2025 (5) TMI 1324 - AT - Income Tax

Levy of penalty for under reporting of income u/s 270A - form 68 was filed beyond 30 day before the AO - claim of ex-gratia (capital receipt) denied and treated the amount as profit in lieu of salary under the head salaries and raised a demand - HELD THAT - We find that the show cause notice was initiated u/s. 274 r/w section 270A for under reported income which is in consequence of misreporting of income the assessee was not eligible to claim the immunity u/s. 270AA and hence did not file form 68 before the AO well within the prescribed period as stated in sub-section (2) of section 270AA i.e. within one month from the end of the month in which the assessment order was received by the assessee. AO passed the penalty order and levied penalty @ 50% of the taxes only for the reason for under-reporting of income and which was confirmed by the CIT(A). Therefore the assessee became eligible to claim immunity from imposition of penalty u/s. 270A of the Act and thus has satisfactorily fulfilled the condition of section 270AA(3) of the Act. We are of the considered view that though form 68 was filed beyond 30 day before the AO the assessee had fulfilled the conditions of 270AA. Hence assessee is eligible for immunity from penalty - Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

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

a) Whether the penalty imposed under section 270A of the Income Tax Act, 1961 for under-reporting of income was justified in the facts and circumstances of the case.

b) Whether the Commissioner of Income Tax (Appeals) erred in upholding the penalty imposed by the Assessing Officer (AO) despite the assessee having paid the tax demand within the stipulated time and not filing any appeal against the assessment order.

c) Whether the provisions of section 270A are invocable in the present facts, particularly in relation to the classification of the ex-gratia amount received by the assessee as capital receipt and not taxable income.

d) Whether the Assessing Officer erred in not specifying the clause under which the case falls under section 270A(9) of the Act.

e) Whether the assessee was eligible for immunity from penalty under section 270AA of the Income Tax Act, having fulfilled the conditions specified therein.

f) Whether the penalty proceedings are independent of assessment proceedings and how that impacts the penalty levy in this case.

g) Whether the addition of Rs. 53,05,934/- as taxable income was warranted.

2. ISSUE-WISE DETAILED ANALYSIS

a) Justification of penalty under section 270A for under-reporting of income

Legal framework and precedents: Section 270A of the Income Tax Act, 1961, empowers the AO to levy penalty for under-reporting and misreporting of income. Under-reporting is defined as the difference between the income declared and the income assessed. The penalty can be levied at 50% of the tax payable on the under-reported income. The law mandates that the penalty is leviable only if the under-reporting is established and the assessee has not satisfied conditions for immunity under section 270AA.

Court's interpretation and reasoning: The Tribunal noted that the AO levied penalty of Rs. 9,07,270/- @ 50% of the tax payable on under-reported income, treating the ex-gratia amount as taxable salary income. The CIT(A) upheld the penalty. However, the Tribunal observed that the assessee had paid the tax demand arising from the addition within the prescribed time and did not file any appeal against the assessment order.

Key evidence and findings: The assessee admitted taxable income of Rs. 8,65,750/- but claimed exemption on Rs. 53,05,934/- received as ex-gratia on early termination of service, contending it was capital receipt. The AO disallowed this claim and treated the amount as profit in lieu of salary. Tax and interest were paid on the demand raised.

Application of law to facts: The Tribunal found that since the tax demand was paid within the stipulated time and no appeal was filed against the assessment order, the conditions for immunity under section 270AA were substantially fulfilled. The penalty under section 270A was therefore not justified.

Treatment of competing arguments: The assessee relied on a precedent from the Pune Tribunal holding that ex-gratia amounts of similar nature are capital receipts and not taxable. The Revenue contended that the penalty was rightly imposed as the income was under-reported. The Tribunal found merit in the assessee's claim of immunity and the timing of tax payment.

Conclusion: The penalty under section 270A for under-reporting was not warranted as the assessee fulfilled conditions for immunity and paid the tax demand timely.

b) Applicability of section 270AA immunity provisions

Legal framework: Section 270AA provides immunity from penalty under section 270A if the assessee satisfies two conditions: (a) pays the tax and interest as per the assessment order within the prescribed time, and (b) files an application for immunity in Form 68 within one month from the end of the month in which the assessment order is received.

Court's reasoning: The Tribunal acknowledged that the assessee did not file Form 68 within the prescribed time but did file it subsequently. The Tribunal held that the assessee had fulfilled the substantive conditions of paying tax and interest timely and not filing an appeal, which are the core requirements for immunity.

