2025 (5) TMI 1495 - AT - Income Tax

Levy of penalty u/s 270A and 272A(1)(d) - under reporting of income - income assessed was greater than the basic exempt income and there was conscious underreporting/ misreporting of income - HELD THAT - A perusal of the provisions of section 270A of the Act reveals that it identifies two different set of defaults for attracting penalty both inviting different quantum of penalty. The section recognizes underreporting of income as one default and underreporting as a consequence of misreporting as the other default with the first default attracting penalty at the rate of 30% of the tax payable on the underreported income and the other default attracting penalty at the rate of 200% of the tax payable on such income. While subsection (1) to (7) of section 270A deal with underreporting of income sub section (8) (9) deal with underreporting as a consequence of misreporting. The assessee was in possession of complete books of accounts from which these financial figures had been derived. But it is revealed from the assessment order that without finding any infirmity in the books of accounts or for that the matter rejecting the books of accounts the AO has estimated the income of the assessee by applying a net profit rate of 1.30% to the total turnover of the assessee. Therefore the estimation of income by the AO in the present case which has invited the levy of penalty u/s. 270A(3) of the Act allegedly for under reporting of income we find is saved by exception provided in Sub-section (6) of Clause (b) of the section 270A since the estimation is not accompanied by rejection of the books of accounts of the assessee and the AO is apparently satisfied with the Books of accounts of the assessee. Therefore we hold the addition made in the hands of the assessee by estimating profits earned from his business could not have invited penalty for under reporting of income as per section 270A(1) r.w.s subsection (7). AO in his order levying penalty does not point out which specific case is fulfilled in the assessee s case. Therefore we hold that it was not even a case fit for levy of penalty for misreporting as a consequence of under reporting also. We hold that the penalty levied in the present case is not sustainable in law and direct deletion of the same. Levy of penalty u/s. 272A(1)(d) for non-compliance of notice issued u/s. 142(1) of the Act - Default in not complying with the notices was neither intentional nor deliberate and there was reasonable and sufficient cause for non-compliance with the same and noting the fact the he thereafter participated in the assessment proceedings and filed reply we completely agree with the assessee that there is no case for levy of penalty u/s. 272A(1)(d) of the Act. Penalty so levied of Rs. 10, 000/- is therefore directed to be deleted.

Summary

The appeals concern the levy of penalties under Sections 270A and 272A(1)(d) of the Income Tax Act, 1961, imposed on the assessee. The Tribunal considered two separate appeals together, both challenging the confirmation of penalties by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi.

Issues Presented and Considered:

1. Whether the penalty under Section 270A of the Income Tax Act, 1961, imposed for under-reporting of income or misreporting of income is sustainable in law and on facts.

2. Whether the Assessing Officer (AO) correctly identified the nature of default-under-reporting or misreporting-and applied the appropriate penalty provisions under Section 270A.

3. Whether the penalty under Section 270A is attracted when income is estimated based on turnover and net profit rate without rejection of books of account.

4. Whether the penalty under Section 272A(1)(d) of the Act, imposed for non-compliance with notice issued under Section 142(1), is justified given the assessee's circumstances and reasonable cause for non-compliance.

5. Whether the principles of natural justice and equity were adhered to in imposing the penalties.

Issue-wise Detailed Analysis:

1. Penalty under Section 270A for Under-reporting or Misreporting of Income

Legal Framework and Precedents: Section 270A of the Income Tax Act, 1961, distinguishes between two types of defaults: under-reporting of income (Sections 270A(1) to (7)) and under-reporting as a consequence of misreporting (Sections 270A(8) and (9)). Under-reporting attracts penalty at 30% of the tax payable on the under-reported income, whereas misreporting attracts a higher penalty of 200% of the tax payable.

The section defines under-reporting in multiple contexts, including assessed income exceeding return-processed income, reassessed income exceeding prior assessments, and others. Misreporting is specifically defined by enumerated acts such as misrepresentation or suppression of facts, failure to record investments or receipts, false entries in books of account, and failure to report international or specified domestic transactions.

Court's Interpretation and Reasoning: The AO levied penalty under Section 270A for under-reporting of income related to the assessee's business of selling Mother Dairy milk and products. The AO estimated income by applying a net profit rate of 1.30% to the turnover obtained from Mother Dairy records. The AO treated the return filed by the assessee as invalid due to late filing and initiated penalty proceedings for under-reporting. The penalty was levied at 50% of the tax payable on the under-reported income, amounting to Rs. 19,381, and confirmed by the CIT(A).

