ITAT Mumbai Rules Out Section 270A Penalty on Deemed Income Under Section 43CA

The Income Tax Appellate Tribunal, Mumbai Bench, in the case of Alrameez Construction Pvt. Ltd. Vs CIT/NFAC, has delivered an important ruling on the scope of penalty under Section 270A where the underlying addition is made purely under the deeming provisions of Section 43CA read with Section 56(2)(x). The Tribunal deleted the penalty, holding that such additions cannot automatically be treated as cases of “under‑reporting” or “misreporting” of income.

This decision clarifies the interplay between the deeming provisions used for determining sale consideration of immovable property and the anti‑evasion penalty regime under Section 270A, and it underlines the importance of correctly identifying the exact limb—under‑reporting or misreporting—before imposing penalty.

Background of the Case

Return Filing and Scrutiny Assessment

  • The assessee, Alrameez Construction Pvt. Ltd., filed its return of income on 28.09.2018, declaring total income of ₹42,540 for AY 2018-19.
  • The case was selected for scrutiny.
  • The Assessing Officer (AO) completed the assessment by determining total income at ₹1,76,640, resulting in an addition of ₹1,34,100.
  • This addition was made by invoking Section 43CA read with Section 56(2)(x), i.e., on the basis of deeming provisions related to transfer of immovable property.

Initiation of Penalty Proceedings

  1. Following the addition, the AO initiated penalty proceedings under Section 270A.
  2. A notice was issued under Section 274 read with Section 270A.
  3. The penalty order under Section 270A was passed on 01.02.2022, levying a penalty of ₹20,843 on alleged under‑reporting/misreporting of income.

Pending Quantum Appeal and NFAC Order

  • The assessee’s quantum appeal against the addition had already been filed and later decided by the CIT(A)/NFAC vide order bearing DIN No. ITBA/NFAC/APL-1/2022-23/1046156273.
  • However, the AO concluded the penalty proceedings on 01.02.2022 without awaiting the final outcome of the quantum appeal, despite adequate time being available within the limitation framework of Section 275.
  • The National Faceless Appeal Centre (NFAC), by order dated 23.12.2022 under Section 250, upheld the penalty.

The assessee, aggrieved by the confirmation of penalty, carried the matter in appeal before the ITAT, Mumbai.

Issues Raised by the Assessee

The assessee challenged the penalty primarily on the following grounds:

  1. Lack of Jurisdiction and Legality of Penalty Order

    • The penalty order was alleged to be invalid in law, beyond jurisdiction and not framed in accordance with the provisions of the Income Tax Act, 1961.

  2. Violation of Principles of Natural Justice

    • NFAC was alleged to have:
      • Not granted proper and sufficient opportunity of being heard.
      • Passed the appellate order without due application of mind to the submissions and facts.
      • Failed to provide an opportunity for personal hearing.
    • On this basis, the assessee contended that the appellate order was bad in law.

  3. Incorrect Characterisation as Under‑Reporting of Income

    • The assessee argued that the penalty under Section 270A was wrongly imposed for alleged under‑reporting of income even though the addition stemmed exclusively from a deeming provision (Section 43CA r.w.s. Section 56(2)(x)).
    • Without prejudice, the assessee argued that:
      • No such addition was warranted on merits.
      • Even assuming some adjustment was required, the manner of computation by the AO was arbitrary and excessive.

  4. Right to Modify Grounds

    • The assessee also reserved liberty to amend, add, or withdraw grounds at the time of hearing.

The Tribunal had to decide:

Whether penalty under Section 270A for “under‑reporting” or “misreporting” of income is tenable when the income addition is made exclusively on the basis of deeming provisions contained in Section 43CA read with Section 56(2)(x)?