TaxTMI 
TaxTMI 
2026 (8) TMI 1719
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.... of law. 2. On the facts and circumstances of the case and in law, the Ld. CIT (A) erred in rejecting the contention of the appellant that the penalty order u/s 270A of the Act for under-reporting of income in consequence of misreporting is bad in law and void ab initio in the absence of identifying and specifying the applicable limb/clause of section 270A(9) in the notice issued u/s 274 r.w.s 270A for initiation of the penalty proceedings and in the assessment order. 3. On the facts and circumstances of the case and in law, the Ld. CIT(A) is not justified in rejecting the contention of the appellant that levy of penalty u/s 270A(1) is not legally permissible in view of the provisions of section 270A(11), when the addition, on the basis of which penalty u/s 270A(1) is imposed, has also formed the basis of imposition of penalty u/s 271AAD(1)(ii) for the same assessment year. 4. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in rejecting the contention of the appellant that no penalty u/s 270A(1) is leviable on merits when the returned income as substituted by the income as per the revised computation of income filed during the ....
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....ancial statement for the A.Y.2022-23 and admitted total income of Rs. 3,03,74,646/- towards cash found during the course of search. Similarly, the assessee has filed return of income for the A.Y. 2023-24 and admitted additional income of Rs. 2,20,43,454/- towards cash found and seized during the course of search. The assessment has been completed under section 143(3) on 19.01.2024 and assessed the total income at Rs. 3,72,41,820/- as per the revised computation of total income filed by the assessee without making any addition. The Ld.AO had also initiated penalty proceedings under section 270A of the Act, for under reporting of income in consequence of misreporting and also penalty proceedings under section 271AAD for omitting the entries in the books of accounts, so as to reduce the income of the assessee. 5. During the penalty proceedings, the Ld.AO issued show-cause notice dated 19.01.2024 and called upon the assessee to file his objections, if any, for proposed imposition of penalty under section 270A of the Act, for under reporting of income in consequence of misreporting. The assessee vide letter dated 21.02.2024 submitted that the penalty is not justified as per section 2....
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.... The relevant findings of the Ld.AO are as under: "9. From a cursory glance at the above events, it is clearly understood that the assessee has under reported his income intentionally to evade payment of income tax. Further, the penalties under Income tax, in the opinion of the undersigned, are deterrent measures. If a person is caught with unaccounted income and the said person is not saddled with extra burden, a wrong signal will be sent to the society that the tax can be paid whenever it is caught by income tax authorities. Viewing from this angle also, penalties are must against a person who is found with unaccounted income. As mentioned earlier the assessee is a practicing doctor in Guntur. During the course of search proceedings, it was unearthed that the assessee's receipts were systematically suppressed and were not disclosed in the books of accounts completely. Therefore, the assessee was forced to come forward and accordingly the assessee filed revised computations including the receipts unearthed during the course of search proceedings. But for the action u/s. 132 of the IT Act 1961 was conducted, the assessee would not have disclosed the suppressed receipts....
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.... of the assessee and also taking note of relevant facts and by following certain judicial precedents including the decision of the Hon'ble Supreme Court in the case Mak Data (P.) Ltd. v. CIT [2013] 38 taxmann.com 448 (SC) / 358 ITR 593 (SC), rejected the explanation of the assessee both on legal ground and on merits. Ld. CIT(A) rejected the legal ground, taken by the assessee, on the issue of defect in notice without specifying the exact clause of section 270A(9) of the Act, on the ground that under reporting of income in consequence of misreporting sufficiently conveying the nature of the default. Unlike earlier regime under section 271(1)(c) of the Act, section 270A does not require selection between mutually exclusive limbs and further misreporting is itself is a complete statutory category. Further, the assessee has also not demonstrated any prejudice caused by the absence of clause numbers in the notice, especially when the penalty order explicitly refers to clauses (a) to (e). Therefore, he observed that, there is no merit in the arguments of the assessee on the legal issue and thus rejected. 9. Ld. CIT(A) had also rejected the contentions of the assessee, in light of prov....
