2025 (5) TMI 31 - AT - Income Tax

Penalty u/s. 270A - Penalty @ of 200% of tax payable on under-reported income in consequence of misreporting (in relation to the disallowance of deduction u/s 80P(2)(d) and at the rate of 50% of tax payable on under-reported income (in relation to the other additions) - HELD THAT - Since the major quantum addition on account of claim u/s 80P has been deleted therefore on the facts brought out by the CIT(A) in the appeal order there is neither any under-reported income nor any under-reported income in consequence of any misreporting as the facts do not establish so and therefore penalty u/s 270A of the Act is not liable to be imposed and accordingly the order of the Ld. CIT(A) deleting the penalty is hereby upheld and the appeal of the Revenue is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

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

(a) Whether the Commissioner of Income Tax (Appeals) was justified in deleting the penalty imposed under section 270A of the Income Tax Act, 1961, particularly the penalty amounting to Rs. 1,00,18,578/- related to alleged under-reporting or misreporting of income arising from disallowance of deduction under section 80P(2)(d) of the Act;

(b) Whether the Revenue could establish that the assessee had under-reported or misreported income within the meaning of section 270A of the Act, especially in relation to cooperative bank status and eligibility for deduction under section 80P(4);

(c) Whether the explanations offered by the assessee in respect of disallowances under sections 40(a)(ia), 80G, and 80P(2)(d) were bona fide and sufficient to exclude the imposition of penalty under section 270A;

(d) The applicability and interpretation of section 270A of the Act, including the distinction between under-reporting and misreporting of income, and the conditions under which penalties can be levied;

(e) The scope for the Revenue to modify or amend grounds of appeal during the appellate proceedings.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Justification for Deletion of Penalty under Section 270A in Relation to Deduction under Section 80P(2)(d)

Relevant Legal Framework and Precedents: Section 80P(4) of the Income Tax Act excludes cooperative banks other than primary agricultural credit societies or primary cooperative agricultural and rural development banks from claiming deduction. The penalty under section 270A is imposed for under-reporting or misreporting of income. The Hon'ble High Court of Rajasthan in Chambal Fertilizers and Chemicals Ltd. v. Pr. CIT (2024) and the ITAT Mumbai Bench in Alrameez Construction (P.) Ltd. v. NFAC (2023) have held that penalty under section 270A cannot be sustained where the assessment involves debatable questions of law or facts, or where the Revenue fails to specify the limb of under-reporting or misreporting under which penalty is imposed.

Court's Interpretation and Reasoning: The Tribunal observed that the disallowance of deduction under section 80P(2)(d) was a debatable issue, which had been contested up to the Hon'ble Supreme Court and was ultimately deleted in the quantum appeal. The Tribunal concurred with the CIT(A)'s finding that no deliberate under-reporting or misreporting was established, as the claim was based on a bona fide interpretation of law. The Tribunal noted that the deletion of the disallowance itself negated the basis for penalty under section 270A.

Key Evidence and Findings: The assessee was a cooperative society registered under the Sikkim Co-operative Societies Act and claimed deduction under section 80P. The AO disallowed the claim, leading to additions and penalty proceedings. The CIT(A) deleted the disallowance and penalty after considering the assessee's consistent and bona fide explanations. The Tribunal relied on these findings and the judicial precedents cited.

Application of Law to Facts: Since the disallowance under section 80P(2)(d) was deleted on appeal, the foundation for penalty on under-reporting or misreporting of income ceased to exist. The Tribunal applied the legal principle that penalty cannot be imposed for debatable issues or bona fide claims, especially where the relevant addition is deleted.

Treatment of Competing Arguments: The Revenue argued that the cooperative banks in question were not entitled to deduction under section 80P(4), and hence the penalty was justified. The Tribunal rejected this argument on the ground that the issue was debatable and the disallowance was deleted, thus no under-reporting or misreporting was established.

Conclusions: The Tribunal upheld the deletion of penalty related to section 80P(2)(d) deduction, finding no case of under-reporting or misreporting of income.

Issue (c): Bona Fide Explanation and Penalty in Respect of Disallowances under Sections 40(a)(ia) and 80G

Relevant Legal Framework and Precedents: Section 270A(6)(a) excludes from under-reported income the amount in respect of which the assessee offers a bona fide explanation and discloses all material facts. The CIT(A) relied on this to delete penalty where the assessee consistently explained the disallowances under sections 40(a)(ia) and 80G.

