ESOP income misclassification as capital gains did not constitute misreporting where corrected as salary perquisite during reassessment.

Penalty for misreporting of income under section 270A(9)(a) was not attracted where ESOP sale proceeds were initially reported as short-term capital gains but, during reassessment, the taxpayer treated the ESOP value as a salary perquisite and offered only the acquisition-cost-to-sale-price difference as capital gains. The note states that, because the shares were sold shortly after allotment and the differential tax was paid, the incorrect classification was accepted as a bona fide error by a salaried employee. The accepted income therefore did not amount to misreporting in the return, and the penalty was deleted.

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Issues: Whether penalty for under-reporting in consequence of misreporting of income was leviable where ESOP income was originally offered as short-term capital gains but, upon reassessment, was offered as salary perquisite and the resulting income was accepted.

Analysis: The ESOP shares were sold within three days of allotment, and the entire sale consideration was originally offered to tax as short-term capital gains at the applicable rate. On receipt of notice for reassessment, the assessee rectified the treatment by offering the ESOP value as a salary perquisite and only the difference between the acquisition cost and sale price as capital gains, and discharged the differential tax liability. In the circumstances, the incorrect classification was accepted as a bona fide mistake by a salaried employee. The accepted returned income did not constitute misreporting in the return so as to attract penalty.

Conclusion: Penalty under Section 270A(9)(a) for misreporting of income was not leviable; the penalty sustained by the appellate authority was deleted, in favour of the assessee.

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