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....automatically on the basis of assessment of income. The Learned Counsel for the assessee, further submitted that, the Ld.AO initiated the penalty proceedings for under reporting of income in consequence of misreporting. The misreporting of income, referred to in sub-section (9) has six limbs from (a) to (f) which deals with penalties under different situations, and, therefore unless the Ld.AO specifies the exact clause under which the proposed penalty has been initiated, it is difficult for the assessee to justify its case with relevant submissions. Since Ld.AO has levied penalty on the basis of vague notice, the order passed by the Ld.AO cannot be upheld. In this regard, he relied on the decision of the ITAT Hyderabad Bench in the case of M/s. MSN Laboratories Private Limited v. ACIT in ITA No. 2304 & 2305/HYD/2025 dated 25.02.2026. 13. Learned Counsel for the assessee, further submitted that, even on merits, the penalty levied by the Ld.AO is unsustainable in law, because the Assessment Order passed by the Ld.AO under section 143(3) of the Act dated 19.01.2024 is invalid. The Learned Counsel for the assessee, further referring to provisions of section 148 and 149 of the Act su....
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....of professional income and also filed revised statement of total income and paid taxes before the assessment. Since the assessee has admitted the income and paid taxes, mere admission of income cannot be considered as under reporting of income in consequence of misreporting, for the purposes of section 270A of the Act. Similarly, for the purposes of section 271AAD of the Act, non-entry in the books of accounts cannot be considered as false entry as per section 271AAD, and, for this purpose, he referred to the Memorandum Explaining the Provisions in the Finance Bill, 2020, and claimed that, the above section has been inserted to curb the practice of taking bogus invoices under Goods and Services Tax for claiming Input Tax Credit and the said provision cannot be applied to the cases of assessee's where the assessee has not reported income. Therefore, he submitted that even on merit, penalty levied by the Ld.AO cannot be sustained and needs to be deleted. 15. The Learned CIT(DR) for the Revenue, Shri Nilanjan Dey, CIT(DR), on the other hand supporting the order of the Ld. CIT(A), and submitted that, it is clear case of under reporting of income in consequence of misreporting and th....
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....lso it is a case of omission of entry which is relevant for computation of total income of such person who evaded tax liability. Therefore, he submitted that the orders of the Ld. CIT(A) should be upheld. 17. We have heard both the sides, perused the material available on record and had gone through the orders of the authorities below. We have carefully considered the relevant case laws relied upon by Learned Counsel for the assessee in support of his contention. The Ld.AO levied penalty under section 270A(9) of the Act in respect of additional income offered by the assessee towards cash found and seized during the course of search of Rs. 5,24,18,100/- spread over to two assessment years where the assessee has admitted sum of Rs. 3,03,74,646/- for the A.Y. 2022-2023 as undisclosed professional income. The Ld.AO completed the assessment by accepting the revised statement of total income filed by the assessee during the course of assessment proceedings which included additional income offered by the assessee towards cash found during the course of search and also paid taxes. Therefore, it is necessary for us, to examine the reasons given by the Ld.AO and upheld by the Ld. CIT(A) t....
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.....AO imposing penalty under section 270(9) of the Act on the basis of vague show-cause notice cannot be upheld. 19. The assessee has relied upon the decision of the ITAT, Hyderabad Bench in the case of M/s. MSN Laboratories Private Limited v. ACIT (supra), wherein the Coordinate Bench of the ITAT, Hyderabad Bench on identical set of facts on levy of penalty under section 270A(9) of the Act deleted the penalty levied by the Ld.AO on the ground that, show cause notice issued by the Ld.AO does not specify the limb under which the penalty under section 270A(9) of the Act was levied, and thus, the entire penalty proceedings becomes null-avoid. The relevant findings of the Tribunal are as under: "17. The assessee has raised a preliminary objection and questioned validity of penalty proceedings in light of notice issued under section 274 r.w.s. 270A of the I.T. Act and claimed that the show cause notice issued by the A.O without specifying a particular charge under which penalty is initiated, vitiate the entire penalty proceedings and consequently, the order passed by the A.O under section 270A of the Act is bad in law and liable to be quashed. In light of above factual back gr....
