2025 (6) TMI 892 - AT - Income Tax

Section 270A penalty deleted when assessee disclosed all facts despite disallowed deduction claims under section 35(2AB)

Akums Drugs and Pharmaceuticals Ltd. Versus Assistant/Deputy Commissioner of Income Tax, Circle-1 (1), Delhi

The ITAT Delhi held that penalty under section 270A for under-reporting of income cannot be imposed when the assessee disclosed all relevant facts in the ... Penalty u/s 270A - under reporting of income - disallowance of claim of deduction under section 35(2AB) - AR argued that the AO had failed to demonstrate that how the disallowance of claim of deduction u/s 35(2AB) could be termed as ‘under- reported income’ HELD THAT:- It is admitted fact that assessee disclosed all the particulars of the above disallowances in its ITR. The AO made the disallowance on the basis of Form 3CL. No disallowance of the above expenditure had been made due to non-genuineness or otherwise out of expenditure claimed in the books of accounts in this regard. Assessee has disclosed all the relevant facts and materials in its ITR as well as before the authorities below on merit. It is not a case of the AO that the assessee has made false claim or suppressed the facts relating to the above claims of the expenditure. Since the assessee has disclosed all the facts before the authorities below, the disallowances under section 35(2AB) of the Act would not par-se lead to an inference that the assessee has under reported its income. On the disallowance u/s 35(2AB) of the Act, imposition of penalty is not automatic. As in the case of Reliance Petroproducts Pvt. Ltd. 2010 (3) TMI 80 - SUPREME COURT held that 'A glance at the provisions of section 271(1)(c) of the Act, suggest that in order to be covered by it, there has to be concealment of particulars of the income of the assessee. For penalty purposes, we do not see much difference in interpretation under section 270A and section 271(1)(c) of the Act. Further, the AO has not established a case that the assessee has furnished inaccurate particulars of its income. Where no information given in the ITR is found to be incorrect or inaccurate, the assessee cannot be held guilty of under reported income. In order to expose the assessee to penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By no stretch of imagination can making an incorrect claim tantamount to furnishing inaccurate particulars. There can be no dispute that everything would depend upon the ITR filed by the assessee, because that is the only document where the assessee can furnish the particulars of his income. To attract penalty, the details mentioned in the ITR, based on the material available to the assessee till then, must be demonstrated to be incorrect or erroneous or false. Here, there is no finding that any details mentioned in the ITR is found incorrect or erroneous or false; therefore, the penalty is not leviable for under reporting of income under section 270A of the Act. A mere making of a claim based on the books of accounts, which is not sustainable in law, by itself, will not amount to under reporting of income by the assessee. Here, there is reasonable caused for claiming deduction, based on the books of accounts, under section 35(2AB) of the Act particularly when the Form 3CL was issued by the DSIR after 7 months from the date of filing of the ITR. Thus, we are of the considered view that it is not a fit case for levy of penalty. Decided in favour of assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:(a) Whether the penalty order passed under section 270A of the Income Tax Act, 1961 (the 'Act') is illegal, bad in law, time-barred, and without jurisdiction;(b) Whether the initiation of penalty proceedings under section 270A was improper and liable to be quashed;(c) Whether the penalty order was passed without considering the assessee's reply, rendering it bad in law;(d) Whether the penalty imposed under section 270A on the addition of income on account of disallowance of deduction claimed under section 35(2AB) of the Act is justified;(e) Whether the penalty is sustainable when the addition was already suo moto accepted and revised computation filed by the assessee before the Assessing Officer (AO); and(f) The broader question of whether disallowance of deduction under section 35(2AB), when claimed in good faith based on audited books and subsequently restricted by Form 3CL issued post filing of return, can constitute under-reporting or misreporting under section 270A warranting penalty.2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (b): Legality and Jurisdiction of Penalty Proceedings under Section 270ARelevant Legal Framework and Precedents: Section 270A of the Act empowers the AO to impose penalty for under-reporting and misreporting of income. The penalty is not automatic and requires demonstration that the particulars furnished are inaccurate or false. The Supreme Court in Reliance Petroproducts Pvt. Ltd. 322 ITR 158 (SC) clarified that concealment or furnishing inaccurate particulars is a sine qua non for penalty under comparable provisions (section 271(1)(c) and by analogy section 270A).Court's Interpretation and Reasoning: The Tribunal noted that the assessee had disclosed all relevant particulars in its Income Tax Return (ITR) and that the AO did not allege any false claim or suppression of facts. The penalty proceedings were initiated for under-reporting and misreporting, but the AO levied penalty on the basis of 'under-reported income' arising from disallowance under section 35(2AB). The Tribunal found that since the particulars were disclosed and no inaccurate or false information was furnished, the penalty proceedings lacked legal basis and jurisdiction.Key Evidence and Findings: The ITR filed by the assessee included the deduction claimed under section 35(2AB) as per the audited accounts. The AO's disallowance was based on Form 3CL issued by DSIR post filing of the return, which restricted the allowable deduction. No allegation was made questioning the genuineness of the expenditure itself.Application of Law to Facts: Since the assessee's return was filed in good faith based on available information and the