Mere Reference to “Misreporting” in Income Tax Assessment Order Insufficient to Deny Statutory Immunity from Penalty & Prosecution: ITAT [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) ruled that mere reference to “misreporting” in assessment order is an insufficient condition to deny the statutory immunity from penalty and prosecution under the Income Tax Act, 1961.

The case arose from an assessment framed under Section 147 read with Section 144B of the Income Tax Act, wherein the Assessing Officer alleged that the assessee, Shree Balaji Chain, had carried out out-of-books transactions amounting to Rs. 13.44 crores. The books of account were rejected, and income was estimated at 3.5%, resulting in an addition of Rs. 47.06 lakhs.

Consequently, penalty proceedings were initiated under Section 270A of the Income Tax Act for alleged under-reporting of income in consequence of misreporting. A show-cause notice was issued on the same date. Despite objections raised by the assessee, the Assessing Officer proceeded to levy a penalty of Rs. 32.89 lakhs. The Commissioner (Appeals), however, dismissed the appeal as non-maintainable due to a delay of 104 days without adjudicating the merits.

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Section 270A of the Income Tax Act, provides for levy of penalty for under-reporting of income (generally 50% of tax) and higher penalty for misreporting of income (200% of tax), subject to the Assessing Officer clearly specifying the applicable limb and satisfying the conditions prescribed under sub-section (2) and sub-section (9).

The Tribunal of Pawan Singh, Judicial Member and Manoj Kumar Aggarwal, Accountant Member noted that the entire addition was based on estimation after rejection of books of account, without any specific evidence of undisclosed income. The penalty order also failed to clearly specify whether the case fell under “under-reporting” or “misreporting” of income under Section 270A of the Income Tax Act.

The bench observed that “misreporting of income” is a distinct category under Section 270A(9), comprising specific situations, and requires clear and categorical findings. In the absence of such specific charges, penalty proceedings cannot be sustained.

Reliance was placed on judicial precedents including Schneider Electric South East Asia (HQ) Pte. Ltd, where it was held that failure to specify the applicable limb of Section 270A of the Income Tax Act, renders the penalty proceedings invalid and arbitrary. Similar views were taken in a plethora of judicial decisions.

In view of the addition being purely estimation-based and the absence of a specific charge under Section 270A of the Income Tax Act, the penalty was held to be unsustainable in law and accordingly set aside.

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