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.... furnishing of inaccurate particulars of income. Therefore, it is necessary to examine, whether penalty proceedings u/s. 270A of the Act, is mandatory in nature and further, such penalty can be invoked without providing an opportunity to the assessee as required u/s. 274 of the Act. 18. The order passed u/s. 270A of the Act, is an appealable order u/s. 246A of the Act before the First Appellate Authority. If the penalty u/s. 270A of the Act had been mandatory, then there cannot be any provision of appeal u/s. 246A of the Act. Since, the order passed Sec.270A of the Act, is an appealable order, it cannot be said that penalty u/s. 270A of the Act, is mandatory in nature. Since, penalty u/s. 270A of the Act, is not mandatory in nature, the AO is required to give an opportunity to the assessee to show cause 'as to why' penalty should be levied in terms of sec.274 of the Act, therefore, it is important to see the reasons given by the in the order in light of show cause notice u/s 274 r.w.s 270A of the Act. Admittedly, the AO issued notice u/s. 274 r.w.s.270A of the Act. Sec.274 of the Act deals with the procedure for levy of penalty, wherein, it directs that no order imposing p....
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....sed in earlier part of this order, subsection (2) to (6) of sec Sec.270A of the Act, deals with concept of 'under reporting of income', for which separate rate of penalty is provided. Sub-sec.(9) deals with a concept of 'misreporting of income' and for this cases separate rate of penalty is provided. Therefore, 'under reporting of income' and 'misreporting of income' shall not be used interchangeably, nor are they synonymous, but each operates under strict definition and do not overlap each other. Since, 'under reporting of income' and 'misreporting of income' are two concepts and separate charges, the AO before initiating penalty proceedings should specifically arrive at a satisfaction to the effect that, for which charge, he has initiated penalty Sec.270A of the Act. In the present case, if you go by the assessment order passed by the AO, there is no satisfaction in respect of initiation of penalty proceedings u/s. 270A of the Act, whether it is for 'under reporting of income and under reporting as a consequence of misreporting of income' thereof which is clearly evident from the assessment order passed by the AO, where, the AO simply referred to initiation of penalty proceedings....
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....me and another for misreporting of income. Therefore, the A.O is bound to issue show cause notice and specify the charge under which he propose to initiate the penalty proceedings, whether it is for under reporting of income or misreporting of income and in case, it is for misreporting, then he must specify the sub clause provided thereon. Since the show cause notice issued by the A.O is vague and without application of mind, the entire proceedings become vitiate and consequently, the penalty levied by the A.O cannot be upheld. This legal principle is supported by the decision of the Hon'ble Supreme Court in the case of CIT vs. SSA's Emerald Meadows (2016) 73 Taxman.com 248 (SC) wherein the SLP filed against the judgement of the Hon'ble Karnataka High Court in the said case was dismissed. The said judgement of the Hon'ble Karnataka High Court was rendered by following the earlier judgment of the same Court in the case of CIT vs. Manjunatha Cotton & Ginning Factory (2013) 35 taxmann.com 250 (Kar.). Therefore, we are of the considered view that, show cause notice issued by the AO u/s. 274 r.w.s.270A of the Act, without specifying the charge under which penalty is proposed....
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.... that the entire edifice of the assessment order framed by Respondent No.1 was actually voluntary computation of income filed by the Petitioner to buy peace and avoid litigation, which fact has been duly noted and accepted in the assessment order as well and consequently, there is no question of any misreporting. 9. This Court is further of the view that the impugned action of Respondent No.1 is contrary to the avowed Legislative intent of Section 270AA of the Act to encourage/incentivize a taxpayer to (i) fast-track settlement of issue, (ii) recover tax demand; and (iii) reduce protracted litigation. 10. Consequently, the impugned order dated 09th W.P.(C) 7092/2022 Page 5 of 6 March 2022 passed by Respondent No.1 under Section 270AA (4) of the Act is set aside and Respondent No.1 is directed to grant immunity under Section 270AA of the Act to the Petitioner." 7. This Court is of the opinion that the only addition in the assessment order framed by Respondent No.1 is in respect of disallowance under section 14A of the Act. The Petitioner has made a disallowance of Rs. 3,20,14,010/- which was recomputed by the Assessing Officer at Rs. 6,82,45,759/-. Thus, t....
