ITAT Chennai Deletes Section 270A Penalty: Bona Fide Explanation and TDS Credit Negate Under-Reporting Charges

In a significant ruling that provides relief to assessees facing penal consequences for delayed compliance due to genuine hardships, the Income Tax Appellate Tribunal (ITAT), Chennai Bench, has set aside a penalty order levied under Section 270A of the Income Tax Act, 1961. The case, Santhosh Abraham Vs ITO, revolves around allegations of under-reporting income merely because the return was filed subsequent to the issuance of a notice under Section 148.

The Tribunal’s decision underscores the critical distinction between deliberate tax evasion and procedural delays caused by bona fide reasons, such as the Covid-19 pandemic. Furthermore, the ruling establishes that where tax liability is substantially covered by Tax Deducted at Source (TDS), the charge of "under-reporting" with intent to evade tax cannot automatically sustain.

Factual Matrix of the Case

The dispute arose for the Assessment Year 2020-21. The assessee, an individual, had not filed his Return of Income (ROI) under Section 139 within the statutory due date. The financial profile of the assessee for the relevant year included substantial transactions in the stock market, specifically in the Futures and Options (F&O) segment, with a gross turnover exceeding Rs. 13 Crores. However, these transactions resulted in a net loss of Rs. 1,97,056.

Additionally, the assessee was employed with major corporate entities, specifically TCS and Ashok Leyland, earning a salary of Rs. 22,76,480. The tax liability on this salary income was duly subjected to TDS provisions.

Due to the non-filing of the return, the Revenue authorities initiated proceedings by issuing a notice under Section 148 of the Income Tax Act, 1961, on 22.03.2024. In compliance with this notice, the assessee filed a return declaring the salary income of Rs. 22,76,480 and a tax payable of Rs. 5,26,210. It is pertinent to note that the tax payable was almost entirely covered by the TDS and advance tax already deposited with the government.

The Assessing Officer (AO) completed the assessment under Section 147 read with Section 144B vide an order dated 15.01.2025, accepting the returned income without any variation or addition.

The Controversy: Imposition of Penalty

Despite accepting the income declared by the assessee in the return filed in response to the Section 148 notice, the AO initiated penalty proceedings. The Revenue's stance was that the failure to file the return voluntarily under Section 139 constituted "under-reporting" of income.

The AO invoked Section 270A of the Income Tax Act, 1961, and levied a penalty of Rs. 2,57,631, calculated at 50% of the tax sought to be evaded. The rationale was that had the notice under Section 148 not been issued, the income would have escaped assessment entirely.