The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has quashed a penalty of ₹5.57 lakh imposed on assessee under Section 270A of the Income Tax Act, holding that the Assessing Officer failed to specify the exact statutory clause under which the assessee was alleged to have under-reported income.
The bench of Kavitha Rajagopal (Judicial Member) and Vikram Singh Yadav ( Accountant Member) has observed that Section 270A(2) contains several distinct categories of under-reporting, ranging from differences between returned and assessed income to cases involving reassessment, deemed income under MAT provisions, and reduction of losses. Therefore, a taxpayer must be informed of the precise allegation being levelled against it.
The assessee company, engaged in the business of manufacturing and selling pharma intermediates, flavour and fragrance products, and specialty chemicals, had filed its income tax return declaring total income of ₹20.30 crore for AY 2019-20. During scrutiny assessment proceedings, the Assessing Officer noticed that the company had earned exempt dividend income of ₹8.93 crore and had not made any disallowance towards expenditure allegedly attributable to earning such exempt income.
Invoking Section 14A read with Rule 8D of the Income Tax Rules, the Assessing Officer computed a disallowance of ₹38.26 lakh and added the amount to the assessee’s income. Consequently, assessment was completed under Section 143(3) read with Section 144B, determining total income at ₹20.68 crore. Simultaneously, penalty proceedings under Section 270A for alleged under-reporting of income were initiated.
Subsequently, a penalty order dated March 21, 2025 levied a penalty of ₹5.57 lakh against the company.
The assessee challenged the penalty before the Commissioner of Income Tax (Appeals). However, the appellate authority upheld the penalty on the ground that the assessee had failed to demonstrate that all relevant facts had been properly disclosed along with supporting evidence.
Aggrieved by the decision, the company approached the ITAT.
Before the Tribunal, the assessee raised an important legal challenge through additional grounds of appeal. It argued that neither the assessment order nor the penalty notices identified the specific clause of Section 270A(2) under which the alleged under-reporting of income was said to have occurred.
The assessee contended that Section 270A contains multiple situations that can constitute under-reporting of income and that the tax authorities are required to clearly indicate the precise statutory charge. Failure to do so, according to the assessee, vitiated the entire penalty proceedings.
Reliance was placed on judicial precedents including decisions of the Delhi High Court in Schneider Electric South East Asia (HQ) Pte. Ltd. and the Rajasthan High Court in G.R. Infra Projects Ltd., which emphasized that penalty notices must specify the exact charge.
The Tribunal admitted the additional grounds, observing that they raised pure questions of law going to the root of the validity of the penalty proceedings.
After examining the notices issued under Section 274 read with Section 270A, the Bench found that the Assessing Officer had merely initiated penalty proceedings for under-reporting of income without identifying which of the specific clauses under Section 270A applied to the assessee’s case.
Referring to the Rajasthan High Court’s ruling in G.R. Infra Projects Ltd. and the Delhi High Court’s judgment in Schneider Electric South East Asia (HQ) Pte. Ltd., the Tribunal held that tax authorities are duty-bound to specify the relevant limb of Section 270A before imposing penalty. A vague notice lacking such particulars cannot sustain penalty proceedings.
The Tribunal concluded that the Assessing Officer’s failure to identify the applicable clause of Section 270A rendered the penalty notice defective and the consequent penalty order legally unsustainable.
Holding that the notice itself suffered from a fundamental defect, the Bench quashed both the penalty notice and the penalty order. Since the matter was decided on this legal issue, the Tribunal did not consider it necessary to examine the merits of the underlying disallowance under Section 14A.
Accordingly, the appeal of the assessee was allowed.
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