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....ding of any false entry in the books of accounts. The AO has arrived at the above conclusion on the basis of findings in the assessment order, where income admitted by the assessee in the return of income filed in response to notice u/s. 153A of the Act, has been accepted. In the revised return u/s. 153A of the Act, the assessee has admitted taxable income of Rs. 2,55,35,485/- which is higher than the last return filed u/s. 139 of the Act. According to the AO, the assessee has 'under reporting of income and under reporting as a consequence of misreporting of income' in respect of marketing expenses, which is clearly evident from information gathered during the course of search coupled with statement recorded from the Director of the assessee company and also enquiries conducted with suppliers of 'gift articles during the course of assessment proceedings. The AO further observed that search was not taken place u/s. 132 of the Act and hence, the 'under reporting of income and under reporting as a consequence of misreporting of income' would not have come to light. Therefore, the AO opined that it is a clear case of 'under reporting of income and under reporting as a consequence of mi....
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....ng of income' thereof by any person and such case of 'misreporting of income' referred to sub-sec.8 has been specified in Sec.9 of Sec.270A of the Act. From the above, it is manifestly clear that provisions of Sec.270A of the Act has two limbs or two charges for which penalty can be levied. The first limb or first charge is 'under reporting of income and such under reporting of income' has been specifically referred to in two sub-sections of Sec.270A of the Act. In the present case, these provisions are not relevant because the AO has not invoked under reporting of income. The second limb or charge is 'under reporting of income as consequence of misreporting of income' thereof and in the present case, the AO invoked the second limb of provisions of Sec.270A of the Act. Admittedly, these provisions have been substituted by the Finance Act, 2016 w.e.f.01.04.2017 and applicable for AY 2017-18 onwards. Prior to insertion of Sec.270A of the Act, a similar provision was existed in the statue by way of sec.271(1)(c) of the Act, for concealment of particulars of income or furnishing of inaccurate particulars of income. Provisions of Sec.271(1)(c) of the Act, was also having two limbs or tw....
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....e dated 26.07.2021, wherein, the AO has stated that 'under reporting of income and under reporting as a consequence of misreporting of income'. From the above, it is not discernable whether penalty has been initiated for 'under reporting of income' as per section 270A (1) to (6) or 'misreporting of income' as per section 8 & 9 of Sec.270A of the Act. The AO issued a notice in a routine manner without specifying under which clause of Sec.270A of the Act, the assessee is liable for penalty. Though, the AO while passing the impugned order has imposed penalty u/s. 270A(9) of the Act, but no such ground was specified in the show cause notice dated 26.07.2021. In our considered view, notice u/s. 274 r.w.s.270A of the Act, is not a valid for the reason that the AO did not specify the satisfaction as to whether assessee had either 'under reporting of income' or 'misreporting of income'. In absence of proper notice, which is mandatory, the AO cannot impose penalty, because, it is a clear violation of principles of natural justice, because, issuing a vague notice without specifying the charge under which limb the proposed penalty proceedings is initiated, would vitiate the entire proceedings....
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....s. 270A of the Act, is a clear case of nonapplication of mind at the time of issuing show cause notice and thus, in absence of specific charge against the assessee. The assessee is not in a position to counter the show cause notice issued by the AO as well as cogent reply to the show cause notice. This legal position is strengthened by the decision of the Hon'ble Delhi High Court in the case of Prem Brothers Infrastructure LLP (supra), where the Hon'ble Delhi High Court by following the earlier decision in the case of Schneider Electric South East Asia (HQ) Pte Ltd. v. ACIT, International Taxation in WP (C) No.5111 of 2022 dated 28.03.2022, held that in view of vague notice without any whisper as to which limb of section 270A of the Act is attracted and how ingredients of sub-section 9 is specified, initiation of penalty u/s. 270A of the Act for 'misreporting of income' is not erroneous but also arbitrary and bereft of any reason and consequently, penalty order passed by the AO, cannot be sustained. The relevant findings of the Hon'ble Delhi High Court are as under: "6. This court in the case of Schneider Electric South East Asia (HQ) PTE Ltd. Vs. ACIT, International Taxat....
