Penalty Invalid as Notice did not specify sub-clause of S.270: ITAT Rules in Favour of Bajaj Housing Finance Ltd [Read Order]

The Income Tax Appellate Tribunal (ITAT) has set aside the penalty against Bajaj Housing Finance, holding that such a penalty will be invalid as the notice for the same did not specify a sub-clause of Section 270 of the Income Tax Act, 1961.

One of the provisions that is necessary for the penaltyproceedings is that the department must specify a sub-clause under the mentioned Section. The sub-clauses denote various cases that fall under under-reporting or misreporting of income. To be particular, absence of specifying sub-clause of Section 270A(9) of the Act for initiation of the proceedings would result in quashing of penalty. The counsel for the appellant argued that the proceedings are void ab initio on this ground.

ITAT decided on a case from the assessment year 2017-18 in which Bajaj Housing Finance Limited, the assessee, has not generated any revenue from its operations and only received profits from sale of investments in mutual funds. This had been recorded as ‘business income’. Due to expenditures incurred in the same year, the net income was declared nil. During assessment proceedings, the assessee revised computation of income of those profits from investments to be re-classified as income under ‘capital gain’. The central issue is whether the proceedings are void ab initio.

AO initiated proceedings by issuance of notice u/s 274 read with s. 270A for under reporting of income in consequence of misreporting of income. Ld. CIT(A) affirmed the order dated 08.05,2025 observing that the assessee - appellant had failed to comply with the show cause notice. Bajaj Housing Finance Limited, the assessee, then filed an appeal before Income Tax (Appellate) Tribunal.

The main contentions for the counsel of the appellant were that concealment of income was not a question since it had only been reclassified from ‘business income’ to ‘long term capital gain’ under heads of income, that it had been done so in light of recent judicial precedents and that even failure by the department to specify sub-clause deserves penalty proceedings to be quashed as per s.270A(9).

The tribunal noted that the appellant had complied with the notices, that notice u/s 274 must refer to a specific sub-clause of s.270A(9) for valid penalty proceedings. It highlighted previous precedents that have consistently held this view of quashing such orders.

The bench comprising Dr. Manish Borad (Accountant Member) held that re-classification of income cannot be considered as under-reporting income or misreporting income. The relevant case of Jaypee Cement Corporation v. ACIT (2023) had been mentioned and relied upon in their order which had similar issues. According to para 15 of that judgment:

“...ld AR also argued that in the penalty show cause notice issued u/s 270A read with Section 274 of the Act, the ld AO did not mention the specific charge of offence committed by the assessee i.e. the AO did not mention whether the assessee has either underreported his income or misreported his income or underreported in consequence of misreporting of his income. He argued that these are not inter-changeable and different rates of penalty are provided for different offences as per section 270A of the Act. Further, he also argued that there is provision for granting immunity u/s 270A of the Act in the case of underreporting of income and the same is not available for misreporting of income.”

To conclude briefly, the penalty was deleted and the appeal was allowed.

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