2025 (4) TMI 717 - AT - Income Tax

Levy of penalty u/s 270A - Adjustment u/s 143(1)(a) - under reporting of income - disallowances of expenses on which the assessee had failed to deduct TDS, in terms of provisions of section 40(a)(ia) - whether the disallowance of such expenses now made in assessment framed under section 143(3) of the Act would tantamount to under reporting of the income as per the provisions of section 270A(2)? - HELD THAT - U/s 143(1)(a) of the Act adjustments to income are to be made only of apparent mistakes emanating from data furnished in the return itself. Like arithmetical errors additions/disallowances reported in tax audit report but not considered for computing income and likewise. Such additions on the face of it are due to apparent mistakes while computing taxable incomes. That while otherwise complete disclosure of incomes additions/disallowances are made but inadvertently they are missed to be considered while computing taxable incomes. Such incorrect reporting by mistake the law has deliberately and consciously kept out of the scope of levy of penalty treating only incomes assessed over and above that determined u/s 143(1)(a) of the Act as underreported income liable to levy of penalty u/s 270A of the Act. The purport objective and intention of law derived from section 270A(2)(a) by treating only income assessed which is greater than income determined u/s 143(1)(a) of the Act as underreported income is very clear that apparent mistakes in the computation of income are not to be subject to imposition of any penalty. Section 270A(2)(a) of the Act has to be read likewise that additions which are subject matter of adjustments u/s 143(1)(a) of the Act are outside the purview of being subject to penalty on account of underreporting of income. It is only income determined after scrutiny assessment which qualifies as underreported income . In the facts circumstances of the case since the addition made to the income of the assessee was an apparent mistake which was liable to be adjusted in the intimation made u/s 143(1)(a) of the Act the addition of the same made in the regular assessment would not qualify as under reported income. Having said so since we have held the impugned income not to qualify as under reported income there is no question of the same qualifying as misreported income since it is only when the under reported income is in consequence of misreporting that it qualifies as misreported of income - Decided in favour of assessee.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment were:

1. Whether the penalty under section 270A of the Income Tax Act, 1961, for under-reporting or misreporting of income, was applicable to the assessee.

2. Whether the addition made to the income of the assessee, due to non-deduction of TDS on certain expenses, constituted under-reporting or misreporting of income.

3. Whether the penalty levied by the Assessing Officer (AO) at 200% for misreporting was justified, or if the reduction to 50% by the Commissioner of Income Tax (Appeals) [CIT(A)] was appropriate.

ISSUE-WISE DETAILED ANALYSIS

1. Applicability of Penalty under Section 270A

Relevant legal framework and precedents: Section 270A of the Income Tax Act provides for penalties on under-reported income. Sub-section (2) specifies conditions under which income is considered under-reported, while sub-section (9) lists instances of misreporting.

Court's interpretation and reasoning: The Tribunal analyzed whether the addition due to non-deduction of TDS fell under under-reporting or misreporting as per sections 270A(2) and 270A(9). It emphasized the importance of the income being greater than that determined in the return processed under section 143(1)(a) for it to qualify as under-reported.

Key evidence and findings: The Tribunal noted that the disallowance was reported in the tax audit report and should have been adjusted in the intimation under section 143(1)(a). The AO's failure to make this adjustment was crucial.

Application of law to facts: The Tribunal concluded that since the disallowance was reported and not adjusted in the intimation, it did not qualify as under-reported income. Consequently, no penalty was warranted under section 270A(2).

Treatment of competing arguments: The Tribunal considered the Revenue's argument that the penalty was justified but found it unsupported by the facts and the law.

Conclusions: The Tribunal held that no penalty for under-reporting was applicable as the addition was an apparent mistake that should have been adjusted earlier.

2. Misreporting of Income

Relevant legal framework and precedents: Section 270A(9) outlines specific instances of misreporting, such as misrepresentation or suppression of facts.

Court's interpretation and reasoning: The Tribunal agreed with the CIT(A) that the case did not fit any instance of misreporting as per section 270A(9).

Key evidence and findings: The Tribunal noted that the assessee had disclosed the TDS violation in the tax audit report, which was the basis for the scrutiny assessment.

Application of law to facts: The Tribunal determined that since the income did not qualify as under-reported, it could not be considered misreported either.

Treatment of competing arguments: The Tribunal dismissed the Revenue's contention that the penalty for misreporting was justified.

Conclusions: The Tribunal held that no penalty for misreporting was applicable as the addition did not qualify as under-reported income.

SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: The Tribunal emphasized, "apparent mistakes in the computation of income are not to be subject to imposition of any penalty."

Core principles established: The judgment clarified that adjustments due to apparent mistakes, which should be made under section 143(1)(a), do not constitute under-reporting or misreporting.

Final determinations on each issue: The Tribunal set aside the penalty for under-reporting and confirmed the CIT(A)'s decision to not levy a penalty for misreporting. The AO was directed to delete the penalty levied under section 270A.

The appeal of the assessee was allowed, and the appeal of the Revenue was dismissed.