The Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) has clarified that where a taxpayer had disclosed all material facts relating to a disallowance in the documents filed with the return of income (such as a tax audit report), and the failure to make the corresponding adjustment in the computation of income is due to a bona fide and inadvertent error, the case is covered by the exception provided under Section 270A(6) of the Income Tax Act.
The ITAT also clarified that if the disallowance is also tax-neutral in nature (i.e., it only reduces a declared loss and is claimable as a deduction in a subsequent year), it further strengthens the bona fide nature of the taxpayer’s explanation. In such circumstances, the ITAT held that the disallowance cannot be treated as under-reported income in consequence of misreporting, and therefore, the levy of penalty under Section 270A(9) is not justified.
The Division Bench comprising Ravish Sood (Judicial Member) and Manjunatha G. (Accountant Member) found merit in the appellant’s argument that the case was not one of misreporting but was covered by the bona fide explanation exception under Section 270A(6). The Bench observed that the appellant had made a full disclosure of all material facts regarding the labour cess in its tax audit report. Thus, the explanation that the failure to disallow the amount in the computation of income was an ‘inadvertent error’ was deemed ‘bona fide and acceptable’.
The Tribunal noted that the addition was ‘tax neutral’ for two reasons: first, it only resulted in a reduction of the current year’s loss and did not lead to any actual tax payment; and second, the taxpayer would be entitled to claim a deduction for this amount in the subsequent year upon payment, effectively restoring the original loss position.
Given the bona fide nature of the explanation and the full disclosure of facts, the Tribunal held that the case falls under Section 270A(6), which excludes such amounts from the definition of under-reported income.
Lastly, the Bench pointed to Section 270AA(3), which explicitly states that immunity can be granted only where penalty proceedings under Section 270A have not been initiated for misreporting under Section 270A(9). Since the AO had initiated penalty proceedings for misreporting under Section 270A(9), the Bench held that the appellant’s immunity application was infructuous. Consequently, the AO was not required to pass a separate order under Section 270AA(4) of the Income Tax Act.
Briefly, after the appellant filed its income tax return declaring a current year loss of Rs. 81.04 Crores, the scrutiny assessment was completed by making a disallowance of Rs. 40.76 Lakh for labour cess under Section 43B of the Income Tax Act, and the AO determined the final loss at Rs. 80.63 Crores. This disallowance was made because the tax auditor had reported in Form 3CD that the labour cess was not paid before the due date for filing the return, yet the appellant had not added this amount back in its computation of total income.
Consequently, the AO initiated penalty proceedings under Section 270A of the Income Tax Act for under-reporting of income in consequence of misreporting under Section 270A(9). In response, the appellant submitted that the failure to add back the disallowance was an inadvertent error.
The appellant accepted the disallowance, and instead of filing an appeal against the assessment order, it filed an application for immunity from penalty under Section 270AA. The AO rejected the immunity application, stating it was not maintainable as the penalty was initiated for misreporting under Section 270A(9), and proceeded to levy a penalty of Rs. 25.19 Lakh, being 200% of the tax on the under-reported income. On appeal, the CIT(A) upheld the penalty.
Appearances:
Advocate Salil Kapoor, for the Appellant/ Taxpayer
Senior AR, Aditi Goyal, for the Respondent/ Revenue
