2025 (6) TMI 283 - AT - Income Tax

Penalty u/s 270A - Assessee has paid interest at extra rate when compared to the prevailing market rate - assessee conceded before the AO that the interest may be disallowed to the extent of 6% and accordingly the AO made an addition -assessee further submitted that tax due on the amount disallowed is already paid and accordingly requested that the penalty proceeding be dropped. HELD THAT - Making a claim which in the opinion of the AO is excess cannot be held to be misrepresentation or suppression of facts. Mere fact that there exists a provision for levy of penalty it does not mean that the levy of penalty is mandatory. See Hindustan Steel Ltd. v. State of Orissa 1969 (8) TMI 31 - SUPREME COURT As already stated in the notice of penalty the AO has not specified the particular limb of 270A(9) which has been invoked in assessee s case we hold that the penalty levied by the AO under section 270A of the Act in assessee s case is not tenable - Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

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

(a) Whether the penalty under section 270A of the Income Tax Act, 1961 (the Act) can be sustained where the assessee voluntarily conceded a disallowance of interest, and whether such concession amounts to under-reporting or misreporting of income.

(b) Whether the Assessing Officer (AO) was justified in levying penalty under section 270A(9)(a) of the Act without specifying the particular limb of misreporting under which the penalty proceedings were initiated in the show-cause notice.

(c) Whether the penalty proceedings initiated by the AO complied with the principles of natural justice, particularly regarding the adequacy and specificity of the notice issued under section 274 read with section 270A.

(d) Whether the National Faceless Appeal Centre (NFAC) CIT(A) erred in confirming the penalty imposed by the AO, especially in relation to the power to grant immunity under section 270AA and the jurisdiction to decide on immunity.

(e) Whether the excess interest paid by the assessee, which was disallowed by the AO, constituted misreporting or suppression of facts attracting penalty under section 270A.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Voluntary Concession of Disallowance and its Impact on Under-reporting or Misreporting

Relevant Legal Framework and Precedents: Section 270A of the Act prescribes penalty for under-reporting of income and under-reporting as a consequence of misreporting. Misreporting includes misrepresentation or suppression of facts as per section 270A(9)(a). The Supreme Court in Hindustan Steel Ltd. v. State of Orissa held that penalty is not to be imposed unless there is a conscious breach of law or conduct that is contumacious, dishonest, or in conscious disregard of statutory obligations.

Various Tribunal decisions (Schneider Electric South East Asia, Greenwoods Govt. Officers Welfare Society, Enrica Enterprises Pvt. Ltd.) emphasize that voluntary disclosure or concession of income or disallowance by the assessee to avoid litigation does not constitute misreporting or suppression of facts.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee voluntarily conceded a disallowance of 6% interest, which was accepted by the AO without any adverse findings or allegations of incorrectness regarding the books of accounts or evidence. The AO's estimate of a reasonable interest rate (12%) compared to the claimed 18% was not disputed by the assessee.

The Tribunal held that making a claim which the AO considers excessive cannot be equated with misrepresentation or suppression of facts. The voluntary concession to avoid litigation is not tantamount to under-reporting or misreporting of income.

Key Evidence and Findings: The assessee's return included the interest income and claimed deduction under section 57. The disallowance was conceded during assessment proceedings. No evidence indicated concealment or suppression.

Application of Law to Facts: The Tribunal applied the principle that penalty is discretionary and not mandatory, and that voluntary disclosure negates the element of misreporting required for penalty under section 270A.

Treatment of Competing Arguments: The Revenue argued that acceptance of disallowance does not negate suppression or misreporting. The Tribunal rejected this, relying on judicial precedents and the absence of any adverse finding against the assessee's books or conduct.

Conclusion: The penalty cannot be sustained on the ground of misreporting when the disallowance is voluntarily conceded and there is no evidence of concealment or suppression.

(b) Requirement of Specificity in the Penalty Notice under Section 274 read with Section 270A

Relevant Legal Framework and Precedents: Section 274 mandates that no penalty order shall be passed without giving the assessee a reasonable opportunity of hearing. The show-cause notice must specify the grounds and the particular limb of section 270A under which penalty is proposed. The Delhi High Court in Schneider Electric South East Asia held that failure to specify the limb (under-reporting or misreporting) renders the notice and consequent penalty order arbitrary and invalid.

Court's Interpretation and Reasoning: The Tribunal observed that the AO's penalty notice did not specify whether penalty was levied for under-reporting or misreporting under section 270A(9). Although the penalty order mentioned misreporting under section 270A(9)(a), the initial notice lacked such clarity.

Key Evidence and Findings: The penalty notice and show-cause notice were vague regarding the specific charge. The Tribunal relied on precedents holding that vague notices violate natural justice as the assessee cannot effectively defend without knowing the precise allegation.

