"Penalty Imposed on Corporate Entity for Under reporting Income Overturned on Appeal".

The assessee, a resident corporate entity, appealed against an order passed by the National Faceless Appeal Centre (NFAC), Delhi, which confirmed a penalty of Rs.77,020 under Section 270A (of Income Tax Act, 1961) for the assessment year 2017-18. The penalty was imposed due to alleged underreporting of income. The Assessing Officer noticed that the assessee had earned exempt income and disallowed expenses under Section 14A (of Income Tax Act, 1961). The Assessing Officer computed the disallowance at Rs.5,25,762, and after reducing the suo motu disallowance made by the assessee, made a net disallowance of Rs.4,98,512. The assessee accepted the disallowance without further litigation, leading to the initiation of penalty proceedings. The assessee argued that the disallowance was restricted to the extent of exempt income earned, following the ratio laid down in various judicial precedents. The assessee contended that accepting the disallowance made by the Assessing Officer does not automatically lead to the conclusion of underreporting of income. The penalty under Section 270A (of Income Tax Act, 1961) is not automatic, and the assessee's case falls within the exception provided under section 270A(6)(a) (of Income Tax Act, 1961). The penalty imposed was deemed unsustainable, and thus, it was deleted. The appeal was allowed.

This is an appeal by the assessee against order dated 26.08.2022 passed by the National Faceless Appeal Centre (NFAC), Delhi confirming the penalty imposed under Section 270A of the IncomeTax Act,1961 for an amount of Rs.77,020 for the assessment year 2017-18.

2. Briefly, the facts are, assessee is a resident corporate entity. For the assessment year under dispute, the assessee filed its return of income on 31.10.2017 declaring income of Rs.20,05,980. Subsequently, assessee filed a revised return of income on 28.08.2018 declaring income of Rs.18,11,980.

3. In course of assessment proceedings, the Assessing Officer

noticed that in the year under consideration, assessee had earned

exempt income, whereas, it has disallowed expenses to the tune of

Rs.27,250 under Section 14A (of Income Tax Act, 1961). Being of the view that the

disallowance made by the assessee is on ad hoc basis and not in

accordance with Rule 8D(2) (of Income Tax Rules, 1962), the Assessing Officer proceeded to

compute disallowance in term with the said rule and computed the

disallowance at Rs.5,25,762. After reducing the suo motu

disallowance made by assessee, he made a net disallowance of

Rs.4,98,512. The assessee accepted the disallowance without litigating

further. Be that as it may, based on the aforesaid disallowance, the

Assessing Officer initiated proceedings for imposition of penalty

under Section 270A (of Income Tax Act, 1961), alleging under reporting of income by

the assessee. Ultimately, the Assessing Officer passed an order

imposed penalty of Rs.77.020 under Section 270A (of Income Tax Act, 1961). Though,

the assessee filed an appeal challenging the imposition of penalty,

however, the first appellate authority confirmed the penalty imposed.

4. Before us, learned counsel for the assessee submitted that in the

year under consideration, the assessee had earned exempt income by

way of dividend amounting to Rs.27,250. Therefore, the assessee

restricted the disallowance under Section 14A (of Income Tax Act, 1961) read with Rule 8D (of Income Tax Rules, 1962) to

the extent of exempt income earned, by following the ratio laid down

in various decisions rendered by Hon'ble High Courts and Tribunal.

He submitted, merely because the assessee accepted the disallowance

made by the Assessing Officer, it cannot lead to the conclusion that

the assessee has under reported its income. Thus, he submitted,

penalty imposed should be deleted.

5. Learned Departmental Representative strongly relied upon the

observations of the Assessing Officer and learned Commissioner

(Appeals).

6. We have considered rival submissions and perused the material

on record.

7. Undisputedly, in the year under consideration, assessee has

earned exempt income by way of dividend amounting to Rs.27,250.

As per the ratio laid down in various judicial precedents, the

disallowance under Section 14A (of Income Tax Act, 1961) read with Rule 8D (of Income Tax Rules, 1962), cannot exceed the

quantum of exempt income earned during a particular assessment

year. Following the settled legal position, the assessee had restricted

disallowance under Section 14A (of Income Tax Act, 1961) to the quantum of exempt income

earned during the year. Thus, in our view, there was a valid reason

available to the assessee for restricting the disallowance under Section

14A of the Act to the extent of exempt income earned. Merely because

assessee accepted the disallowance made by the Assessing Officer, it

cannot automatically lead to the conclusion that the assessee had

under reported its income. In fact, penalty under Section 270A (of Income Tax Act, 1961) of the

Act is not automatic. Sub-section(6) of section 270A (of Income Tax Act, 1961) carves out

exceptions where in certain instances the income assessed cannot be

treated as under reported income. In the facts of the present case, in

our view, assessee’s case will fall within the exception provided under

section 270A(6)(a) (of Income Tax Act, 1961), as, the explanation offered by the assessee with

regard to the disallowance made under Section 14A (of Income Tax Act, 1961) is a valid and

reasonable explanation. Therefore, in our view, the penalty imposed

under Section 270A (of Income Tax Act, 1961) in the facts of the present case is

unsustainable. Accordingly, we delete the penalty imposed.

8. In the result, the appeal is allowed

Order pronounced in the open court on 18th May, 2023.

Sd/- Sd/-

(M BALAGANESH ) (SAKTIJIT DEY)

ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 18th May, 2023