Deduction under section 10AA for interest income and penalty under section 270A deleted where bona fide explanation and full disclosure existed

Treatment of interest income claimed alongside a deduction under section 10AA was examined in relation to penalty proceedings under section 270A. The commentary explains that where interest income was expressly disclosed and the assessee relied on a judicial precedent, the bona fide explanation exception and full disclosure requirement under the under-reporting framework applied, making the assessment addition not constitute under-reporting. The consequence described is deletion of the penalty since the taxpayer satisfied the statutory exception by a reasonable, plausible legal position and complete disclosure of material facts.

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Issues: Whether penalty under section 270A of the Income-tax Act, 1961 could be levied on interest income of Rs. 3,27,09,605/- when the assessee had disclosed the income and claimed deduction under section 10AA on a bona fide legal view.

Analysis: The assessee disclosed the interest income in the audited financial statements and return, and claimed deduction under section 10AA based on a bona fide belief drawn from judicial precedent treating interest as business income for similar incentive provisions. Section 270A(6)(a) excludes amounts from under-reported income where a bona fide explanation is offered and all material facts are disclosed. The revenue's contrary view on eligibility for section 10AA pertains to quantum and does not by itself establish mala fide or concealment. Applying the statutory exception in section 270A(6)(a) to the disclosed claim made on a reasonable legal view, the penalty cannot be sustained.

Conclusion: Penalty imposed under section 270A is deleted and the appeal is allowed in favour of the assessee.

Ratio Decidendi: Where an assessee offers a bona fide explanation and discloses all material facts, the amount so explained does not constitute under-reported income for the purposes of section 270A and penalty under section 270A cannot be levied.

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