Key findings: The Tribunal emphasized that the penalty proceedings were initiated for under-reporting consequent to misreporting of income, but since the tax demand was paid timely and no appeal was preferred, the assessee was eligible for immunity despite the delay in filing Form 68.

Application of law to facts: The Tribunal exercised discretion to condone the delay in filing Form 68, considering the overall facts and the assessee's compliance with substantive conditions.

Competing arguments: The Revenue argued that failure to file Form 68 within time disqualified the assessee from immunity. The Tribunal disagreed, emphasizing the spirit of the provision and the assessee's overall compliance.

Conclusion: The assessee was entitled to immunity from penalty under section 270AA despite procedural delay in filing Form 68.

c) Classification of ex-gratia amount as capital receipt vs. taxable income

Legal framework: Income received from employer on early termination of service can be taxable as 'profit in lieu of salary' or treated as capital receipt depending on the nature of the amount and terms of employment.

Court's reasoning: The Tribunal noted the assessee's contention that the ex-gratia was not part of employment contract and hence capital receipt. The assessee relied on a precedent where a similar ex-gratia amount was held to be capital in nature and not taxable.

Key findings: The AO disallowed the claim treating the amount as salary income. However, the Tribunal did not directly decide the issue of taxability but focused on penalty and immunity aspects. The precedent cited by the assessee was acknowledged but the Tribunal's order primarily dealt with penalty.

Application of law to facts: The issue of taxability was not the primary focus of the appeal before the Tribunal; the Tribunal accepted the factual position that the tax demand arose from treating the amount as taxable income.

Competing arguments: The assessee argued for capital receipt classification; the Revenue treated it as taxable salary income. The Tribunal did not overturn the tax demand but focused on penalty immunity.

Conclusion: The Tribunal did not disturb the tax demand but allowed penalty relief based on immunity provisions.

d) Validity of penalty proceedings and specification of clause under section 270A(9)

Legal framework: Section 270A(9) requires the AO to specify the clause under which the penalty is levied.

Court's reasoning: The assessee contended that the AO erred in not specifying the clause under section 270A(9). The Tribunal did not find this omission fatal to the penalty proceedings, especially since the penalty was levied only for under-reporting of income.

Conclusion: The Tribunal did not find merit in this ground and did not interfere on this point.

e) Independence of penalty proceedings from assessment proceedings

Legal framework: Penalty proceedings under section 270A are independent of assessment proceedings, but the imposition of penalty depends on the outcome of assessment and compliance by the assessee.

Court's reasoning: The Tribunal noted that although penalty proceedings are independent, the assessee's payment of tax and interest within time and failure to file appeal against assessment order are relevant for immunity under section 270AA.

Conclusion: The independence of penalty proceedings does not preclude immunity where conditions under section 270AA are met.

f) Delay in filing appeal and condonation

Legal framework: Appeals must be filed within prescribed time limits unless delay is condoned for sufficient cause.

Court's reasoning: The Tribunal condoned a delay of 160 days in filing the appeal due to the assessee's serious health issues, considering it a reasonable cause and in the interests of justice.

Conclusion: Delay was condoned and appeal admitted.

3. SIGNIFICANT HOLDINGS

"We find that the assessee has fulfilled the conditions prescribed u/s. 270AA of the Act for claiming immunity from imposition of penalty u/s. 270A of the Act and did not file an appeal against the assessment order dated 05.09.2022. Thus, the assessee has fulfilled the conditions of clause (a) & clause (b) of sub-section 1 of section 270AA of the Act."

"Though form 68 was filed beyond 30 day before the AO, the assessee had fulfilled the conditions of 270AA of the Act. Hence, considering the overall facts of this case, we are of the view that the assessee is eligible for immunity from penalty and therefore no penalty ought to have been levied u/s. 270A of the Act for under-reporting of income."

"We condone delay in filing of appeal and admit the appeal filed by the assessee for adjudication."

The Tribunal established the principle that substantive compliance with section 270AA conditions, namely payment of tax and interest within prescribed time and not filing appeal against assessment order, can confer immunity from penalty under section 270A, even if procedural requirements such as timely filing of Form 68 are not strictly met.

The final determination was to delete the penalty of Rs. 9,07,270/- imposed under section 270A for under-reporting of income, thereby allowing the appeal filed by the assessee.