ITAT Chennai: Disallowance Made On Estimate Basis Cannot Result in Tax Penalty U/S 270A

Recently, an appeal was filed by the Chennai Bench of the Income Tax Appellate Tribunal (ITAT). The bench appealed, arguing that when disapproval is made on an estimated basis, an income tax penalty cannot be imposed under Section 270A of the Income Tax Act, 1961.

The study and analysis of the scenario were conducted by the Chennai ITAT after they received an appeal from the assessee. The reason was being directed against the command of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, on 05/07/2022. It was relevant to the assessment year 2017–18 in assuring the charge as a penalty under Section 270A of the Income Tax Act, 1961.

The case, in summary, is that the applicant company had submitted its return of income declaring the complete earning of Rs. 19,25,62,355/- for the assessment year 2017–18. The applicant filed a return under Section 143(1) of the Income Tax Act.

The assessee’s case was then taken under CASS for an in-depth examination. The notice was issued under Section 143(2) of the Income Tax Act and asked for an explanation from the assessee. The assessment was finished in accordance with Section 143(3) of the Act after looking over the assessee’s justifications and confirming the records.

While examining the assessee’s profit and loss account, the Assessing Officer noticed in the assessment order that the assessee had claimed an amount of Rs. 1,01,64,738/- for repairs and maintenance. Additionally, it was found that the repair and maintenance expenses included some capital expenses totalling Rs. 20,32,948/- for which the assessee had not given relevant reasons. As a result, the amount of Rs. 20,32,948/- was disapproved and added to the assessee’s returned income.

The Assessing Officer then issued a show-cause notice dated 06.12.2019 to initiate the penalty exercised under Section 270A of the Income Tax Act. After examining the assessee’s explanations, the Assessing Officer imposed the penalty proceedings and issued an order on September 18, 2021, levying a penalty of Rs. 5,70,222 under Section 270A of the Income Tax Act for not reporting or reporting with not enough information of income concerning the Rs. 20,32,948 in repair and maintenance expenses. This penalty is subject to the assessment order’s disapproval. Furthermore, the CIT(A) upheld the penalty assessed under Section 270A of the Income Tax Act following an appeal.

Also, the discontented assessee chose the instant appeal before the Chennai ITAT.

The assessee’s advocate, Shri S. Sridhar, filed an appeal claiming that the assessee had sustained a total of Rs. 1,01,64,738/- in expenses and that the Assessing Officer had disapproved 20% of those expenses on an estimated basis.

He further stated that the penalty of Rs. 5,70,222/- under Section 270A of the Income Tax Act cannot be imposed, and he requested for the income tax penalty to be removed agreeing with the CIT(A).

The DR, JCIT, and Shri D. Hema Bhupal, on the other hand, firmly supported the directives of the authorities below.

In response to the question of whether it was possible to disagree with either side’s arguments and review the materials that were on file, the Chennai ITAT made the following statement: “We have heard both parties, reviewed the papers that were on file, and gone through the orders of authorities below. Due to underreported income, the Assessing Officer in this case has started penalty procedures under Section 270A of the Income Tax Act. Under Section 274 r.w.s. 270A of the Act, the Assessing Officer issued a show cause notice, asking the assessee to explain why a penalty cannot be assessed for underreporting or failing to record income. The assessee has provided the Assessing Officer with all pertinent information, including the costs they have incurred.

Therefore, no penalty can be fined under Section 270A of the Act because the Assessing Officer disapproved an amount of Rs. 20,32,748 based on the appraised value. We examined and found that 20% of the assessee’s stated expenses were not approved by the assessing officer. It cannot be argued that approving the expense is a report of earnings that was not recorded. The assessee has provided all the information, and on top of that, the Assessing Officer has disapproved the expense based on the estimation. No fine can be imposed once the rejection is reached on the basis of an estimate, the panel, which also included judges V. Durga Rao and G. Manjunatha, stated.

Read Also: ITAT: No Tax Penalty U/S 271B If Audit Report & ITR Submitted Before Assessment

Hence, the Chennai bench of the ITAT allowed the assessee’s appeal and ruled-

“The penalty levied under Section 270A of the Income Tax Act is removed since the penalty fined by the Assessing Officer and confirmed by the Id CIT(A) is implausible. The appeal submitted by the assessee was successfully approved at the end.”