Penalty Cannot Survive Without Clear Identification of Section 270A Clause, Rules ITAT 

The ITAT Mumbai set aside a penalty of Rs 5.57 lakh imposed on the assessee company, Anshul Specialty Molecules Private Limited, for the assessment year 2019-20, holding that the penalty notice issued by the assessing officer was legally defective.

In the case of the assessee, the tax authorities had noticed that during the year under consideration, i.e., AY 2019-20, the assessee had received dividend income amounting to Rs 8.93 crore and claimed an exemption on the same in its income tax return. Considering the same, the assessee’s case was selected for scrutiny, and notices under Section 143(2) and 142(1) of the Income Tax Act were issued. During the probe, the tax authorities noted that “the assessee has not bifurcated the expenditure claimed by it as those incurred for earning exempt income and for taxable income”.

Consequently, the Assessing Officer (AO) disallowed 1% of the annual average of the monthly average of the opening and closing balances of the total value of investment aggregating to Rs 38.26 lakh under section 14A r.w.r. 8D of the Income Tax Rules and completed the assessment, declaring the total income of the assessee at Rs 20.68 crore. Additionally, a penalty of Rs 5.57 lakh was imposed on the grounds of under-reporting of income.

The assessee challenged the penalty before the ITAT, arguing that the penalty notice and subsequent orders did not specify the exact clause of Section 270A(2) under which the alleged under-reporting of income fell. The company contended that such a specification is mandatory because Section 270A contains several distinct situations that may constitute under-reporting.

After examining the records, the Tribunal observed that the Assessing Officer had merely initiated penalty proceedings without identifying the relevant clause applicable to the assessee’s case. The tribunal cited earlier judgements of the Rajasthan High Court and the Delhi High Court, which flagged that the tax authorities must clearly specify the precise charge while initiating penalty proceedings.

ITAT quashed the impugned penalty, holding that the failure to identify the applicable limb of Section 270A rendered the notice and the resulting penalty order invalid. Since the appeal was allowed on this legal ground, the Tribunal did not consider the merits of the disallowance.