ITAT Hyderabad confirms Section 270A penalty on underreported mutual fund redemption income

Background of the dispute

The Income Tax Appellate Tribunal, Hyderabad, in the case of Yadava Reddy Appidi Vs DCIT, examined whether penalty under Section 270A of the Income Tax Act 1961 was validly imposed for not disclosing capital gains arising from redemption of mutual funds.

The appeal related to Assessment Year 2022-23 and challenged the order of the Commissioner of Income Tax (Appeals), Hyderabad-11, dated 06.09.2025, affirming the penalty imposed by the Assessing Officer (AO) for underreporting of income in consequence of misreporting.

The assessee had:

  • Filed return of income on 30.07.2022
  • Declared total income of Rs. 1,21,73,440
  • Included capital gains from securities transactions in the return
  • Omitted capital gains relating to redemption of mutual funds

The case was taken up for scrutiny, and the AO completed assessment under Section 143(3) r.w.s. 144B on 22.03.2024 by adding Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG) from mutual fund redemptions, which had not been declared in the return.

Consequentially, the AO initiated penalty proceedings under Section 270A on the ground that there was underreported income attributable to misreporting.

Assessment and penalty proceedings under Section 270A

Assessment findings

During scrutiny assessment, the AO:

  • Identified transactions relating to redemption of mutual funds
  • Computed additional STCG and LTCG attributable to such redemptions
  • Noted that these capital gains were absent from the originally filed RoI
  • Finalised the assessment by treating these gains as undisclosed income

It was undisputed that the additions relating to mutual fund redemptions resulted in underreporting of income to the extent of Rs. 15,12,141.

Initiation of penalty proceedings

After assessment, the AO started penalty proceedings u/s Section 270A for underreporting of income and issued show cause notices dated 07.06.2024 and 06.08.2024. The assessee was called upon to explain why penalty should not be levied for:

“underreporting of income, in consequence of misreporting of income”.

Assessee’s explanation before the AO

In response, vide letter dated 22.08.2024, the assessee explained:

  • He was regularly undertaking securities transactions through a Portfolio Management Service (PMS).

  • Capital gains reported in the RoI were based on:

    Statement of transactions furnished by the PMS provider.

  • The PMS statement, according to the assessee, did not include details of mutual fund redemption transactions.

  • Due to this, the capital gains arising from redemption of mutual funds were unintentionally omitted from the return.

  • Upon being confronted with these transactions during assessment, the assessee:

    • Accepted the additions,
    • Admitted that there was a lapse, and
    • Paid the tax on such gains.

On this basis, the assessee argued:

  • The case involved an inadvertent omission, not a conscious attempt to conceal;
  • The omission could not be treated as “misreporting” within the meaning of Section 270A(9);
  • Accordingly, penalty ought not to be levied under Section 270A for misreporting.

AO’s reasoning in levying penalty

The AO considered these submissions but rejected the explanation as unsatisfactory, holding that:

  • The assessee had underreported STCG and LTCG from mutual fund redemption.
  • Given that the redemption proceeds were real transactions with tax implications, failure to report them in the RoI constituted misreporting.
  • The omission was not adequately justified, and the conditions of Section 270A(9) stood attracted.

Accordingly, the AO:

  • Treated the case as one of “underreporting of income in consequence of misreporting of income”;
  • Calculated the tax sought to be evaded; and
  • Levied a penalty of Rs. 3,62,030, being 200% of the tax on such underreported income.

Proceedings before the Commissioner of Income Tax (Appeals)

Appeal before CIT(A)

The assessee challenged the penalty before the CIT(A), Hyderabad-11. In the appellate proceedings: