2026 (2) TMI 163 - HC - Income Tax

Penalty under Section 270A for alleged underreporting denied where bona fide explanation and no higher assessed income found, penalty stayed

Penalty under the incometax penalty provision was found unsustainable where the taxpayer offered a bona fide explanation based on existing precedent for a ... Penalty u/s 270A - no under reporting of income because the income offered to tax, in the return of income, was as per the decision of Ghatge Patil Transports Ltd [2014 (10) TMI 402 - BOMBAY HIGH COURT] - What if income assessed u/s 143(3) is not greater than the income processed u/s 143(1)(a)? HELD THAT:- Section 270A (6) [the provision under which penalty is levied], inter alia stipulates that under reported income, for the purposes of Section 270A, shall not include, amongst other things, the amount of income in respect of which the assessee offers an explanation and the AO or the Joint Commissioner (Appeals) or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered. In the present case, the explanation offered by the Petitioner is that on the date of the filing of the return of income, the Petitioner was entitled to the deduction as per the decision of this Court in Ghatge Patil Transports Ltd. (supra) . Once this is the case, the explanation was bona fide and the Assessing Officer could never have come to the conclusion that there was any under reporting of income. If there was no under reporting of income, there was no question of levying any penalty under Section 270A. This is apart from the fact that under reporting of income can arise [under Section 270A (2)] only when the income assessed under Section 143(3) is higher than the income determined in the return processed under Section 143(1)(a) of the IT Act. In the present case, atleast prima facie, the assessed income [under Section 143(3)], as per the Appellate Order, is not greater than the income processed under Section 143(1) (a). On this count also, atleast prima facie, we find that no penalty proceedings could have been initiated or any order passed under Section 270A of the IT Act. There will be ad-interim relief staying the operation of the penalty order. Issues: (i) Whether penalty under Section 270A could be levied where the assessee, at the time of filing the return, claimed a deduction in accordance with binding precedent and offered a bona fide explanation under Section 270A(6); (ii) Whether under-reporting of income arises for the purposes of Section 270A(2) where the income assessed under Section 143(3) is not greater than the income processed under Section 143(1)(a).Issue (i): Whether penalty under Section 270A could be levied where the assessee relied on existing High Court precedent and offered a bona fide explanation under Section 270A(6).Analysis: Section 270A(6) excludes from 'under-reported income' amounts in respect of which the assessee offers a bona fide explanation and discloses all material facts to substantiate that explanation. The assessee filed the return claiming deduction in conformity with the then-binding High Court decision. On a prima facie view, that explanation qualifies as bona fide and was supported by disclosure of material facts, thereby removing the basis for treating the amount as under-reported under Section 270A.Conclusion: Penalty under Section 270A could not be levied on the basis of the facts prima facie where the assessee had a bona fide explanation based on binding precedent; this conclusion is in favour of the assessee.Issue (ii): Whether under-reporting under Section 270A(2) exists when assessed income under Section 143(3) is not greater than income processed under Section 143(1)(a).Analysis: Section 270A(2) contemplates under-reporting only where the income assessed under Section 143(3) exceeds the income determined in the return processed under Section 143(1)(a). On the material before the Court, and on a prima facie basis, the assessed income under Section 143(3) is not greater than the income processed under Section 143(1)(a), negating the statutory condition for under-reporting to arise.Conclusion: On the prima facie material, under-reporting under Section 270A(2) is not established; this conclusion is in favour of the assessee.Final Conclusion: The petition discloses a strong prima facie case that the penalty could not lawfully have been imposed; accordingly, interim relief in the form of a stay of coercive action pursuant to the penalty order is warranted while the matter is pending.Ratio Decidendi: Where an assessee, at the time of filing the return, claims a deduction in conformity with binding precedent and offers a bona fide explanation with full disclosure of material facts, the amount so explained is excluded from 'under-reported income' under Section 270A(6), and a penalty under Section 270A cannot be sustained absent assessed income exceeding returned income as required by Section 270A(2).