2025 (5) TMI 712 - AT - Income Tax

Penalty u/s 270(A) - assessee had under reported income in consequence of misreporting - explanation offered by the assessee attributing the underreporting to the wrongful actions of a tax consultant - HELD THAT - Tax consultant/Kishor Patil who cheated all the employees claimed excess deduction in their returns without informing them for his own benefit. The fact of the cheating came in light when a survey u/s 133A was conducted at the premises of Mr Kishor Patil. When the fact that this kind of fraud was made in the name of number of persons all of them complaint to the Economic Offence Wing of Police Nashik against the tax consultant Kishore Patil. The news regarding fraud committed by Kishore Patil also flashed in the daily news paper of Nashik. It is also apparent that there is no mistake of the assessee but it was the hidden interest of the tax consultant who triggered the gun by using shoulders of the assessee many more for his own benefit. As soon as the fact of excess deduction claimed came to the knowledge of the assessee he immediately paid the due tax with interest even before the issue of notice u/s 148 contacted another genuine tax consultant who prepared and furnished correct return in response to the notice u/s 148. We find that the AO has levied penalty u/s 270(A) on the basis of the fact that the correct income was not returned voluntarily but only after issue of notice u/s 148 of the IT Act. It is also found that when the notice u/s 148 was issued the appellant has disclosed his correct income paid the due tax before issue of notice. We also find that the AO has accepted the return as it is which was furnished by the appellant in response to the notice u/s 148 . We cannot accept the contention of DR that the revised return was not voluntary therefore the penalty u/s 270(A) of the Act is inevitable. We find force in the arguments of the Ld. counsel of the assessee that the amount of tax interest was deposited voluntarily much prior to the issue of notice u/s 148 since the income tax with interest was deposited by the assessee on 28-05-2019 whereas the notice u/s 148 was issued on 25-02-2020. This is not a fit case to impose penalty u/s 270(A). The grounds of appeal raised by the assessee are allowed.

The core legal questions considered by the Tribunal in this appeal are:

1. Whether the penalty imposed under section 270A of the Income Tax Act for underreporting of income due to misreporting is justified in law.

2. Whether the explanation offered by the assessee attributing the underreporting to the wrongful actions of a tax consultant, supported by evidence including a complaint filed with the Economic Offence Wing, rebuts the presumption of misreporting and negates the liability for penalty under section 270A.

3. Whether the bona fide nature of the assessee's conduct, given his technical background and complete reliance on the tax consultant, exempts him from penalty under section 270A despite the underreporting of income.

4. Whether voluntary payment of the tax and interest prior to issuance of notice under section 148, but after the original due date for filing return, negates the applicability of penalty under section 270A.

Issue-wise detailed analysis:

1. Justification for levy of penalty under section 270A for underreporting of income due to misreporting

The relevant legal framework is section 270A of the Income Tax Act, which provides for levy of penalty in cases of underreporting or misreporting of income. The penalty is discretionary but must be justified by the facts and circumstances, including whether the underreporting was deliberate or due to bona fide error.

The Tribunal noted that the Assessing Officer levied penalty of Rs. 1,46,760/- under section 270A(8) on the ground that the assessee had underreported income by misreporting. This was confirmed by the Commissioner of Income Tax (Appeals)/NFAC.

However, the Tribunal analyzed the factual matrix and found that the underreporting was not due to any deliberate act by the assessee but due to the wrongful actions of the tax consultant who filed the return without the assessee's knowledge of the excess deductions claimed. The Tribunal emphasized that the assessee was a salaried employee from a technical background, lacking knowledge of tax matters, and had completely relied on the tax consultant.

The Tribunal also considered that the assessee promptly paid the tax and interest as soon as the discrepancy was discovered, even before the issuance of notice under section 148. The revised return declaring correct income was filed in response to the notice under section 148.

Applying the law to these facts, the Tribunal held that the penalty under section 270A was not justified because the underreporting was not voluntary or deliberate but caused by the tax consultant's fraudulent actions. The Tribunal rejected the Revenue's contention that the return was not voluntarily revised and penalty was inevitable.

2. Explanation attributing underreporting to tax consultant's wrongdoing and evidentiary support

The assessee explained that the tax consultant, who filed returns for many employees of the company, had fraudulently claimed excess deductions under Chapter VI-A without informing the assessee or others. The assessee supported this explanation by filing a complaint against the tax consultant with the Economic Offence Wing of the Police Department. Additionally, a survey under section 133A revealed the consultant's misconduct, which was also reported in the local press.

The Tribunal found that the assessee's explanation was credible and bona fide. The evidence of complaints filed and the investigation against the tax consultant corroborated the assessee's claim that the underreporting was caused by the consultant's fraud, not by the assessee's own misrepresentation.

The Tribunal thus held that the explanation offered by the assessee was sufficient to rebut the presumption of misreporting under section 270A and negated the liability for penalty.

3. Bona fide conduct of the assessee and reliance on tax consultant

The Tribunal highlighted that the assessee, being from a technical background and a salaried employee, was not equipped to understand the complexities of income tax law and had relied entirely on the tax consultant for filing returns. The Tribunal accepted that the assessee was unaware of the excess deductions claimed by the consultant and believed the returns to be legally compliant.

This reliance and lack of knowledge were significant in determining the absence of any willful attempt to evade tax or misreport income. The Tribunal emphasized that the assessee's conduct was bona fide, as demonstrated by the immediate payment of tax and interest upon discovery of the error.

Therefore, the Tribunal concluded that the bona fide nature of the assessee's conduct disentitled the Revenue from imposing penalty under section 270A.

4. Effect of voluntary payment of tax and interest prior to issuance of notice under section 148

The assessee paid the tax and interest on 28-05-2019, well before the notice under section 148 was issued on 25-02-2020. However, the revised return could not be filed voluntarily before the due date as it had already expired.

The Tribunal noted that the penalty under section 270A is generally imposed when the correct income is not disclosed voluntarily. However, the Tribunal found merit in the assessee's argument that the payment of tax and interest before the notice was a voluntary compliance and demonstrated the absence of any intention to conceal income.

The Tribunal rejected the Revenue's argument that since the revised return was filed only after the notice, the penalty was inevitable. It held that the voluntary payment of tax and interest prior to notice issuance negated the applicability of penalty under section 270A.

Conclusions on issues:

The Tribunal concluded that the penalty under section 270A was not justified in the facts and circumstances of the case. The underreporting was caused by the tax consultant's fraudulent actions, not by any willful misreporting by the assessee. The assessee's bona fide conduct, reliance on the consultant, and voluntary payment of tax and interest before notice issuance negated the applicability of penalty.

Significant holdings and core principles established:

The Tribunal held:

"Considering the totality of the facts of the case, we are of the considered opinion that this is not a fit case to impose penalty u/s 270(A) of the IT Act."

"We cannot accept the contention of Ld. DR that the revised return was not voluntary therefore the penalty u/s 270(A) of the Act is inevitable."

"The amount of tax & interest was deposited voluntarily much prior to the issue of notice u/s 148 of the IT Act."

These statements affirm the principle that penalty under section 270A cannot be imposed where the underreporting is due to the fraudulent act of a third party (tax consultant), the assessee acts bona fide, and correct tax along with interest is paid voluntarily before the initiation of reassessment proceedings.

The Tribunal's final determination was to set aside the penalty order and direct the Assessing Officer to delete the penalty of Rs. 1,46,760/- imposed under section 270A of the Income Tax Act, thereby allowing the appeal of the assessee.

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