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2025 (5) TMI 7 - AT - Income TaxPenalty u/s 270A - additional income on account of undisclosed turnover is quantified during the course of search proceeding for the AY 2019-20 and admitted at the rate of 3% of undisclosed turnover - HELD THAT - For the applicability of section 270A of the Act the conditions stated therein must be strictly followed. A mere declaration of additional income which was estimated as being around 30% of regular turnover and even offered for taxation before the completion of assessment by itself will not amount to under reporting resulting in misreporting of income. Penalty u/s 270A cannot be levied when the income was arrived at based on estimation. Further the return income was duly accepted by the AO as no other disallowance or additions were made to the returned income. Therefore we completely disagree with the argument of DR that AO has not resorted to any estimation since the additional income offered by the assessee which is solely based on estimation is utterly accepted by the AO. Eventually the Income assessed u/s 143(3) of the Act r.w.s. 153C of the Act is nothing but acceptance of Income based on complete estimation. Who had estimated the income is irrelevant especially when such income is accepted by both the parties. CIT(A)-2 Panaji has rightly observed that no adverse findings / additions have been recorded by the AO with regard to income offered during the course of assessment proceedings. We also agree with the view of the CIT(A)-2 Panaji that the AO dejectedly failed to identify or determine and then communicate either through assessment order or through notice of the specific circumstance or incidence i.e. specific clause (a) to clause (g) of s/s (2) of section 270A within which the case of the appellant falls so as to hold income as under-reported to trigger the said penal provisions. The failure continued further in identifying or determining the show casing the specific action of the assessee in terms of clause (a) to clause (f) of s/s (9) of section 270A within which the such action of assessee falls so as to jacket or categorize such under-reported income is in consequence of misreporting. Unless the person has been communicated the specific incidence vis- -vis action triggering the 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 the principles of natural justice. Therefore the ladder has to be followed strictly for levying the penalty u/s 270A of the Act. 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. Penalty is not at par with the tax and interest and therefore penalty should not be levied in a light hearted manner or in routine manner and not very additions/ disallowances are liable for penalty. The primary onus is on the revenue to prove that assessee falls under particular limb of default. AO have to bring the case in the four corners of the sections in order to levy penalty which in our opinion the AO failed to do so. Therefore we are of the opinion that the explanation offered by the assessee is bonafide and the assessee has disclosed all material facts to substantiate the explanation during the course of assessment proceeding and accordingly no addition was made in the assessment proceedings. Decided against revenue.
The core legal questions considered in this judgment revolve around the applicability and correctness of penalty proceedings under section 270A of the Income Tax Act, 1961 ("the Act") in the context of income admitted by the assessee during search and assessment proceedings. Specifically, the issues are:
1. Whether penalty under section 270A can be levied when the income is admitted by the assessee based on estimation and accepted by the Assessing Officer (AO) without any addition or disallowance. 2. Whether the AO correctly invoked the provisions of section 270A for misreporting of income, particularly when the assessee voluntarily declared additional income during assessment proceedings following incriminating evidence seized during search. 3. Whether the AO complied with the procedural and substantive requirements under section 270A, including specifying the exact limb under which under-reporting and misreporting were alleged, and whether the penalty imposition adhered to principles of natural justice. 4. The interpretation and application of section 270A, including the distinction between under-reporting and misreporting of income, the conditions precedent to levy penalty, and the scope of discretion available to the AO. Issue-wise Detailed Analysis Issue 1: Applicability of penalty under section 270A when income is admitted on estimation and accepted by AO The relevant legal framework is section 270A of the Act, which prescribes penalty for under-reporting and misreporting of income. Section 270A(6)(b) and (c) provide exceptions where under-reported income determined on estimation basis cannot attract penalty if the accounts are correct and complete or if the assessee has voluntarily estimated and disclosed the income. The Tribunal noted that the assessee admitted additional income of Rs. 2.88 crores, calculated as 3% gross profit on an estimated undisclosed turnover of about 30% of total sales, during the course of search and assessment proceedings. This income was declared in the return filed under section 153C and accepted by the AO without any addition or