2025 (1) TMI 1472 - AT - Income Tax

Revision u/s 263 - AO failed to initiate penalty u/s. 270A for under-reporting of income vitiates the assessment order passed by the AO u/s. 153A of the Act thereby making assessment order erroneous as well as prejudiced to the interest of the Revenue - HELD THAT - As undisputed that there has been no Intimation issued by the revenue u/s. 143(1)(a) of the Act. Therefore it can be safely presumed that the assessee cannot be considered to have under-reported his income within the meaning of sub-section(2) of section 270A of the Act. In that event unless assessee s case falls in the ken of sub-section 2 the invocation of sub-section (9) of section 270A does not arise. Moreover machinery provisions to levy penalty u/s. 270A of the Act also fails because the penalty is computed @50% of the amount of tax payable on the under-reported income in consequence to mis-reporting of income or @200%of the amount of tax payable on the under-reported income in consequence to mis- reporting of income. So without computing under-reporting income as per sub-section (2) of section 270A of the Act machinery provisions also fails. It is a trite law that the penalty provisions must be construed strictly. Therefore the direction given by the Ld.PCIT modifying the assessment order with a direction to AO to invoke the applicable penalty provisions u/s. 270A(9)(e) on the entire sum is legally untenable - Appeal of the assessee is allowed.

ISSUES PRESENTED and CONSIDERED

The core legal issue in this case is whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking Section 263 of the Income Tax Act, 1961, to revise the assessment order for the Assessment Year 2020-21. Specifically, the question is whether the PCIT could direct the Assessing Officer (AO) to initiate penalty proceedings under Section 270A(9)(e) for misreporting of income, given the circumstances of the case.

ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents:

The legal framework revolves around Sections 263 and 270A of the Income Tax Act, 1961. Section 263 grants the PCIT the power to revise an assessment order if it is erroneous and prejudicial to the interests of the revenue. Section 270A deals with penalties for under-reporting and misreporting of income.

The PCIT relied on the precedent set by the Hon'ble Madras High Court in CIT v. Chennai Metro Rail Ltd., which held that the PCIT has the power to revise an assessment order to include penalty assessment.

Court's interpretation and reasoning:

The Tribunal analyzed whether the PCIT's directive to impose a penalty under Section 270A(9)(e) was legally valid. The Tribunal examined the applicability of Section 270A, which outlines the conditions under which a person is considered to have under-reported income. The Tribunal noted that for penalties under Section 270A to apply, the conditions in subsection (2) must be met.

Key evidence and findings:

The Tribunal found that the original return of income filed by the assessee did not lead to an intimation under Section 143(1)(a), which is a prerequisite for considering under-reporting of income under Section 270A(2)(a). The Tribunal also noted that the AO had already initiated penalty proceedings for a different amount, and the PCIT's directive was based on a different interpretation of the facts.

Application of law to facts:

The Tribunal applied the provisions of Section 270A and concluded that the assessee's case did not fall within the ambit of under-reporting as defined in subsection (2). Since the conditions for under-reporting were not met, the penalty provisions under Section 270A(9)(e) for misreporting could not be invoked.

Treatment of competing arguments:

The Tribunal considered the arguments presented by the PCIT and the assessee. The PCIT argued for the revision of the assessment order based on the alleged misreporting of income. The assessee, on the other hand, contended that the PCIT's action was not tenable as the conditions for under-reporting were not satisfied.

Conclusions:

The Tribunal concluded that the PCIT's directive to revise the assessment order and initiate penalty proceedings under Section 270A(9)(e) was legally untenable. The Tribunal set aside the PCIT's order, allowing the appeal in favor of the assessee.

SIGNIFICANT HOLDINGS

The Tribunal held that the PCIT's action to invoke Section 263 and direct the imposition of penalties under Section 270A(9)(e) was not supported by the legal framework. The Tribunal emphasized that penalty provisions must be construed strictly and that the conditions for under-reporting, as outlined in Section 270A(2), were not met in this case.

The Tribunal stated: "A bare reading of section 270A (supra) would reveal that there can be penalty levied for two lapses/faults: (i) under-reporting income for which assessee shall be levied 50% of the amount of tax payable on the under-reported income (ii) for under-reporting income in consequence to mis-reporting for which penalty leviable shall be leviable @200% of the amount of tax payable on the under-reported income."

In conclusion, the Tribunal found the PCIT's directive to be legally untenable and set aside the impugned order, thereby allowing the appeal of the assessee.

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