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....in the disallowance voluntarily estimated by the assessee. This court is conscious of the fact that there can be cases where underreporting of income may result in misreporting of income, however, in peculiar facts of the present case, the underreporting allegedly done by the assessee cannot amount to misreporting as the assessee had furnished all the details of the transactions relating to disallowance made under Section 14A of the Act and the AO as well as assessee has used the same details to arrive at different conclusions i.e. differing quantum of disallowances under Section 14A of the Act. This by no stretch of imagination can be held to be 'misreporting'. 8. This Court also finds that there is not even a whisper as to which limb of Section 270A of the Act is attracted and how the ingredient of sub-section (9) of Section 270A is satisfied. In the absence of such particulars, the mere reference to the word "misreporting" by the Respondents in the penalty order to deny immunity from imposition of penalty and prosecution makes the impugned order manifestly arbitrary. W.P.(C) 9. Consequently, the impugned penalty order dated 28th March 2022 passed by Respondent ....
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....on'ble Supreme Court in the case of CIT v. Anwar Ali, reported in [1970] 76 ITR 696 (SC) observed that the findings in assessment proceedings may constitute co-evidence in the penalty proceedings, but it does not follow that penalty is mandatory whenever addition or disallowance is made. Further, the jurisdictional High Court in the case of CIT v. Gem Granites reported in [2013] 86 CCH 160 (Madras), observed that merely because, the assessment proceedings namely the quantum assessment having been confirmed, cannot automatically lead to the conclusion that the penalty proceedings are justified. In other words, there should be an independent finding from the AO regarding under reporting of income or misreporting of income in the penalty proceedings which alone can lead to conclusion that it is a fit case for levy of penalty." 23. In the present case, there is no dispute with regard to the fact that the show cause notice issued by the A.O under section 274 r.w.s. 270A of the Act dated 27/03/2023 and 12/06/2025 is issued without any specific charge as to which clause, whether it is clause (a) or clause (c) or clause (e) of sub section (9) of section 270A of the Act is applicab....
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.... travelling and conveyance, foreign travel expenses, purchase of raw material and other expenses are recorded in the regular books of account maintained by the assessee for the A.Y under consideration. The disallowed above expenditures either for not substantiating said expenditure with supporting evidence or for violation of section 40A(3) and for personal nature of expenses. The assessee explained that mere admission of additional income towards sale of spent solvent and scraps and also disallowance of unsubstantiated expenses cannot per se lead to a conclusion that the assessee had under reported income is in consequence of misreporting thereof. Admittedly, there is no finding from the A.O in the assessment order about the incorrectness in additional income admitted by the assessee towards unaccounted receipts and spent solvent and scraps and also unsubstantiated expenses incurred in cash. The A.O has accepted the additional income declared by the assessee without any modification and also not made any observation with regard to expenditure claimed by the assessee and its correctness. Therefore, it is necessary to examine the argument of the learned Counsel for the assessee in l....
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....d. 26. Coming to ground Nos. 5 & 6 of assessee's appeal, which relates to challenging the levy of penalty under section 270A(9) of the Act, in light of return of income filed in response to notice under section 153A of the Act and income returned thereon and the assessment order passed by the A.O under section 143(3) r.w.s. 153A of the Act dated 31/03/2023 and income assessed thereon. The learned Counsel for the assessee argued that the admission of income during the course of search proceedings and filed by return of income under section 153A of the Act does not lead to under reporting is in consequence of misreporting of income for the purpose of section 270A(9) of the Act. The learned Counsel for the assessee had also supported his argument in light of certain judicial precedents including the decision of the Hon'ble Gujarat High Court in the case of Kirit Dahyabhai Patel vs. Assistant Commissioner of Income Tax (Supra) and the decision of the Hon'ble Delhi High Court in the case of PCIT vs. Pr. CIT vs. Neeraj Jindal (Supra). The Hon'ble Delhi High Court had considered an identical issue of levy of penalty under section 271(1)(c) of the Act in light of differenc....
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....d whether any income was undisclosed in that return of income. In view of specific provision of Section 153A of the I.T. Act, the return of income filed in response to notice under Section 153(a) of the I.T. Act is to be considered as return filed under Section 139 of the Act, as the Assessing Officer has made assessment on the said return and therefore, the return is to be considered for the purpose of penalty under Section 271(1)(c ) of the I.T. Act and the penalty is to be levied on the income assessed over and above the income returned under Section 153A, if any. 14. Further, in the present case, it appears from the record that the assessee's had satisfied all the conditions which are required for claiming immunity from payment of penalty under Section 271(1) of the Act. The provision does not specify any time limit during which the aforesaid amount i.e., the amount of penalty with interest has to be paid. Admittedly when the assessee's herein have paid the entire amount with interest, the Assessing Officer ought to have granted them immunity available under Section 271(1)(C ) of the Income Tax Act." 28. The sum and substance of ratios laid down by the Hon'....