AO did not establish concealment or inaccurate particulars, the penalty under section 270A could not be sustained. The Tribunal emphasized that mere disallowance of a claim does not ipso facto amount to under-reporting or misreporting.Treatment of Competing Arguments: The Revenue argued that the penalty was justified as the revised computation was filed only after issuance of show cause notice and that the claim would have gone unnoticed otherwise. The Tribunal rejected this, noting that penalty cannot be imposed merely because the claim was disallowed or revised after scrutiny.Conclusion: The penalty proceedings under section 270A were held to be illegal and without jurisdiction as the assessee had not furnished inaccurate particulars.Issue (c): Consideration of Assessee's Reply in Penalty OrderRelevant Legal Framework: Principles of natural justice require that the assessee's submissions and replies be considered before imposition of penalty.Court's Reasoning: The assessee contended that the penalty order was passed without due consideration of its reply. The Tribunal observed that the AO's penalty order did not adequately address the explanation regarding the timing of Form 3CL issuance and the consequent inability to file revised return within statutory time limits.Conclusion: The penalty order was flawed for non-consideration of the assessee's reply, further undermining its validity.Issue (d) and (e): Justification of Penalty on Addition under Section 35(2AB) and Suo Moto Revision of ComputationRelevant Legal Framework and Precedents: Section 35(2AB) provides weighted deduction for expenditure on scientific research subject to certification by DSIR via Form 3CL. The timing of issuance of Form 3CL and the consequent permissible deduction is critical. The Supreme Court and various ITAT decisions have held that bona fide claims based on available information cannot be penalized merely because they are disallowed subsequently.Court's Interpretation and Reasoning: The assessee filed the return on 15.02.2021 claiming deduction as per auditor's certificate. The DSIR issued Form 3CL on 13.09.2021, after the return filing date and the expiry of the time limit for filing revised returns under section 139(5). The assessee voluntarily filed revised computation during assessment proceedings. The AO contended that the revised computation was filed only after show cause notice and not suo moto. The Tribunal found that the delay was due to the late issuance of Form 3CL and the statutory constraints on revising return, thus constituting reasonable cause.Key Evidence: Documentary evidence of Form 3CL issuance date, timelines for return and revised return filing, and the letter dated 22.11.2021 wherein the assessee submitted revised computation.Application of Law to Facts: Given the late issuance of Form 3CL and the inability to file revised return within prescribed time, the assessee's claim was bona fide. The Tribunal held that mere disallowance of deduction under section 35(2AB) based on Form 3CL does not amount to under-reporting or misreporting warranting penalty.Treatment of Competing Arguments: The Revenue relied on the fact that the revised computation was filed only after show cause notice and that the claim would have escaped scrutiny otherwise. The Tribunal rejected this approach, emphasizing that penalty cannot be imposed for bona fide claims and procedural delays beyond the assessee's control.Conclusion: The penalty on the addition under section 35(2AB) was not justified and was liable to be deleted.Issue (f): Whether Disallowance under Section 35(2AB) Constitutes Under-Reporting or MisreportingLegal Framework and Precedents: Section 270A penalizes under-reporting and misreporting of income. The Supreme Court in Reliance Petroproducts Pvt. Ltd. held that concealment or furnishing inaccurate particulars is essential to invoke penalty. ITAT decisions cited by the assessee reinforce that bona fide claims based on books of accounts and subsequent adjustments do not attract penalty.Court's Reasoning: The Tribunal noted that the assessee disclosed all relevant facts and the AO did not dispute genuineness of expenditure. The disallowance was purely on technical grounds due to Form 3CL issuance timing. The Tribunal held that making an incorrect claim based on books of accounts does not amount to furnishing inaccurate particulars or under-reporting.Conclusion: Disallowance under section 35(2AB) in such circumstances does not attract penalty under section 270A.3. SIGNIFICANT HOLDINGS'A glance at the provisions of section 271(1)(c) of the Act, suggest that in order to be covered by it, there has to be concealment of particulars of the income of the assessee. For penalty purposes, we do not see much difference in interpretation under section 270A and section 271(1)(c) of the Act. Further, the AO has not established a case that the assessee has furnished inaccurate particulars of its income.''Where no information given in the ITR is found to be incorrect or inaccurate, the assessee cannot be held guilty of under reported income. In order to expose the assessee to penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By no stretch of imagination can making an incorrect claim tantamount to furnishing inaccurate particulars.''Here, there is reasonable cause for claiming deduction, based on the books of accounts, under section 35(2AB) of the Act particularly when the Form 3CL was issued by the DSIR after 7 months from the date of filing of the ITR.'Final determinations:The penalty imposed under section 270A of the Act on the disallowance of deduction claimed under section 35(2AB) is not sustainable.The initiation of penalty proceedings and the penalty order are illegal and without jurisdiction as the assessee did not furnish inaccurate particulars or conceal income.The assessee's voluntary revision of computation during assessment proceedings, after issuance of Form 3CL post filing of return, constitutes reasonable cause and negates the imposition of penalty.The penalty imposed on the disallowance of education cess was rightly deleted by the CIT(A).The appeal is allowed with consequential relief to the assessee.