2026 (4) TMI 275 - HC - Income Tax

Revision under Section 264 and penalty for under-reporting were both unsustainable on the disclosed PF/ESI disallowance.

Section 264 revisional power is available against a penalty order even though an appeal also lies, unless the case falls within the express bars in ... Revisional jurisdiction u/s 264 - Under-reported income - Penalty on debatable issue - penalty order under Section 270A - Bona fide explanation and full disclosure - disallowance relating to employees' contribution to PF/ESI - whether a penalty order under section 270A could be made the subject of revision u/s 264 notwithstanding that it was otherwise appealable? - HELD THAT: - The Court held that section 264 is couched in wide terms and extends to any order passed by an authority subordinate to the Principal Commissioner. The exclusions to that power are exhaustively contained in section 264(4). An appealable order is not, by that reason alone, outside revisional jurisdiction; the bar operates only in the situations expressly specified, namely where the appeal period is still available and not waived, or where an appeal has already been filed and is pending, or the order has already been made the subject of an appeal. The assessee is therefore not compelled by statute to pursue the appellate remedy and may choose revision instead. On that footing, the Principal Commissioner erred in declining to entertain the revision on the ground of maintainability and in failing to examine the penalty on merits, contrary to the wide revisional power recognised in Swaminarayan Mandir Trust [2026 (1) TMI 370 - BOMBAY HIGH COURT] and Pramod R. Agrawal [2023 (10) TMI 1142 - BOMBAY HIGH COURT] [Paras 9, 10, 11] The objection to maintainability was rejected, and the order refusing to exercise jurisdiction under section 264 was held unsustainable. Penalty order u/s 270A - Under-reported income - Section 143(1)(a) intimation - Reiterated disallowance - HELD THAT: - The Court applied the statutory computation under section 270A(2)(a) and section 270A(3)(i)(a), under which under-reported income arises only if the income assessed exceeds the income determined in the return processed under section 143(1)(a), and the quantum of such under-reporting is the difference between the two. In the present case, the PF/ESI disallowance had already been added while processing the return under section 143(1)(a), and the assessment order merely repeated the same addition. Since, qua this addition, the assessed income did not exceed the income already determined in the intimation, the statutory ingredients of under-reported income were not satisfied. On that ground alone, the penalty could not stand. [Paras 15, 17, 18, 19, 20] The disallowance could not be treated as under-reported income, and the penalty was liable to be deleted. Bona fide explanation and full disclosure - Exception to under-reported income - HELD THAT: - The Court found that the assessee had disclosed all material facts in the return and the tax audit report, and that the claim was advanced under a bona fide belief supported by jurisdictional precedent. In those circumstances, the explanation satisfied the statutory requirement of section 270A(6)(a), and the amount in question could not be included in under-reported income. The Court applied the principle stated in CIT v. Reliance Petroproducts (P.) Ltd. [2010 (3) TMI 80 - SUPREME COURT] that a mere unsustainable claim, absent any false or inaccurate particulars, does not justify penalty, and held that the same rationale applies to the exception contained in section 270A(6)(a). [Paras 26, 27, 28] The assessee was entitled to the protection of section 270A(6)(a), furnishing an additional and independent ground for setting aside the penalty. Final Conclusion: The Court held that the revision under section 264 was maintainable and that the Principal Commissioner wrongly refused to exercise his revisional jurisdiction. On merits, the penalty under section 270A was held unsustainable since there was no under-reported income, the claim was made on the basis of binding and at least debatable law, and the assessee had made full disclosure with a bona fide explanation; accordingly, both the revisional order and the penalty order were quashed. Issues: (i) Whether a penalty order under Section 270A of the Income-tax Act, 1961 could be revised under Section 264 of the Income-tax Act, 1961 despite the order being appealable. (ii) Whether penalty for under-reporting of income was leviable on the disallowance relating to employees' contribution to PF/ESI.Issue (i): Whether a penalty order under Section 270A of the Income-tax Act, 1961 could be revised under Section 264 of the Income-tax Act, 1961 despite the order being appealable.Analysis: Section 264 confers wide revisional power over any subordinate order, subject only to the express restrictions in sub-section (4). An order is barred from revision only where an appeal lies and the time to appeal has not expired without waiver, or where an appeal is pending or has been filed. Outside those statutory exceptions, the mere fact that an order is appealable does not exclude revision. The assessee is entitled to choose between the appellate remedy under Section 246A and the revisional remedy under Section 264.Conclusion: The revision application was maintainable, and the refusal to entertain it on the ground of availability of appeal was not justified.Issue (ii): Whether penalty for under-reporting of income was leviable on the disallowance relating to employees' contribution to PF/ESI.Analysis: Penalty under Section 270A is discretionary and is not automatic upon addition. Under-reporting, in the context of a return already processed under Section 143(1)(a), requires the assessed income to exceed the income determined in that processing. Here, the same disallowance had already been made at the processing stage and was merely reiterated in assessment, so the statutory ingredients of under-reporting were not satisfied. The claim was also made on the basis of then-prevailing jurisdictional law, the issue was debatable, and all material facts had been disclosed with a bona fide explanation.Conclusion: Penalty under Section 270A was not leviable and was liable to be deleted.Final Conclusion: The writ petition succeeded, the revisional rejection and penalty order were quashed, and the assessee obtained complete relief.Ratio Decidendi: A penalty order under the Income-tax Act may be revised under Section 264 unless expressly barred by sub-section (4), and penalty for under-reporting cannot be sustained where the same disallowance was already reflected in processing under Section 143(1)(a) and the claim was bona fide on a debatable legal issue fully disclosed by the assessee.