ITAT Deletes Section 270A Penalty as AO Failed to Specify Charge of Misreporting under Income Tax Act

The Income Tax Appellate Tribunal (ITAT), Bangalore, has held that ad hoc disallowance of business expenditure and disallowance under Section 40(a)(ia) for non-deduction of TDS, by themselves, do not establish misreporting warranting penalty.

The assessee is engaged in the wholesale trade of rice, pulses and other commodities and filed his return declaring an income of Rs 68.76 lakh. During scrutiny assessment, the AO disallowed 80% of certain loading and unloading expenses on the ground that the assessee failed to produce Aadhaar details and other supporting documents of the labourers. Later, 30% of transportation expenses were disallowed under Section 40(a)(ia) for non-deduction of tax at source. The total disallowance amounted to Rs 16.05 lakh. The AO initiated penalty proceedings under Section 270A and imposed a penalty of Rs 11.02 lakh by treating the additions as “misreporting of income“.

The National Faceless Appeal Centre (NFAC) upheld the penalty.

The Tribunal found that the penalty order merely referred to “misreporting” without identifying the relevant clause under Section 270A(9). It further held that an estimated disallowance of labour expenses due to lack of supporting documents and a disallowance under Section 40(a)(ia) for non-deduction of TDS do not, by themselves, establish misreporting of income. The Tribunal also noted that the assessee had particularly opted not to receive appellate notices through email. Despite this, notices were issued only through email, which failed to provide an effective opportunity of hearing before the CIT(A).

The tribunal allowed the assessee’s appeal and deleted the penalty. It observed that Section 270A(9) contains different categories of misreporting, and before imposing a penalty at the increased rate, the AO must clearly identify the specific clause applied and give reasons in writing to prove how the assessee’s conduct falls within that clause.

The Tribunal set aside the penalty order and directed the AO to delete the penalty imposed under Section 270A.