ITAT Holds Mere Disallowance of Employees’ PF/ESI Contribution Insufficient:

Nascent Info Technologies Pvt. Ltd. filed its return of income for Assessment Year 2017–18, declaring a total income of Rs. 6,14,25,720. The AO completed the assessment under Section 143(3) of the Income Tax Act, 1961, on 5 December 2019, determining the total income at Rs. 6,21,42,330 after disallowing employees’ contributions towards PF and ESI amounting to Rs. 7,16,611.

Subsequently, penalty proceedings were initiated under Section 270A, alleging misreporting of income, and a penalty of Rs. 4,42,866 was imposed by order dated 20 March 2025.

Aggrieved by the penalty, the assessee appealed before the CIT(A, which dismissed the appeal. The Tribunal considered the assessee’s challenge to the penalty and relied on the decision of the co-ordinate Bench in Hiro Mulchand Tanwani Vs ITO Case. The co-ordinate Bench had held that a mere disallowance of a claim does not automatically constitute misreporting of income under Section 270A. The Revenue must establish that the assessee’s case falls within the specific circumstances enumerated under Section 270A(9).

Applying this principle, the Tribunal observed that the penalty in the present case arose from the disallowance of employees’ contributions towards PF and ESI. However, the material on record did not establish that the assessee’s conduct fell within any of the statutory categories of misreporting prescribed under Section 270A(9).

The Tribunal accordingly held that the mere disallowance of the claim, by itself, could not sustain a penalty for misreporting of income. Accordingly, the Tribunal allowed the assessee’s appeal. It set aside the order of the CIT(A) and deleted the penalty of Rs. 4,42,866 imposed under Section 270A of the Income Tax Act, 1961.