Penalty u/s 270A quashed for no satisfaction on what was under reporting & misreporting by assessee

Penalty u/s 270A quashed as there was no satisfaction in the penalty order on what exactly was under reporting of income and what was misreporting of income by the assessee

In a recent judgment, ITAT Raipur deleted penalty under section 270A observing that there was no satisfaction brought out in the penalty order regarding what was exactly under reporting of income by the assessee and what was misreporting of income by the assessee and penalty was simply levied without application of mind only on the basis that ad-hoc disallowance.

ABCAUS Case Law Citation:
4899 (2025) (12) abcaus.in ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A), nfac in confirming penalty u/s 270A(9)(c)of the Income Tax Act, 1961 (the Act).

During The course of the assessment, the Assessing Officer (AO) noted on verification of labour payment vouchers and register that the payments to the labour were made in the attendance register by putting thumb mark or signature. However, no vouchers for payments were prepared, but receipt of payments made by the assessee were available with the assessee.

AO treated such labour payments as false claim of expenses made by the assessee and accordingly, he disallowed the entire expenses and initiated penalty u/s. 270A(1) r.w.s. 270A(9)(c) of the Act.

The CIT(A), NFAC partially allowed the appeal of the assessee substantially and had held that the AO was not justified in disallowing entire labour expenses. However, on ad-hoc basis and considering the nature of business of the assessee, the CIT(Appeals)/NFAC restricted the disallowance @ 20% of the labour expenses.

The Tribunal observed that the AO levied penalty u/s 270A of the Act and even though the CIT(Appeals)/NFAC upheld the disallowance @ 20% of labour expenses but in the penalty order the AO mentioned that for under reported income, penalty is 50% and for mis-reported income, it is 200% and accordingly, he computed and levied penalty u/s.270A of the Act @ 200%

The Tribunal further noted that as per the assessment order, penalty was initiated u/s. 270A(1) r.w.s. 270A(9)(c) of the Act but in the penalty order there was no such specification of the provisions in which penalty was levied and as per penalty order such levy of penalty had been done u/s. 270A of the Act for both under-reporting and misreporting of income.

The Tribunal observed that there are two limbs i.e. under-reporting of income and misreporting of income. In the entire penalty order, the AO had failed to bring out any satisfaction regarding what was the underreporting of income by the assessee and what was the misreporting of income by the assessee for which, penalty was levied u/s. 270A of the Act @ 200%.

The Tribunal observed that it was a matter of common knowledge that such penalty proceedings was not a proceedings to be carried out in a routine manner and there requires specific satisfaction to be arrived at by the quasi judicial authority for levy of such penalty since it is a financial hardship added to the liability of the assessee. In the present case, there was no satisfaction brought out in the penalty order levying penalty regarding what was exactly under reporting of income by the assessee and what was misreporting of income by the assessee.

The Tribunal noted that it was very much discernable from the penalty order that such penalty had simply been levied without application of mind by the AO only on the basis that ad-hoc disallowance had been upheld by the CIT(Appeals) @ 20%. The penalty order being silent of any reasoning and without any satisfaction arrived at by the imposing authority, therefore, was vitiated, perverse, bad in law, liable to be quashed.

The Tribunal further observed that against the penalty order when the assessee preferred an appeal before the CIT(Appeals), it while disposing the appeal of the assessee had not followed again the mandate of Section 250(4) & (6) of the Act and it had simply upheld the penalty order of the A.O without independent application of mind or reasoning in its order. As per the mandate of adjudication by a quasi-judicial authority it had miserably failed to adjudicate the same through principles of substantive justice. The order of the CIT(Appeals) had been done in a summary manner without application of mind and one such instance is that as per quantum the disallowance which had been restricted by the CIT(Appeals) was at 20% of the impugned disallowance.

The Tribunal also observed that provisions of Section 270A(6)(c) of the Act clearly states that the under-reported income for the purpose of this section shall not include the amount of underreported income determined on the basis of an estimate.

The Tribunal held that entire substantive additions had been done on estimate basis only which therefore did not fall within the parameters of under-reported income and as there was no satisfaction brought on record by the AO levying penalty u/s 270A of the Act, therefore, on examination of entire facts and circumstances along with legal principles such levy of penalty in the hands of the assessee was arbitrary, bad in law, void ab initio and hence quashed.

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