ITAT Holds Estimated Disallowance Under Rule 8D Cannot Justify Penalty; Deletes 6.23 Lakhs Section 270A Penalty

The ITAT Delhi has allowed an appeal by deleting the penalty of Rs. 6.23 lakh imposed on Inox Infrastructure Limited under Section 270A of the Income Tax Act and observed that a disallowance calculated as per Section 14A read with Rule 8D, which is based on estimation and a prescribed formula, cannot itself lead to a case of misreporting of income.

The appellant, Inox Infrastructure Limited, declared a total income of Rs 31.28 lakh in the income returns for the assessment year 2017-18. During the assessment proceedings, the Assessing Officer (AO) calculated another amount of Rs 9.44 lakh in the head of disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962, consequently assessing the total income at Rs 40.72 lakh. Concurrently, penalty proceedings were initiated against the company.

In appeal, the assessee argued that the estimation of disallowance was based on a prescribed formula and therefore could not lead to a penalty for misreporting income unless any concealment of facts is proved. The Tribunal accepted this line of reasoning after noting that the CIT(A) had already directed the Assessing Officer to ensure the disallowance was restricted to the total expenditure incurred by the assessee during the year. Since the quantum addition itself was not final in its original form and required fresh calculation, the penalty could not stand on firm footing.