2025 (9) TMI 585 - HC - Income Tax

Immunity under s.270AA(3) protects taxpayer from s.270A penalty for under-reporting absent misrepresentation or s.270A(9)(a)-(f) circumstances

Shanaji Becharji Baraiya Versus Income Tax Office Circle 1 (3) (1) Ahmedabad

HC held that penalties under s.270A arise from two limbs-unreported income and misreported income-and that immunity under s.270AA(3) is available for ... Penalty u/s 270AA - misreporting by the petitioner of the income - HELD THAT:- There are two different limbs for levy of penalty, one is unreported income and second is misreported income. In case of an under-reporting of income, the petitioner can apply for immunity from imposition of penalty as per the provision of Sec. 270AA of the Act because as per the provision of sub-section (3) of Sec. 270AA of the Act, immunity cannot be granted only in cases under the circumstances referred to in sub-section (9) of Sec. 270A of the Act. It is not in dispute that none of the circumstances prescribed in Clause a to f of sub-section (9) of Sec. 270A of the Act exist in the facts of the case. Neither there is misrepresentation or suppression of the facts as no return of income was filed, whereas clause b to e pertains to the entries in the books of accounts whereas, clause f refers to the international transaction. Therefore, in the facts of the case, the petitioner is entitled to immunity under Sec. 270AA of the Act. We are of the opinion that the petitioner is entitled to the immunity from levy of the penalty as per the provisions of Sec. 270AA of the Act and as a consequence the impugned order passed by the respondent under Sec. 270AA(4) of the Act is quashed and set aside. ISSUES PRESENTED AND CONSIDERED 1. Whether immunity under Section 270AA of the Income Tax Act is available to an assessee who filed return for the first time pursuant to a notice under Section 148, where penalty proceedings were initiated describing the offence as 'under-reporting as a consequence of misreporting' and the Assessing Officer framed penalty under Section 270A. 2. Whether initiation of penalty proceedings under the misreporting limb of Section 270A(9) can be sustained where none of the specific eventualities (clauses (a)-(f) of Section 270A(9)) are present and the case facts indicate mere non-filing/first-time filing under Section 148 (i.e. under-reporting under Section 270A(2)(b)). 3. Whether the order rejecting immunity under Section 270AA(4) was time-barred or invalid because of timing/calculation of the one-month period prescribed by Section 270AA(4). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Availability of immunity under Section 270AA where penalty described as 'under-reporting as a consequence of misreporting' Legal framework: Section 270A prescribes penalty for under-reporting and misreporting of income; sub-section (2) defines under-reporting (including first-time filing under Section 148 at clause (b)); sub-sections (8) and (9) address enhanced penalty where under-reported income is in consequence of misreporting and list six specified types of misreporting in subsection (9). Section 270AA provides for immunity from penalty under Section 270A (and initiation of prosecution under Sections 276C/276CC) where tax and interest as per assessment are paid and no appeal is filed, except where penalty proceedings have been initiated under circumstances referred to in Section 270A(9). Section 270AA(4) requires the Assessing Officer to pass order accepting or rejecting immunity within one month from end of the month in which application was received, after affording opportunity of hearing. Precedent treatment: The Court referred to and followed the reasoning of a High Court decision which held that denying immunity merely by labelling proceedings as for 'misreporting' without specifying which limb of Section 270A(9) is attracted is arbitrary and contrary to the legislative intent of Section 270AA to incentivize voluntary compliance. Interpretation and reasoning: The Court analysed statutory structure: under-reporting and misreporting are separate limbs. Section 270A(2)(b) expressly covers cases where return is furnished for the first time under Section 148; such a case is classically one of under-reporting, not misreporting. Misreporting under Section 270A(9) requires presence of one of the enumerated eventualities (misrepresentation/suppression of facts; failure to record investments; unsubstantiated claim of expenditure; false entries; failure to record receipt in books; failure to report international/specified transactions). The facts showed non-filing followed by first-time filing after issuance of Section 148 notice and no allegations or material to show any of the Section 270A(9) eventualities. Therefore characterisation of the penalty as arising from misreporting was incorrect; at best it was under-reporting under Section 270A(2)(b). Section 270AA(3) disallows immunity only where penalty proceedings have been initiated under circumstances