ITAT deletes penalty in fake Income Tax deduction case for Defective Penalty Notice

The ITAT sat aside a penalty notice passed by the tax authorities under Section 270A of the Income Tax Act, holding that notices issued without properly specifying alleged charges are considered a violation of the principles of natural justice.

On the recommendation of a tax consultant, Girish Raghuram (assessee) had filed a revised return, declaring the total income of Rs 12.88 lakh, after claiming deductions under Chapter VI-A. The consultant had assured the assessee that the action would enhance his total refund amount. The assessee was aged 50 years and was unaware of the income tax rules and relevant deductions. Consequently, they relied on the consultant’s advice and claimed deductions under Sections 80GGC, 80EEB, and 80D. The tax authorities selected the tax for complete scrutiny under the E-Assessment Scheme, 2019, on grounds of deductions claimed under the revised return.

Later, the assessee became aware of the nature of the claimed deductions. Subsequently, upon realising it, he accepted his mistake of incorrectly claiming deductions amounting to Rs 30.51 lakh without supporting evidence. Considering the same, the tax authorities disallowed the complete amount of the claimed deduction and made an addition to the assessee’s income, resulting in the imposition of a total demand amounting to Rs 10.08 lakh on the assessee’s income. However, penalty proceedings were initiated against the assessee under Section 270A(8) for the alleged misreporting of income. Resulted in the imposition of a Rs 18.94 lakh penalty.

When the assessee took the case before the ITAT Chennai, the tribunal endorsed the taxpayer. It noted that the penalty notice merely used general language without clearly stating which specific type of misreporting was alleged. Such a lack of clarity under penalty notices reflects a violation of the principles of natural justice, since the assessee was not informed of the exact charges that had been levied on him to defend. Consequently, the tribunal held that the impugned penalty notice was invalid as per the law and entirely quashed the same.