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....income has been assessed for the first time, if return has been furnished, the difference between the amount of income assessed and the amount of income determined u/s 143(1) of the Act. Since there is no provision under the Act to assess or to process the return of income filed in response to notice under section 153A as per the provisions of section 143(1) of the Act and further once the return of income filed under section 153A of the Act, has been treated as return filed u/s 139(1), in our considered view when when there is no difference between the assessed income and the returned income, the concept of under reporting of income cannot be applied for the purpose of levy of penalty under section 270A of the Act. Therefore, in our considered view, on this ground also, the penalty levied under section 270A of the Act cannot be sustained. 30. In this view of the matter and considering the facts and circumstances of the case and also by considering the ratios of various case laws discussed herein above, we are of the considered view that penalty levied by the A.O under section 270A(9) of the Act is unsustainable in law. Thus, we direct the A.O to delete the penalty under s....
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.... proceedings like penalty proceedings as held by the ITAT, Kolkata Bench, Third Member decision in the case of Shri Valley Refractories Limited v. DCIT in ITA 1102/KOL/2023, wherein, it has been clearly held that even in the penalty proceedings, the assessee can challenge the validity of the assessment proceedings, though the assessee has not challenged the validity of assessment proceedings before the Appellate Authorities. 22. In the present case, the assessee has admitted additional income towards cash found during the course of search and also paid taxes and therefore he was not having any opportunity to question validity of assessment order passed by the Ld.AO. Since the Ld.AO has levied penalty under section 270A(9) of the Act on additional income offered by the assessee, the assessee got an opportunity for the first time to question the validity of the assessment proceedings, and, therefore in our considered view, there is no bar in questioning the validity of the assessment proceedings in a collateral proceedings like penalty proceedings. Since the foundation for levy of penalty under section 270A is the assessment passed by the Ld.AO and further if the assessment order ....
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.... course of assessment proceedings. In the present case, the appellant has admitted additional income towards undisclosed professional receipts and also disclosed the additional income in the statement of additional income and paid taxes, before the Ld.AO completed the assessment. Further, the Ld.AO while finalizing the assessment, for the assessment year under consideration, accepted such surrendered income without making any observations. Therefore, in our considered view, the Ld.AO having accepted the additional income disclosed by the assessee, erred, in holding that the assessee has under reported income is in consequence of misreporting, which attracts penalty under section 270A(9) of the Act. We further note that, the Hon'ble Supreme Court in the case of Shadilal Sugar and General Mills Ltd., v. CIT (1987) 168 ITR 705, where it has been held that, merely aggreging to an addition does not automatically imply concealment or furnishing of inaccurate particulars; an assessee may accept an addition for several reasons such as avoiding litigation, buying peace or difficulty in producing evidence. Penalty requires the Revenue to prove deliberate concealment, and a voluntary or agree....
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....visions of section 271AAD has been brought into statute to curb the menace of fraudulent claim of input tax credit on the basis of tax invoice without actual supply of goods. Therefore, the above provision cannot be invoked to the cases like the assessee, where the assessee has found to be owner of cash during the course of search and the same has been claimed to have been earned out of his professional income. Therefore, in our considered view, the penalty order passed by the Ld.AO under section 271AAD, equal to the amount of income admitted by the assessee towards cash found during the course of search in the category of omission to record entry in the books of accounts which is relevant for computation of total income is contrary to the purpose of insertion of section 271AAD of the Act and cannot be upheld. The Ld. CIT(A) without appreciating the relevant facts simply sustained the penalty order passed by the Ld.AO. Therefore, we direct the Ld.AO to delete the penalty levied under section 271AAD of the Act. 25. Coming back to another aspect of the issue, the assessee has challenged levy of penalty under section 271AAD of the Act, on the ground of invalid assessment order pass....