Section 270A penalty requires under-reporting with tax impact; disallowed depreciation alone does not sustain penalty.

Penalty under section 270A requires statutory under-reporting of income and a real tax impact. A disallowance of depreciation under section 11(6) on assets treated earlier as application of income does not, by itself, establish under-reporting when the assessee's returned income and assessed income are both nil. Where the income remains exempt under section 11 and the disallowance creates no taxable income, tax payable, loss reduction, or conversion of loss into income, the conditions in section 270A(2) are not met. The penalty provision is strictly construed and cannot be invoked merely because a claim is disallowed.

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Issues: Whether a penalty under section 270A of the Income-tax Act, 1961 could be sustained where the assessee, a charitable trust, claimed depreciation on assets whose cost had earlier been treated as application of income, but the assessed income remained nil and no tax advantage, loss reduction, or carry-forward benefit arose.

Analysis: Penalty under section 270A is attracted only when there is under-reported income falling within the statutory conditions in sub-section (2). A disallowance of depreciation under section 11(6) does not by itself establish under-reporting for penalty purposes. In the present facts, the returned income and assessed income were both nil, the assessee's income remained exempt under section 11, and the disallowance did not result in any taxable income, tax payable, reduction of loss, or conversion of loss into income. The conditions of section 270A(2)(a) were also not satisfied because the income returned and the income assessed were numerically the same. Penalty provisions, being serious in consequence, require strict construction and cannot be invoked merely because a claim is disallowed.

Conclusion: The levy of penalty under section 270A was unsustainable and was deleted.

Ratio Decidendi: A disallowance of an otherwise inadmissible claim does not amount to under-reporting of income for section 270A unless it results in assessed income exceeding returned income or otherwise produces a statutory tax impact.

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