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2025 (5) TMI 1061 - AT - Income TaxPenalty u/s 270A(8) - under reporting of income in consequence of misreporting income - It is only because of the revenue action the under reporting of income was unearthed - HELD THAT - Without the charge of under reporting of income the AO cannot straightaway jump with the charge of misreporting of income. In the present case the AO without even a whisper as to how the ingredient of sub-section (2) of section 270A is satisfied has also not specifically mentioned the exact limb of misreporting as per section 270A(9) of the Act. Further the AO stated under reported income in his penalty order but levied 200% penalty. By respectfully following the judgment of Schneider Electric South East Asia (HQ) PTE Ltd. 2022 (3) TMI 1295 - DELHI HIGH COURT we are of the considered view that failure on the part of the AO to show cause which of the specific action of the assessee company from clause (a) to (f) of Section 270A(9) was determinant before imposing penalty u/s 270A of the Act has rendered the proceedings invalid and thus untenable in the eyes of law. Therefore it goes without saying that for the applicability of section 270A of the Act the condition stated therein must be strictly followed. On going through the order of CIT(A) we find that even ld. CIT(A) was also confused whether the assessee has under reported his income or mis reported his income. We are further of the considered opinion that the penalty by hereditary nature is always discretionary. The legislature has used the word may in section 270A(1) of the Act which clearly says that it is discretionary on the part of the AO to levy penalty or not. The primary onus is on the revenue to prove that assessee falls under particular limb of default. The AO has to bring the case in the four corners of the sections in order to levy penalty which in our opinion the authorities below failed to do so. In view of the above we delete the penalty u/s 270A - Assessee appeal allowed.
The core legal questions considered in this appeal pertain to the validity and correctness of the penalty imposed under section 270A of the Income Tax Act, 1961, specifically:
Issue-wise detailed analysis: 1. Validity of penalty under section 270A of the Income Tax Act Relevant legal framework and precedents: Section 270A prescribes penalty for under-reporting and misreporting of income. Sub-section (1) empowers the AO or Commissioner to impose penalty where under-reporting is established. Sub-section (2) defines under-reporting through various limbs (a) to (g). Sub-section (6) provides exceptions where under-reporting does not arise if the assessee offers bona fide explanations substantiated by material facts. Sub-section (8) mandates enhanced penalty (200%) where under-reporting is in consequence of misreporting, which is further defined in sub-section (9) through specific acts such as misrepresentation, failure to record investments, claim of unsubstantiated expenditure, false entries, and failure to report transactions. Precedent relied upon includes the judgment of the Hon'ble Delhi High Court in Schneider Electric South East Asia (HQ) PTE Ltd. which emphasized the necessity of specifying the exact limb of misreporting before levying penalty under section 270A. Court's interpretation and reasoning: The Tribunal observed that the AO failed to clearly establish which limb of section 270A(2) was attracted to hold that the assessee under-reported income. Further, the AO did not specify the exact limb of misreporting under section 270A(9) upon which the penalty was based. The AO noted under-reported income of Rs. 91,47,331 but levied penalty at 200% for misreporting without clarity on the specific misreporting act. The Tribunal held that without establishing under-reporting as per sub-section (2), the AO cannot directly proceed to misreporting under sub-section (9). This procedural lapse renders the penalty proceedings invalid. Key evidence and findings: The AO disallowed the cost of improvement claimed by the assessee due to lack of bills and vouchers, relying instead on a valuation report which was deemed an estimation rather than substantiation. The assessee admitted the disallowance and paid the tax. The AO initiated penalty proceedings for under-reporting in consequence of misreporting but did not specify the exact misreporting clause. Application of law to facts: The Tribunal applied the step-ladder approach mandated by section 270A: first establishing under-reporting, then considering exceptions, and only thereafter considering misreporting. The AO's failure to specify the limb of misreporting and the confusion in the penalty order and CIT(A) order led to the conclusion that the penalty was not validly imposed. Treatment of competing arguments: The assessee argued that the acceptance of addition was to avoid litigation and that the penalty notice did not specify the limb of penalty. The Revenue contended the penalty was justified since the assessee admitted disallowance. The Tribunal sided with the assessee, emphasizing procedural requirements and principles of natural justice. Conclusion: The penalty imposed under section 270A was deleted due to failure of the AO to comply with statutory requirements and lack of clarity on the basis of misreporting. 