The Bangalore bench of the Income Tax Appellate Tribunal ( ITAT ) in a recent case quashed a penalty levied under section 270 of the Income Tax Act 1961, noting that the assessee failed to file Income Tax Return due to bonafide misunderstanding.
Sekhon Jagtar Singh, the assessee in this case, is an individual who did not file a return of income for the relevant assessment year 2017-18 under Section 139 of the Income Tax Act. The assessee’s income primarily comprised salary, and he disclosed this income only after receiving notices under Section 148 of the Act, which pertains to the reassessment of income.
In response to these notices, the assessee furnished Form 16, a certificate issued by the employer detailing the tax deducted at source ( TDS ) and income earned. During the reassessment proceedings, the AO observed that the assessee had claimed an excessive deduction under Section 24 of the tax statute amounting to ₹74,951, which represented interest on a housing loan. This deduction was disallowed, and the amount was added to the assessee’s total income, resulting in an assessed income of ₹58,70,680.
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Since the assessee had not filed the original return of income, the AO initiated penalty proceedings for underreporting income under Section 270A of the tax legislature. The penalty was computed as 50% of the tax sought to be evaded, amounting to ₹8,16,895.
Aggrieved, the assessee appealed against this before the Commissioner of Income Tax ( Appeals ) [CIT(A)].
On appeal, the CIT(A) also confirmed the penalty, leading the assessee to file an appeal before the ITAT.
Before the appellate tribunal, the assessee’s representative counsel argued that the entire tax on the salary income had already been deducted by the employer, and therefore, there was a bona fide belief that there was no underreporting of income. The representative contended that the penalty under Section 270A of the income tax statute should not apply in this case, as the assessee had not intentionally misreported or concealed income.
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In his defense, the assessee further argued that he had regularly filed returns in previous years and had provided the necessary details to his tax consultant, believing that the return for the year in question had been filed as well. It was also submitted that the assessee had changed jobs during the year, and all tax liabilities were duly deducted by the employer and deposited with the government. The assessee further claimed his failure to file the return was due to a bona fide belief that his tax obligations were fully met through TDS, and there was no intention to underreport income.
The department’s representative, on the other hand, supported the orders of the lower authorities, stressing that the assessee was required to file a return of income under income tax Section 139, but failed to do so. The department argued that the failure to file a return resulted in the underreporting of income, justifying the penalty imposed by the AO.
Upon reviewing the case, the division bench of Mr Waseem Ahmed and Mr Keshav Dubey noted that the AO did not accept the assessee’s reasoning, asserting that the assessee was required to file a return but did not do so, and that the submission of Form 16 during the assessment proceedings did not exempt him from the penalty for underreporting income.
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However, the tribunal acknowledged that the entire tax liability had already been deducted at source by the employer and reflected in the department’s records, indicating no loss of revenue. The tribunal referred to Section 270A(6)(a) of ITA, which stipulates that no penalty shall be imposed if the assessee provides a satisfactory explanation for the income and discloses all material facts. In this case, the tribunal was convinced that the assessee’s explanation was bona fide, given that he had regularly filed returns in the past and there was no intent to conceal income.
Additionally, the tribunal noted that the disallowed deduction of ₹74,951 under Section 24 of ITA was claimed under a bona fide belief, and thus, no penalty should be levied for underreporting income. The tribunal cited a similar case, Parulben Vijaykumar Patel vs. ITO, where the Ahmedabad Tribunal held that if an assessee’s explanation is bona fide and the income was disclosed, albeit through Form 16 or Form 26AS, no penalty should be imposed under Section 270A of the tax statute.
In result, the tribunal set aside the CIT(A)’s order and directed the AO to delete the penalty of ₹8,16,895 levied under Section 270A of ITA.
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