Bona Fide Reliance on Form 16 Can’t Be Treated as Misreporting: ITAT Deletes Rs. 51.20 Lakh Penalty on ESOP Exemption Claim

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has deleted a penalty of ₹51.20 lakh imposed under Section 270A of the Income Tax Act after holding that an assessee who claimed exemption on ESOP-related income based on Form 16 issued by his employer could not be accused of misreporting income when the claim was made under a bona fide belief. The bench of Keshav Dubey (Judicial Member) and Waseem Ahmed (Accountant Member) has observed that Section 270A requires a structured process. It explained that the Assessing Officer must first establish the exact category of under-reporting under Section 270A(2), and only thereafter determine whether the case falls within any category of misreporting under Section 270A(9). According to the Tribunal, such statutory requirements cannot be bypassed. The dispute arose for Assessment Year 2022–23 in the case of Renil E K Kumar, who was employed with Wipro Limited and had filed his return declaring total income of ₹84.27 lakh after claiming exemption of ₹82.05 lakh under Section 10(10CC) in relation to ESOP-related non-monetary perquisites. During scrutiny assessment, the Assessing Officer rejected the exemption claim and added the amount back to taxable income, increasing the assessed income to ₹1.66 crore. Following the assessment proceedings, the department initiated penalty proceedings under Section 270A alleging under-reporting of income and subsequently treated the matter as one involving under-reporting resulting from misreporting. The Assessing Officer imposed a penalty of ₹51.20 lakh, equivalent to 200% of tax on the alleged under-reported income of ₹82.05 lakh. The assessee argued that the exemption claim was made solely on the basis of Form 16 issued by the employer, which reflected the amount as exempt under Section 10 and did not indicate any tax deduction on that component. The assessee maintained that he relied entirely on the employer-issued document and acted under an honest and bona fide belief while filing the return. It was also pointed out that once the issue came to light, the refund amount received from the department was returned and taxes were paid without challenging the assessment order. The department however, took a strict view and held that ignorance of law could not be accepted as a defence. The Assessing Officer also observed that the assessee occupied a senior managerial position at a multinational company and therefore could not claim lack of knowledge regarding taxation provisions. Revenue further argued that had the return not been selected for scrutiny, the alleged tax leakage would have remained undetected. The Tribunal found substantial defects in the manner in which the penalty proceedings had been initiated and concluded. It noted that the show cause notice issued under Section 270A merely alleged “under-reporting of income,” whereas the final penalty order proceeded on the basis of “under-reporting resulting from misreporting.” The Tribunal observed that the Assessing Officer himself appeared uncertain regarding the exact charge under which penalty was sought to be imposed. The Tribunal accepted the assessee's explanation as bona fide and observed that where an employer itself reflects a particular amount as exempt in Form 16 and no tax is deducted at source, an employee may naturally proceed under the belief that the treatment adopted by the employer is correct. The Tribunal held that the assessee had disclosed all material facts and therefore qualified for protection under Section 270A(6)(a). The Tribunal also made significant observations on the nature of penalty provisions and stated that penalty cannot be imposed mechanically or as a routine consequence of every addition or disallowance. It emphasized that the word “may” in Section 270A indicates discretion and that Revenue authorities must strictly establish the specific statutory conditions before invoking penalty provisions. The Bangalore ITAT directed deletion of the entire penalty of ₹51.20 lakh imposed under Section 270A and allowed the appeal in favour of the assessee. Case Details Case Title: Renil E K Kumar Versus Deputy Commissioner of Income Tax Citation: JURISHOUR-1331-ITA-2026(BANG) Case No.: ITA No.: 2468/Bang/2025 Date: 12-05-2026 Counsel For Appellant: Hemant Pai and Ms. Smrithi Athreya, Advocates Counsel For Respondent: Subramanian – JCIT DR Click Here To Read Order Read More: Modi–Meloni Moment | Melody Attracts 5% GST Vide This Notification

Bona Fide Reliance on Form 16 Can’t Be Treated as Misreporting: ITAT Deletes Rs. 51.20 Lakh Penalty on ESOP Exemption Claim

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