2. Effect of acceptance of addition by the assessee Relevant legal framework and precedents: Acceptance of addition to income to avoid litigation does not ipso facto amount to under-reporting or misreporting unless the addition is contested or shown to be incorrect. The penalty provisions require establishing under-reporting independent of acceptance for peace. Court's interpretation and reasoning: The Tribunal noted the assessee's submission that the addition was accepted to buy peace of mind and the tax was paid along with interest. The Tribunal found that mere acceptance to avoid litigation does not constitute misreporting or under-reporting for penalty purposes. Key evidence and findings: The assessee had admitted the disallowance and paid tax, but did not substantiate the expenditure with bills. The AO treated this as misreporting for penalty. Application of law to facts: The Tribunal held that acceptance of addition without contest is not sufficient to impose penalty unless the statutory conditions of under-reporting and misreporting are met. Treatment of competing arguments: Revenue argued admission of disallowance justified penalty; the Tribunal rejected this as insufficient without statutory proof of misreporting. Conclusion: Acceptance of addition to avoid litigation does not automatically attract penalty under section 270A. 3. Substantiation of expenditure on cost of improvement Relevant legal framework and precedents: Claims of expenditure must be substantiated by evidence such as bills, vouchers, payment details, and ledger accounts. Valuation reports estimating construction cost are not sufficient proof. Court's interpretation and reasoning: The AO disallowed Rs. 90,53,431 claimed as cost of improvement due to lack of documentary evidence and reliance on a valuation report dated after construction. The Tribunal accepted the AO's finding that the valuation report was merely an estimate and not sufficient evidence. Key evidence and findings: Absence of bills, vouchers, and payment details; only valuation report produced by the assessee. Application of law to facts: The disallowance of expenditure was justified on lack of evidence. Treatment of competing arguments: Assessee contended genuineness of valuation report; AO and Tribunal found it insufficient. Conclusion: The disallowance of expenditure was proper; however, this alone does not justify penalty without establishing misreporting. 4. Compliance with principles of natural justice and procedural requirements under section 270A Relevant legal framework and precedents: The penalty proceedings must specify the exact grounds and limb of under-reporting and misreporting alleged to enable the assessee to defend. Failure to do so violates natural justice and renders penalty invalid. The Delhi High Court judgment in Schneider Electric underscored this requirement. Court's interpretation and reasoning: The Tribunal found that the AO's show cause notice and penalty order did not specify the limb of misreporting under section 270A(9). The CIT(A) order also reflected confusion on whether the penalty was for under-reporting or misreporting. This lack of clarity and specificity was held to be a violation of natural justice. Key evidence and findings: Show cause notice and penalty order lacked specification of misreporting limb; CIT(A) order showed confusion. Application of law to facts: Without clear communication of the charge, the assessee's right to defend was impaired. Treatment of competing arguments: Revenue did not adequately address the procedural lapses; Tribunal emphasized strict adherence to statutory procedure. Conclusion: Penalty proceedings were invalid due to failure to comply with procedural requirements and principles of natural justice. 5. Discretionary nature of penalty under section 270A Relevant legal framework and precedents: Section 270A uses the word "may" indicating penalty is discretionary, not mandatory. Penalty is not akin to tax or interest and should not be levied routinely or lightly. The AO must bring the case within the four corners of the statute. Court's interpretation and reasoning: The Tribunal observed that penalty is discretionary and must be imposed only after due consideration. The AO and CIT(A) failed to properly exercise discretion based on statutory requirements. Key evidence and findings: The AO levied penalty without clear basis; no detailed reasoning on discretion. Application of law to facts: Discretion was not properly exercised, justifying deletion of penalty. Treatment of competing arguments: Revenue argued penalty justified; Tribunal found lapses in exercise of discretion. Conclusion: Penalty was improperly imposed without proper exercise of discretion. Significant holdings include the following verbatim extract of crucial legal reasoning: "Without the charge of under reporting of income, the AO cannot straightaway jump with the charge of misreporting of income... The AO himself is confused under which limb the assessee is liable for penalty u/s 270A of the Act... failure on the part of the AO to show cause which of the specific action of the assessee company from clause (a) to (f) of Section 270A(9) was determinant before imposing penalty u/s 270A of the Act has rendered the proceedings invalid and thus untenable in the eyes of law... Unless the person has been communicated the specific instance vis-`a-vis action triggering of imposition of penalty, it would drastically obstruct an assessee from enforcing his right to dismantle the charge alleged against him. Thus, resulting into a gross violation of principles of natural justice." Core principles established:
Final determinations on each issue:
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