HC Rules Penalty Under Section 270A Set Aside for Bona Fide PF/ESI Claim

The assessee filed its return for AY 2019–20 declaring income of Rs. 70.11 crore. While processing the return under Section 143(1), the CPC made a disallowance of Rs. 26.72 lakh towards the delayed deposit of employees’ PF/ESI contribution. The same disallowance was later repeated in assessment proceedings under Sections 143(3) read with 153A.

Although the CIT(A) deleted the addition, the ITAT restored it following the Supreme Court ruling in Checkmate Services Pvt. Ltd. v. CIT. Based on this, the Assessing Officer imposed a penalty under Section 270A for under-reporting of income. The assessee then filed a revision under Section 264, which was rejected without any reasoning, leading to the present writ.

Main Issue: Whether a penalty under Section 270A can be levied when the addition was already made during processing under Section 143(1) and the claim was based on the prevailing legal position.

HC’s Decision: The High Court allowed the writ and set aside both the revision and penalty orders. It held that the Commissioner failed to properly exercise powers under Section 264, as the revision was rejected without giving reasons. Such an approach was not sustainable. On penalty, the Court found that there was no “under-reporting” since the disallowance had already been made at the processing stage, and the assessed income did not exceed the processed income.

The Court also emphasised that the penalty is not automatic. The assessee had made the claim based on a binding High Court judgement existing at the time, and a later Supreme Court ruling could not retrospectively justify penal action. Since the issue was debatable and all facts were fully disclosed, the case qualified as a bona fide claim. Therefore, the penalty was held to be unsustainable.

To Read Full Judgment, Download PDF Given Below