disallowance. The Court emphasized that income determined on estimation basis and accepted by the AO cannot be treated as under-reported income for penalty purposes. The AO's contention that no estimation was made was rejected, as the admitted income itself was based on estimation. The Tribunal relied on the principle that penalty cannot be levied lightly or routinely and must be based on clear findings of under-reporting or misreporting. The acceptance of estimated income by the AO negated the charge of under-reporting. Issue 2: Correctness of invoking section 270A for misreporting of income Section 270A(8) and (9) provide for enhanced penalty (200% of tax on under-reported income) where under-reporting is in consequence of misreporting, which includes misrepresentation or suppression of facts, false entries, failure to record receipts, etc. The AO initiated penalty proceedings under section 270A for misreporting based on the Managing Director's statement admitting undisclosed sales and additional income. The AO described the case as one involving suppression of facts and deliberate evasion of tax. However, the Tribunal found that the AO failed to specify under which exact clause of section 270A(9) the misreporting was alleged. The penalty notice and order lacked clarity on the specific limb of misreporting invoked. The Tribunal held that without clear identification of the nature of misreporting, the penalty proceedings are invalid. The AO's failure to link the penalty to specific provisions and to communicate this to the assessee violated principles of natural justice and statutory requirements. Issue 3: Compliance with procedural and substantive requirements under section 270A The Tribunal laid down a stepwise approach that the AO must follow before levying penalty under section 270A:
In the present case, the AO failed to identify or communicate the specific clause under which under-reporting or misreporting was alleged. The penalty was initiated without proper satisfaction or recording of reasons. The show cause notice merely stated "it appears to be underreporting in consequence of misreporting" without specifics. The Tribunal held that such casual and routine initiation of penalty proceedings is impermissible and renders the penalty order untenable. The Tribunal also referred to a precedent emphasizing that failure to specify the exact limb of misreporting before imposing penalty invalidates the proceedings. Issue 4: Discretionary nature of penalty under section 270A and requirement of bonafide explanation The Tribunal observed that penalty under section 270A(1) is discretionary ("may" be imposed) and not mandatory. Penalty is a punitive measure distinct from tax or interest and should not be levied lightly or routinely. The revenue bears the onus to prove the assessee's default under the specific provisions. In this case, the assessee cooperated fully, disclosed all material facts, admitted income based on estimation, and the AO accepted the return without addition. The Tribunal found the explanation bonafide and rejected the penalty imposition. It emphasized that penalty should not be imposed where the assessee has disclosed correct and complete particulars to the satisfaction of the AO. Application of law to facts and treatment of competing arguments The Revenue argued that the AO did not resort to estimation and that the admitted income was based on incriminating evidence found during search, justifying penalty for misreporting. The Revenue also pointed to the Managing Director's admission of undisclosed sales and additional income. The Tribunal rejected these contentions, holding that the admitted income was itself an estimate, accepted by the AO, and no additions or disallowances were made. The absence of any specific reference to the clauses of section 270A(2) and (9) in the penalty proceedings was fatal. The Tribunal agreed with the assessee and the CIT(A) that penalty cannot be levied where income is admitted on estimation basis and accepted by the AO, and where procedural safeguards under section 270A are not followed. Significant Holdings "We are of the considered opinion that without the charge of under reporting of income, the AO cannot straightaway jump with the charge of misreporting of income." "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." "Penalty u/s 270A of the Act cannot be levied when the income was arrived at based on estimation. Further the return income was duly accepted by the AO as no other disallowance or additions were made to the returned income." "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." "Unless the person has been communicated the specific incidence vis-`a-vis action triggering the 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 the principles of natural justice." "A mere declaration of additional income which was estimated as being around 30% of regular turnover and even offered for taxation before the completion of assessment by itself will not amount to under reporting resulting in misreporting of income." The Tribunal dismissed the Revenue's appeal and upheld the deletion of penalty under section 270A, affirming that the penalty was not sustainable due to procedural lapses, absence of under-reporting, acceptance of estimated income, and the discretionary nature of penalty imposition.
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