Mere Change in Head of Loss Does Not Constitute Under-Reporting u/s 270A: ITAT Deletes ₹15.19 Cr Penalty [Read Order]

The Income Tax Appellate Tribunal, Mumbai Bench (ITAT), held that a mere change in the head under which a loss is classified cannot be treated as under-reporting of income for the purpose of levying penalty under Section 270A of the Income Tax Act, 1961, and accordingly set aside the penalty of ₹15.19 crore imposed by the Revenue.

The appeal was filed by INU Exports Private Limited for the Assessment Year 2017-2018, challenging the order passed by the National Faceless Appeal Centre [CIT(A)] which had confirmed the levy of penalty under Section 270A of the Income Tax Act, 1961, observing that the assessee had accepted the assessment order and had not challenged the reclassification of the loss in further appeal.

The assessee filed its return of income declaring a loss of ₹87.92 crore, which was selected for scrutiny and the assessment was completed under Section 143(3) ofthe Income Tax Act, 1961. During assessment proceedings, the Assessing Officer (AO) observed that the assessee had debited ₹87.83 crore as claim and settlement loss arising from forward contracts entered into for trading in commodities.

The AO concluded that since there was no actual delivery of goods under the forward contracts, the transactions were speculative in nature. On this basis, the loss claimed as business loss was treated as speculative loss. Penalty proceedings were thereafter initiated under Section 270A of the Income Tax Act, 1961 on the ground of under-reporting of income, and a penalty of ₹15,19,85,920 was levied.

The appellant contended that the loss was incurred during the normal course of its business and was fully disclosed in the return of income, and that the AO had merely reclassified the loss from business loss to speculative loss without disputing the genuineness or quantum of the loss.

Therefore, such reclassification amounted only to a change in the head of loss and did not result in concealment of income or furnishing of inaccurate particulars. Further, argued that penalty proceedings are independent of assessment proceedings and that the absence of a quantum appeal, particularly where no tax demand arose, could not justify the levy of penalty.

The Bench of Pawan Singh, Judicial Member, and Renu Jauhri, Accountant Member, allowed the appeal and deleted the penalty, observing that the loss claimed by the assessee was accepted in its entirety, though under a different head, and there was no finding that the assessee had concealed income or furnished inaccurate particulars.

The Tribunal held that reclassification of a loss from business loss to speculativeloss amounts only to a change in the head of loss and does not automatically give rise to under-reporting of income. Further, ITAT clarified that penalty proceedings under Section 270A of the Income Tax Act, 1961 require a clear case of under-reporting, which was absent in the present matter.

Additionally, rejected the Revenue’s reliance on the assessee’s failure to file a quantum appeal, holding that penalty proceedings are separate and independent, and the absence of tax demand was a valid explanation for not pursuing further appeal.

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