2023 (3) TMI 550 - AT - Income Tax

Tribunal quashes penalty order, emphasizes disclosed facts prevent misreporting penalties

The Tribunal allowed the appeal, quashing the penalty order under section 270A and directing immunity under section 270AA. It emphasized that disallowance ... Penalty u/s 270A - Disallowance u/s 14A r.w.r. 8D - HELD THAT:- Assessee case was selected for scrutiny and assessment order was passed u/s 143(3) of the Act by making disallowance u/s 14A r.w Rule 8D - assessee himself did not make any disallowance u/s 14A towards earning of exempt income which are not includible in the total income of the assessee. During the impugned assessment year, he received exempt income of Rs.1,00,503/- and fresh investments was made during the year of Rs.8,20,300/- and the total investments in mutual fund is Rs.5,63,44,040/- at the year end. AO disallowed 1% of the average investments and accordingly it works out to Rs.5,63,440/- and initiated penalty u/s 270A of the I.T. Act.. The penalty order passed by the AO is on under reported income and whether that under report income is in consequence of any misreporting of income. CIT(A) confirmed the order of the AO during the course of hearing, we notice that the AO imposed penalty for not making suo moto any disallowance us/ 14A r.w Rule 8D. The similar issue has been decided by the Hon’ble Delhi High Court in the case of Prom Brother Infrastructure LLP Vs. 110 National Face Less Assessment Center [2022 (6) TMI 130 - DELHI HIGH COURT] Appeal of the assessee is allowed. Issues Involved:1. Validity of penalty order under section 270A of the Income-tax Act, 1961.2. Jurisdiction of the Assessing Officer in passing the penalty order.3. Proper notice and recording of satisfaction by the Assessing Officer.4. Confirmation of penalty quantum by the CIT(A).5. Applicability of penalty for under-reporting or misreporting of income.6. Excessiveness and erroneous nature of the penalty.Detailed Analysis:1. Validity of Penalty Order under Section 270A:The assessee argued that the penalty order passed under section 270A of the Income-tax Act, 1961, was erroneous and should be quashed. The CIT(A) confirmed the penalty order, stating that the penalty was invoked correctly as there was an addition to the returned income. The CIT(A) highlighted that the assessee did not file an application for immunity under section 270AA within the prescribed period, thus making the penalty imposable.2. Jurisdiction of the Assessing Officer:The assessee contended that the penalty order lacked jurisdiction. However, the CIT(A) and the lower authorities found that the Assessing Officer had jurisdiction to pass the penalty order as the assessee did not appeal against the assessment order, which led to the initiation of penalty proceedings under section 270A.3. Proper Notice and Recording of Satisfaction:The assessee claimed that the penalty was levied without proper notice and recording of satisfaction by the Assessing Officer. The CIT(A) and the Tribunal observed that the Assessing Officer had issued a show cause notice and considered the assessee's reply before passing the penalty order, thus following due process.4. Confirmation of Penalty Quantum by the CIT(A):The CIT(A) confirmed the quantum of penalty, even though the assessee argued that the CIT(A)'s findings were contradictory. The Tribunal noted that the CIT(A) upheld the penalty based on the provisions of section 270A, which mandates a penalty equal to 200% of the tax payable for under-reporting of income.5. Applicability of Penalty for Under-Reporting or Misreporting of Income:The assessee argued that the disallowance under section 14A did not constitute misreporting or under-reporting of income. The Tribunal referred to the Delhi High Court's judgment in Prem Brothers Infrastructure LLP vs. National Faceless Assessment Centre, which held that disallowance under section 14A does not amount to misreporting if all facts were disclosed. The Tribunal found that the assessee had disclosed all investments in the balance sheet, and there was no suppression of facts. Thus, the penalty for misreporting was not justified.6. Excessiveness and Erroneous Nature of the Penalty:The assessee contended that the penalty was excessive and erroneous. The Tribunal, following the Delhi High Court's judgment, concluded that the penalty was not applicable as the issue involved was an estimation of disallowance under section 14A. The Tribunal quashed the penalty order, directing the Assessing Officer to grant immunity under section 270AA.Conclusion:The Tribunal allowed the appeal of the assessee, quashing the penalty order under section 270A and directing the Assessing Officer to grant immunity under section 270AA. The judgment emphasized that disallowance under section 14A, based on disclosed facts, does not constitute misreporting, and penalties should not be imposed in such cases.