Merely accepting disallowance does not mean assessee under reported income u/s 270A

Merely because assessee accepted disallowance made by Assessing Officer, it cannot automatically lead to conclusion that assessee under reported income under Section 270A – ITAT 

ABCAUS Case Law Citation:
ABCAUS 3746 (2023) (05) ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming the action of the Assessing Officer (AO) in imposing penalty under Section 270A of the Income Tax Act, 1961 (the Act).

The assessee was a resident corporate entity. For the assessment year under dispute, the assessee filed a revised return of income declaring reduced income.

In course of assessment proceedings, the Assessing Officer noticed that in the year under consideration, assessee had earned exempt income and disallowed expenses on ad hoc basis and not in accordance with Rule 8D(2).

The AO computed disallowance in term with the said rule and computed the disallowance at a much higher amount than suo moto disallowed by the AO. 

The assessee accepted the disallowance without litigating further. 

Subsequently, the Assessing Officer initiated proceedings for imposition of penalty under Section 270A of the Act, alleging under reporting of income by the assessee and ultimately, passed an order imposing penalty under Section 270A of the Act.

The first appellate authority confirmed the penalty imposed.

Before the Tribunal the assessee submitted that in the year under consideration, the assessee had earned exempt income by way of dividend and the assessee had suo moto computed the disallowance under Section 14A read with Rule 8D to the extent of exempt income earned, by following the ratio laid down in various decisions rendered by Hon’ble High Courts and Tribunal.

He submitted that merely because the assessee accepted the disallowance made by the Assessing Officer, it cannot lead to the conclusion that the assessee had under reported its income. 

The Tribunal observed that as  per the ratio laid down in   various judicial precedents, the disallowance under Section 14A read with Rule 8D, cannot exceed the quantum  of  exempt  income  earned  during  a  particular  assessment year. 

The Tribunal opined that following the settled legal position, the assessee had restricted disallowance under Section 14A to the quantum of exempt income earned during the year. Thus, there was a valid reason available to the assessee for restricting the disallowance under Section 14A of the Act to the extent of exempt income earned.

The Tribunal stated that merely because assessee accepted the disallowance made by the Assessing Officer, it cannot automatically lead to the conclusion that the assessee had under reported its income.

The Tribunal observed that penalty under Section 270A of the Act is not automatic. Sub-section(6) of section 270A  carves out exceptions where in certain instances the  income assessed cannot be treated as under reported  income.

The Tribunal opined that in the facts of the present case, the assessee’s case will fall within the exception provided under section 270A(6)(a), as, the explanation offered by the assessee with regard to the disallowance made under Section 14A was a valid and reasonable explanation. 

The Tribunal held that the penalty imposed under Section 270A of the Act in the facts of the present case is unsustainable.

Accordingly, the Tribunal deleted the penalty imposed and allowed the appeal.

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