penalty can be levied under section 270A of the Act. We find that the Assessing Officer has disallowed 20% of the expenditure claimed by the assessee. Disallowing the expenditure cannot be said that it is an under-reporting of the income. The assessee has filed all the details and not only that the Assessing Officer, on estimated basis disallowed the expenditure. Once, the disallowance made on estimatedbasis, no penalty can be levied”, the Panel comprising of G. Manjunatha, the Accountant Member, along with V. Durga Rao, the Judicial Member added.
Thus, allowing the assessee’s appeal, the Chennai ITAT held:
“Therefore, the penalty levied by the Assessing Officer and confirmed by the ld. CIT(A) is unsustainable and thus, the penalty levied under section 270A of the Act is deleted. In the result, the appeal filed by the assessee is allowed.”
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