2025 (8) TMI 354 - AT - Income Tax

Penalty under Section 270A requires proper notice; bona fide mistakes and contractual penalties don't warrant penalty

The ITAT Ahmedabad held that penalty under section 270A could not be imposed without initiation of penalty proceedings and proper show cause notice, which ... Penalty u/s 270A - addition made in respect of belated payment of EPF & ESI - HELD THAT:- The initiation of penalty is sine qua non for levy of penalty and the AO could not have levied the penalty without initiating the penalty proceeding in respect of this addition. In the show cause notice also for the penalty as issued by the AO, no mention of penalty in respect of addition in respect of belated payment of EPF & ESI is mentioned. Therefore, the penalty imposed in respect of this addition is liable to be quashed. Addition in respect of additional depreciation - AO has reproduced the submission of the assessee in this regard in the assessment order. The assessee had categorically admitted that additional depreciation on old and used machinery was claimed due to oversight. As explained by the assessee, this was a bona-fide mistake admitted by the assessee and there was no intention on the part of the assessee to misreport its income. Therefore, levy of penalty in respect of this addition was also not justified. Addition of penalty charges, the penalty debited by the assessee to its account was not for infraction of any law. The contractual penalty paid by the assessee cannot be equated with penalty for an offence which is prohibited by law. Merely because the assessee has not disputed this addition, this cannot be a ground to levy the penalty. No levy of penalty u/s.270A of the Act was called for in this case. Appeal of the assessee is allowed. ISSUES: Whether penalty under Section 270A of the Income Tax Act, 1961 can be levied without initiation of penalty proceedings in respect of specific additions.Whether a bona-fide mistake in claiming additional depreciation on used machinery justifies levy of penalty under Section 270A.Whether penalty charges debited to accounts as contractual penalties for delay in execution of contracts constitute a basis for penalty under Section 270A. RULINGS / HOLDINGS: The penalty under Section 270A cannot be levied without initiation of penalty proceedings in respect of the addition; 'initiation of penalty is sine qua non for levy of penalty' and absence thereof renders the penalty liable to be quashed.A bona-fide mistake admitted by the assessee in claiming additional depreciation on old and used machinery, without intention to misreport income, does not justify levy of penalty under Section 270A.Contractual penalties for delay in execution of contracts are not penalties for infraction of law and therefore do not attract penalty under Section 270A merely because the addition is undisputed. RATIONALE: The Court applied the statutory requirement under Section 270A of the Income Tax Act, 1961, emphasizing the necessity of initiating penalty proceedings before levy.The Court relied on the assessee's disclosure in the Tax Audit Report and admissions during assessment to interpret bona-fide mistakes as insufficient grounds for penalty, aligning with principles that penalty requires intentional misreporting or concealment.The Court distinguished between contractual penalties and statutory penalties, holding that penalties arising from contractual obligations do not constitute offences under the Act and hence do not warrant penalty under Section 270A.