Application of Law to Facts: The Tribunal applied the principle that a vague or non-specific notice is invalid and vitiates the penalty proceedings.

Treatment of Competing Arguments: The Revenue contended that the AO had specified the clause in the penalty order and that was sufficient. The Tribunal disagreed, emphasizing the necessity of specificity at the notice stage to enable a fair hearing.

Conclusion: The penalty proceedings were invalid due to failure to specify the particular limb of section 270A in the show-cause notice, violating principles of natural justice.

(c) Jurisdiction and Power to Grant Immunity under Section 270AA

Relevant Legal Framework: Section 270AA provides immunity from penalty under section 270A if the assessee files a declaration in Form 68 and the AO passes an order granting or rejecting immunity.

Court's Interpretation and Reasoning: The Tribunal noted the assessee submitted Form 68 seeking immunity, but the AO did not pass any order granting or rejecting immunity. The CIT(A) and NFAC CIT(A) incorrectly assumed jurisdiction to decide on immunity, which is vested only with the AO.

Key Evidence and Findings: The AO did not issue any order on immunity. The NFAC CIT(A) confirmed penalty without addressing immunity, which the Tribunal found to be beyond their jurisdiction.

Application of Law to Facts: Immunity determination is a statutory function of the AO. The appellate authorities cannot assume jurisdiction to grant or reject immunity.

Treatment of Competing Arguments: The Revenue did not dispute this jurisdictional aspect explicitly.

Conclusion: The penalty confirmed by the appellate authorities without AO's order on immunity is bad in law.

(d) Whether Excess Interest Paid Constitutes Misreporting or Suppression of Facts

Relevant Legal Framework: Section 270A(9)(a) defines misreporting to include misrepresentation or suppression of facts. The Supreme Court and various High Courts have held that misrepresentation involves false or misleading assertions made with intent to deceive.

Court's Interpretation and Reasoning: The Tribunal found that the assessee claimed interest at 18%, which the AO considered excessive and estimated a reasonable rate at 12%. The assessee conceded the excess interest disallowance voluntarily.

Key Evidence and Findings: No evidence suggested that the assessee intentionally misrepresented facts or suppressed information. The interest claimed was disclosed in the return, and the disallowance was accepted during assessment.

Application of Law to Facts: Mere claim of a higher interest rate, which is subsequently disallowed as excessive, does not amount to misrepresentation or suppression.

Treatment of Competing Arguments: Revenue argued that the excess interest paid was a shift from sound business prudence and thus misreporting. The Tribunal rejected this, relying on the absence of any fraudulent intent or concealment.

Conclusion: The excess interest claimed does not constitute misreporting or suppression of facts attracting penalty under section 270A.

(e) Legality and Jurisdiction of NFAC CIT(A) in Confirming Penalty

Relevant Legal Framework: The appellate authorities have jurisdiction to confirm or set aside penalty but do not have power to grant immunity under section 270AA.

Court's Interpretation and Reasoning: The Tribunal observed that the NFAC CIT(A) confirmed penalty without addressing immunity, which is solely within the AO's jurisdiction.

Key Evidence and Findings: The CIT(A) and NFAC CIT(A) ignored the fact that immunity was not decided by the AO.

Application of Law to Facts: The appellate authorities exceeded their jurisdiction by confirming penalty without AO's order on immunity.

Treatment of Competing Arguments: The Revenue did not contest this jurisdictional limitation.

Conclusion: The confirmation of penalty by NFAC CIT(A) without AO's immunity order is legally unsustainable.

3. SIGNIFICANT HOLDINGS

"Penalty is not to be imposed if there is no conscious breach of law. An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or guilty of conduct, contumacious or dishonest, or acted in conscious disregard to its obligation."

"The Respondents action of denying the benefit of immunity on the ground that the penalty was initiated under Section 270A of the Act for misreporting of income is not only erroneous but also arbitrary and bereft of any reason as in the penalty notice the Respondents have failed to specify the limb 'underreporting' of 'misreporting of income, under which the penalty proceedings had been initiated."

"Issuing a vague notice without specifying the charge under which limb the proposed penalty proceedings is initiated, would vitiate the entire proceedings, because, the assessee was not given an opportunity to explain its case on specific charge."

"Income voluntarily admitted by the assessee does not constitute 'under reporting of income' or 'misreporting of income', and thus, penalty levied u/s. 270A of the Act is unsustainable in law on merits."

"The power to grant or reject immunity under section 270AA lies exclusively with the Assessing Officer and not with the appellate authorities."

The Tribunal finally held that the penalty levied under section 270A of the Act is not tenable on two grounds: (i) failure to specify the limb of section 270A(9) in the penalty notice, violating natural justice, and (ii) absence of misreporting or under-reporting as the disallowance was voluntarily conceded by the assessee.

Consequently, the appeal was allowed and the penalty was quashed.