The Tribunal found that the AO was unclear whether the case involved under-reporting attracting 30% penalty or misreporting attracting 200% penalty. The AO's order inconsistently referred to misreporting but applied the penalty rate for under-reporting. This lack of clarity on the nature of default was held to be fatal to the penalty's validity.

Key Evidence and Findings: The assessee had submitted complete books of accounts and financial statements for the business activity. The AO did not reject the books of accounts but estimated income by applying a net profit rate to turnover. The Tribunal noted that Section 270A(6)(b) excludes from under-reported income any amount determined on the basis of an estimate if the accounts are correct and complete to the satisfaction of the AO but the method employed does not allow proper deduction of income.

Application of Law to Facts: Since the AO accepted the books of accounts as correct and complete and estimated income due to the nature of the business activity, the penalty for under-reporting was not attracted under Section 270A. The Tribunal held that estimation of income without rejection of books and without clear identification of misreporting does not justify penalty under Section 270A.

Treatment of Competing Arguments: The Revenue argued that the assessee under-reported income and misreported facts, justifying penalty. However, the Tribunal emphasized the AO's own uncertainty and failure to specify the exact misreporting act as required under Section 270A(9). The Tribunal also noted that the assessee had filed returns and participated in proceedings, negating willful concealment or suppression.

Conclusion: The penalty under Section 270A was held unsustainable and was deleted. The Tribunal emphasized that the AO must clearly identify the nature of default and apply penalty provisions accordingly. The estimation of income based on turnover and net profit rate without rejection of books does not attract penalty under Section 270A.

2. Penalty under Section 272A(1)(d) for Non-compliance with Notice under Section 142(1)

Legal Framework: Section 272A(1)(d) imposes penalty for failure to comply with notices issued under the Income Tax Act, including Section 142(1), which requires furnishing of information or documents during assessment proceedings.

Court's Interpretation and Reasoning: The penalty of Rs. 10,000 was levied for non-compliance with a notice dated 17.01.2018 issued under Section 142(1). The assessee contended that the notice was sent to his Armed Forces address (Unit Location, 56 APO), which was no longer his residence since retirement. The assessee resided in Farrukhabad and had filed the return with that address. The notices did not reach him due to this discrepancy. Upon becoming aware of the proceedings, the assessee complied with subsequent notices and filed the return and audit report.

Key Evidence and Findings: The assessee submitted proof of retirement from Armed Forces, address details, and copies of correspondence. The AO did not close the window for e-filing returns and acknowledged the return filed by the assessee, albeit late. The Tribunal noted that the default was neither intentional nor deliberate but due to reasonable cause-non-receipt of notice at the correct address.

Application of Law to Facts: The Tribunal applied the principle of reasonable cause and emphasized that penalty under Section 272A(1)(d) should not be levied where non-compliance is due to valid reasons beyond assessee's control. The assessee's bona fide participation in assessment proceedings and subsequent compliance negated wilful default.

Treatment of Competing Arguments: The Revenue did not controvert the assessee's submissions regarding address and non-receipt of notice. The Tribunal accepted the assessee's explanation and found no justification for penalty.

Conclusion: The penalty under Section 272A(1)(d) was held unsustainable and was deleted.

Significant Holdings:

"It is clearly evident therefore, that the AO himself is not clear whether it is a case of under reporting of income or a case of mis- reporting as a consequence of under reporting. For this reason alone, the penalty levied in the present case, we hold is not sustainable."

"The estimation of income by the AO in the present case which has invited the levy of penalty u/s. 270A(3) of the Act allegedly for under reporting of income, we find is saved by exception provided in Sub-section (6) of Clause (b) of the section 270A, since, the estimation is not accompanied by rejection of the books of accounts of the assessee and the AO is apparently satisfied with the Books of accounts of the assessee."

"The above facts have not been controverted by the Revenue. It is, therefore, clear that the default in not complying with the notices was neither intentional nor deliberate and there was reasonable and sufficient cause for non-compliance with the same and noting the fact the he, thereafter, participated in the assessment proceedings and filed reply, we completely agree with the Ld. Counsel for the assessee that there is no case for levy of penalty u/s. 272A(1)(d) of the Act."

Core principles established include that penalty under Section 270A requires clear identification of the nature of default-under-reporting or misreporting-and the AO must apply the correct quantum of penalty accordingly. Estimation of income without rejection of books of accounts and with AO's satisfaction of correctness does not attract penalty. Further, penalty under Section 272A(1)(d) is not leviable where non-compliance with notice is due to reasonable cause beyond assessee's control, especially when the assessee participates bona fide in proceedings thereafter.

Final determinations were that both penalties under Sections 270A and 272A(1)(d) were unsustainable and were deleted, allowing the assessee's appeals.