ITAT Bangalore annuls Section 270A penalty where misreporting limb not clearly invoked

Background and controversy

In Mehul Ratilal Shah Vs DCIT (ITAT Bangalore), the Tribunal examined the validity of a penalty imposed under Section 270A amounting to Rs. 32,24,478. The penalty stemmed from additional income arising out of investments in Alternate Investment Funds (AIFs), which the assessee had offered during the scrutiny assessment on the basis of Form 64C.

Key factual elements were:

  • The assessee, an individual, filed the original return of income on 07.11.2022 declaring total income of Rs. 33,53,900.
  • A revised return was filed on 22.02.2023 with the same figure of income.
  • During scrutiny, based on Form 64C issued by AIFs and Form 26AS data, the assessee submitted a revised computation (not a second revised return) offering additional income.
  • The Assessing Officer (AO) completed assessment under Section 143(3) r.w.s. Section 144B on 23.03.2024 determining total income at Rs. 1,78,47,320.
  • The assessed income matched exactly with the revised computation filed during assessment proceedings.
  • On the difference of Rs. 44,93,420 between returned and assessed income, the AO levied penalty for “under‑reported income in consequence of misreporting” under Section 270A(9) at 200% of tax, i.e., Rs. 32,24,478.

The central legal issue before the Tribunal was not the quantum of income or nature of AIF income, but whether the penalty proceedings were vitiated because the AO failed to clearly indicate which specific limb of “misreporting of income” under Section 270A(9) was being invoked in the notice and assessment order.

Assessee’s profile and income structure

The assessee is an individual engaged in multiple sources of income:

  • Share of profit and remuneration from a partnership firm, Tools Engineering Company
  • Commission income
  • Interest
  • Dividend
  • Capital gains
  • Income from investments in AIFs

The dispute primarily related to income arising from AIF investments, including:

  • Indiabulls Dual Advantage Commercial Asset Fund (dividend income)
  • IIFL Special Opportunities Fund Series-2 (dividend and other income components)
  • Tata Capital Healthcare Fund II (interest and distributed income)

Initially, in the original return, the assessee had treated certain AIF receipts as exempt income. However, upon receipt and reconciliation of Form 64C from these AIFs, it emerged that:

  • Only specified income distributed by the AIF and reflected in Form 64C qualified for exemption under Section 115UB.
  • Some amounts earlier claimed as exempt actually represented taxable income such as short term capital gains, long term capital gains, interest income, and other income attributable from the AIF.

Flow of assessment and recomputation based on Form 64C

AIF income reconciliation

During scrutiny, the AO confronted the assessee with information from Form 26AS and Form 64C. The assessee reviewed the AIF statements and:

  1. Identified that certain receipts earlier taken as exempt did not align with Form 64C data.
  2. Prepared a revised computation of total income, voluntarily enhancing taxable income based on:
    • Income distributed by Tata Capital Healthcare Fund II as per Form 64C (Rs. 1,26,931; TDS of Rs. 14,685)
    • Income credited by IIFL Special Opportunities Fund Series-2 as per Form 64C (with a composite structure of taxable and non-taxable amounts, indexation on unlisted equity shares, and computation of gross income for Form 64C purposes)
  3. Recognised that only income distributed as per Form 64C could be considered exempt under Section 115UB, and the rest had to be brought to tax.

The assessee then:

  • Filed a detailed revised computation on 16.08.2023
  • Paid the additional tax liability arising from this recomputation during the assessment stage

Assessment outcome

In the assessment order:

  • The AO adopted the income originally returned at Rs. 1,33,53,900 (as per the revised return).
  • An upward variation of Rs. 44,93,420 was made, based entirely on the revised computation furnished during scrutiny.
  • The final assessed income of Rs. 1,78,47,320 corresponded exactly to the income voluntarily declared in the revised computation.

This meant:

There was a difference between the returned income and assessed income, but no difference between the revised computation filed during assessment and the finally assessed income.

Despite this, the AO recorded in para 3.4.3 of the assessment order that penalty proceedings under Section 270A were initiated for “under‑reported income in consequence of misreporting of income”.

Initiation of penalty proceedings under Section 270A