The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has deleted a penalty of Rs. 1,03,15,656 imposed on an interior decoration company for alleged misreporting of income.

The bench of Anikesh Banerjee (Judicial Member) and Makarand Vasant Mahadeokar (Accountant Member) observed that cash receipts disclosed during a survey could not, by that fact alone, attract a penalty under Section 270A of the Income-tax Act when the company subsequently included the amount in its return and the Assessing Officer accepted that return without making an addition.

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Income Tax officials conducted a survey at the company’s business premises on September 22, 2016. During the survey, the company declared cash receipts of ₹1.56 crore. It later offered that amount to tax in its return for assessment year 2017–18.

The company filed an original return declaring income of ₹1,61,91,500 and subsequently filed a revised return declaring ₹1,62,71,890. The Assessing Officer completed scrutiny assessment in December 2019 at the revised returned income of ₹1,62,71,890, without making any addition.

The Assessing Officer initiated penalty proceedings. The officer reasoned that the company had disclosed the ₹1.56 crore because of the survey and would not have declared it otherwise. The penalty authority treated the amount as under-reported income resulting from misreporting and imposed a penalty of ₹1,03,15,656, calculated at 200% of the tax on that amount. The Commissioner of Income Tax (Appeals) upheld the penalty.

The company argued that the penalty lacked its basic statutory foundation: the income assessed was the same as the income declared in its return. It also challenged the initiation of proceedings, saying the Assessing Officer had failed to clearly specify whether the proposed penalty was for under-reporting or for misreporting.

The Tribunal accepted that there was no difference between the income processed under Section 143(1) and the income assessed under Section 143(3). In those circumstances, it held, the requirements for identifying “under-reported income” under Section 270A(2) and (3) were not met.

The Bench also found the initiation of penalty proceedings vague. The assessment order did not clearly identify the applicable charge, even though under-reporting and misreporting carry materially different penalty consequences. The company was entitled to know the precise allegation it had to answer, the Tribunal said.

The department’s case rested on the view that the survey had prompted the disclosure. The Tribunal held that this was insufficient to establish misreporting under Section 270A(9). The amount had been included in the return filed after the survey, and the Assessing Officer had accepted that return without modification.

The order noted that there was no finding of a false entry in the books, an unsupported expenditure claim, or another specified ground of misreporting under Section 270A(9). The Assessing Officer’s belief about what the company mighthave done in the absence of a survey could not replace proof of the statutory conditions for penalty.

The Tribunal further observed that the survey took place during the relevant financial year, before the accounts had been finalised and before the time for filing the return had expired. Disclosure during a survey at that stage did not itself mean that the company had failed to report income, particularly when it subsequently included the amount in its return.

The Bench relied on the Gujarat High Court’s decision in Principal Commissioner of Income-tax v. Prafulbhai Vallabhdas Fuletra, which addressed the application of Section 270A where income disclosed following a search or survey was included in the return and accepted in assessment.

Holding that neither under-reporting nor the alleged misreporting had been established, the ITAT allowed the company’s appeal and deleted the ₹1,03,15,656 penalty.

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