Court's Interpretation and Reasoning: The Tribunal agreed with the CIT(A) that the assessee had been consistent and bona fide in its explanations regarding payments without TDS deduction (section 40(a)(ia)) and donation claims (section 80G). The Tribunal noted that the explanations were offered during assessment, penalty, and appellate proceedings, and all material facts were on record.

Key Evidence and Findings: The assessee's submissions and documentary evidence were considered sufficient to demonstrate bona fide explanations. The absence of deliberate concealment or suppression was emphasized.

Application of Law to Facts: The Tribunal applied section 270A(6)(a) to exclude these amounts from under-reported income, thereby negating the basis for penalty.

Treatment of Competing Arguments: The Revenue contended that penalty was warranted due to under-reporting. The Tribunal rejected this, emphasizing the bona fide nature of the explanations and full disclosure.

Conclusions: Penalty under section 270A was rightly deleted in respect of disallowances under sections 40(a)(ia) and 80G.

Issue (d): Interpretation and Applicability of Section 270A of the Income Tax Act

Relevant Legal Framework: Section 270A provides for penalty on under-reported income, with higher penalty rates in cases of misreporting. The section defines under-reporting and misreporting, and lists exclusions where penalty shall not be imposed, including bona fide explanations. Subsections (7) and (8) prescribe penalty rates of 50% for under-reporting and 200% for misreporting respectively.

Court's Interpretation and Reasoning: The Tribunal emphasized the distinction between under-reporting and misreporting, noting that misreporting involves misrepresentation, suppression, false entries, or failure to record transactions. The Tribunal found no evidence of misreporting in this case. The Tribunal also highlighted the statutory requirement that penalty cannot be levied if bona fide explanations are accepted.

Key Evidence and Findings: The Tribunal noted that the AO failed to establish deliberate misreporting or suppression of facts. The explanations were consistent and material facts were disclosed. The penalty notices lacked specification of the limb under which penalty was imposed.

Application of Law to Facts: Applying section 270A, the Tribunal found that the penalty imposed was not sustainable as the conditions for under-reporting or misreporting were not met.

Treatment of Competing Arguments: The Revenue argued for penalty based on disallowances and claimed misreporting. The Tribunal rejected these arguments due to lack of evidence and acceptance of bona fide explanations.

Conclusions: Penalty under section 270A was not justified and was rightly deleted by the CIT(A) and upheld by the Tribunal.

Issue (e): Right of Revenue to Modify Grounds of Appeal

Relevant Legal Framework: The Revenue sought leave to alter, add, delete or modify grounds of appeal. However, no such modifications were exercised during appellate proceedings.

Court's Interpretation and Reasoning: The Tribunal held that since no amendments were made, the ground did not require adjudication.

Conclusions: The ground was dismissed as not pressed.

3. SIGNIFICANT HOLDINGS

The Tribunal made the following crucial legal determinations:

"In view of the facts and circumstances of the case, and the prevailing position of law, I find that this is not a case of under-reporting or misreporting of income, within the meaning of section 270A of the Act. The alleged under-reporting by way of making an incorrect claim in law, was purely a result of oversight, for which a bona fide explanation was offered by the appellant. This is not a case of misrepresentation or suppression of facts, as all the relevant and material facts were already on record."

"Therefore, the action of AO in levying penalty of Rs. 1,43,036/- under section 270A at the rate of 50 percent of tax payable on under-reported income is not sustained. Further, the action of AO in levying penalty of Rs. 1,00,18,578/- under section 270A at the rate of 200 percent of tax payable on under-reporting in consequence of misreported income is also not sustained, as the related disallowance of deduction under section 80P has itself been deleted in appeal."

"Accordingly, the Jurisdictional Assessing Officer (JAO) is directed to delete the aggregate penalty of Rs. 1,01,61,614/- levied under section 270A, on these accounts."

Core principles established include:

• Penalty under section 270A cannot be imposed where the under-reporting arises from a bona fide claim or debatable question of law, especially where the addition or disallowance is deleted on appeal.
• Misreporting requires evidence of misrepresentation, suppression, false entries, or failure to record transactions; mere incorrect claims or oversight do not amount to misreporting.
• The assessee's consistent and bona fide explanations, along with full disclosure of material facts, exclude the imposition of penalty under section 270A(6)(a).
• Revenue must specify the basis (under-reporting or misreporting) in penalty proceedings; failure to do so renders the proceedings arbitrary and liable to be quashed.

Final determinations on each issue resulted in dismissal of the Revenue's appeal and upholding of the CIT(A)'s order deleting the penalty under section 270A of the Income Tax Act.