referred to in Section 270A(9); since those circumstances do not exist, immunity must be granted subject to fulfilment of conditions in Section 270AA(1). Ratio vs. Obiter: Ratio - Where assessment facts disclose first-time filing under Section 148 and none of the enumerated misreporting eventualities under Section 270A(9) exist, the Assessing Officer cannot sustain initiation of penalty as misreporting to deny immunity under Section 270AA; such a denial is contrary to statutory scheme and must be set aside. The Court's reliance on and application of the earlier High Court decision to the present facts is operative reasoning (ratio). Observations on legislative intent and policy in the Memorandum to the Finance Bill are supportive comment (obiter insofar as legislative history is explanatory, but not necessary to the decision). Conclusions: Immunity under Section 270AA is available. The impugned rejection of the immunity application on the ground that the penalty was initiated under Section 270A(9) (misreporting) is unsustainable where the factual matrix does not satisfy any clause (a)-(f) of Section 270A(9) and where the case squarely falls within Section 270A(2)(b) (return filed for the first time under Section 148). The Assessing Officer must grant immunity if statutory conditions (payment of tax and interest, no appeal) are met. Issue 2 - Whether misreporting and under-reporting can co-exist or be conflated in assessment/penalty proceedings Legal framework: The statutory scheme distinguishes between under-reporting (Section 270A(2)) and misreporting (Section 270A(8)-(9)); enhanced penalty applies when under-reported income is in consequence of misreporting described in Section 270A(9). Precedent treatment: The Court adopted the view that labelling without specification is inadequate, following prior High Court reasoning that the authority must specify which limb is attracted and show satisfaction of ingredients before invoking misreporting to deny immunity. Interpretation and reasoning: The Court held that under-reporting occasioned by first-time filing cannot be equated with misreporting unless the Assessing Officer records and demonstrates the presence of one of the specific misreporting eventualities. The mere factual finding that 'but for initiation of reassessment the income would have escaped assessment' does not, by itself, establish misreporting as defined in Section 270A(9). The statutory text, which separately prescribes clauses (a)-(f) for misreporting, precludes conflation of the two independent limbs. Ratio vs. Obiter: Ratio - Misreporting must be established by reference to the specific sub-clauses of Section 270A(9); absent such a finding, under-reporting alone permits grant of immunity under Section 270AA. Obiter - General policy observations about rationalization of penalty provisions are explanatory. Conclusions: The two limbs are distinct and cannot be presumed to co-exist; penalty proceedings must be properly classified and supported by material. Where the classification is incorrect, immunity under Section 270AA cannot be denied on the ground of misreporting. Issue 3 - Validity/timeliness of order under Section 270AA(4) Legal framework: Section 270AA(4) requires the Assessing Officer to pass order accepting or rejecting immunity within one month from the end of the month in which the application is received; provided that rejection cannot be passed without opportunity of hearing. Interpretation and reasoning: The respondent's own observations noted that the application was received and that the Assessing Officer granted time to the assessee, with the one-month period expiring on the date the impugned order was passed; the Court observed that the timing/calculation did not preclude decision. The principal ground of rejection was substantive (misreporting), not infirmity of timing. The Court therefore did not set aside the order on timing grounds but on substantive misclassification. Ratio vs. Obiter: Ratio - Timeliness of the Section 270AA(4) order was not determinative where the substantive rejection was unsustainable; procedural timeline observations in the order did not cure substantive error. Obiter - Specific calculations about the one-month period are factual and not determinative here. Conclusions: No interference was required on grounds of time-bar where the Assessing Officer acted within the prescribed period; however, the impugned order is quashed on substantive grounds because it misapplied Section 270A(9) to facts amounting only to under-reporting. Final Disposition (operative conclusion) The Court quashed the order rejecting immunity under Section 270AA(4) and directed the Assessing Officer to grant immunity under Section 270AA, since the conditions for immunity were satisfied and the penalty proceedings could only have been validly initiated under the under-reporting limb (Section 270A(2)(b)) and not under the misreporting limb (Section 270A(9)), none of whose specific eventualities existed in the case.