Penalty u/s 270A can not be levied for additions made on estimation basis. Penalty on the basis of findings in quantum proceedings not independently examined can not be sustained.
ABCAUS Case Law Citation:
ABCAUS 3861 (2024) (02) ITAT
Important Case Laws relied upon by parties:
Jai Balaji Business Corporation Pvt. Ltd. Vs. ACIT
Pallava Textiles Pvt. Ltd. Vs. ITO
In the instant case, the assessee had challenged the order passed by the CIT(A), NFAC in confirming the penalty u/s 270A of the Income Tax Act, 1961 (the Act) for mis-reporting of income.
The assessee was carrying on real estate development business. It claimed various expenditure including depreciation, incurred wholly and exclusively for business. The assessee was subjected to Tax audit u/s 44AB and the audit report was filed along with the return of income.
The case was selected for scrutiny. During the course of scrutiny assessment, the AO asked the assessee to produce bills claimed as work expenses paid to individuals. All the payments are through Bank and were subject to TDS. As the assessee had not produced the bills all these expenses were added to the returned income.
Further, the AO found expenses for the installation charges was paid to various entities. All the payments were through Bank and were subject to TDS.
AO has asked for the bills of the same. However, assessee was unable to provide all the bills in respect of the expenses claimed. Hence AO disallowed 10 percent of the same and added to the total income of the assessee.
The assessee paid the damand generated due to said additions without opting to go in appeal. The AO in assessment order proposed section 270A penalty.
Later NFAC issued a show cause notice and a draft penalty SCN to the assessee. The assessee replied objecting to apply / levy the penalty. Finally, the section 270A penalty was levied on account of mis-reporting of income and the 200 percent of the tax on the addition was levied as penalty.
Aggrieved to the above the assessee filed appeal before ld. CIT(A).
The CIT(A) observed that it was clear that the assessee made a claim of expenditure not substantiated by any evidence and it was clear that these expenses were wrongly claimed to evade tax. Therefore, CIT(A) held that the case falls within the purview of sec. 270A(9)(a) of the Act.
Before the ITAT, the assessee submitted that AO had passed penalty order levying penalty u/s 270A(9)(a) of the Act for mis-reporting of income stating that there is a mis-representation or suppression of the facts. However, in assessment order, the AO had mentioned that levy of penalty u/s 270A(9)(c) of the Act i.e. claim of expenditure not substantiated by any evidence. The CIT(A) had confirmed the penalty u/s 270A(9)(a) of the Act, which was not the case Assessing Officer (AO) in assessment order.
Further, it was submitted that all expenses were supported by vouchers recorded in the books of accounts of the assessee and payment through banking channels and due TDS had been made and the books of accounts of the assessee were duly audited by statutory/tax auditors.
It was submitted that adhoc disallowance was made by AO for the reason best known to him cannot qualify for levy of penalty u/s 270A(9)(a) or (c) of the Act. He submitted that all the details for the purpose of assessment i.e. bills, vouchers, receipts, etc. were produced by the
assessee. At the time of assessment, the AO without specifying the specific discrepancies in the books of accounts of the assessee, disallowed 10% of the expenditure mentioning that assessee was unable to provide all details in respect of expenses claimed.
When addition made on estimate basis, penalty u/s 270A cannot be levied
The assessee relied upon the judgment of Co-ordinate Bench wherein it was held that an addition made on the basis of estimation cannot provide foundation for under-reported income for the purpose of imposition of penalty under s. 270A of the Act. In another case it was held by the Bench that when addition are made on estimate basis, penalty cannot be levied.
The Tribunal observed that the AO levied penalty u/s 270A(9)(c) of the Act since the assessee was not able to substantiate his expenses with concrete evidence. The NFAC/CIT(A) had agreed by the contention that there was no failure on the part of assessee to claim expenditure and it was admitted that assessee has substantiated the expenditure by evidence. On the other hand, the CIT(A) invoked the provisions of section 270A(9)(a) of the Act for misrepresentation or suppression of facts.
Penalty u/s 270A cannot be levied under a different limb
The Tribunal opined that under the above circumstances, if CIT(A) wanted to change the head of levying of penalty u/s 270A of the Act after agreeing with the contention of the assessee that it not falls under the limb for which the AO has levied the penalty, he should give a fresh notice to the assessee, so as to give an opportunity of hearing to explain the case of the assessee under the limb which the CIT(A) had invoked. Admittedly, the NFAC did not carry out this exercise. On this count, the penalty cannot be levied.
The Tribunal further observed that without prejudice to the above, the disallowance of expenditure made on estimate basis though the assessee had filed all the necessary details of expenditure, which is not accepted by the AO for the reason best known to him and as such, this case was not fit for levy of penalty u/s 270A(9)(a) or 270A(9)(c) of the Act.
The Tribunal further observed that in penalty order, the authorities proceeded merely on the basis of findings in the quantum proceedings and have not independently examined the matter for levy of impugned penalty. The Tribunal opined that even on this procedural count, penalty levied cannot be sustained.
Disallowance of expenditure by itself cannot be reason to levy penalty u/s 270A
The Tribunal further observed that though the addition was made on adhoc basis that by itself does not prove that there is any conclusive material to suggest that the assessee has not incurred this expenditure and penalty cannot be levied in this kind of situation, unless the claim of assessee was proved to be bogus or that any amount was not spent by assessee or received back by the assessee. In other words, the disallowance of expenditure by itself cannot be the reason to levy the penalty u/s 270A(9)(a) or 270(9)(c) of the Act.
The addition was only on estimate basis and the AO could not prove that there was non-incurring of this expenditure by assessee and there was no positive material to suggest that the assessee misrepresented or suppressed any facts either before AO or before CIT(A). Hence, it was is not a fit case for penalty u/s 270A(9)(a) or 270A(9)(c) of the Act.
Accordingly, the Tribunal deleted the penalty and appeal of the assessee was allowed.
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