ITAT Mumbai Holds Section 270A Penalty Invalid When Reassessment Addition is Deleted in Quantum Appeal

Background and Context

This decision of the ITAT Mumbai in Rahul Saunik Vs ITO deals with the interplay between reassessment additions under Section 147 and penalty for under-reporting of income under Section 270A. The case clarifies that where the entire quantum addition forming the base for penalty is subsequently deleted in appellate proceedings, the penalty cannot independently survive.

The matter arises from a situation where the assessee, a salaried individual, was subjected to reassessment on the basis of data appearing in the departmental system and thereafter visited with penalty under Section 270A. In quantum appeal, the addition was completely removed, causing a direct impact on the sustainability of the related penalty.

Brief Facts of the Case

Reopening of Assessment

  1. The assessee is an individual drawing salary income.
  2. For Assessment Year 2017–18, the Assessing Officer (AO) reopened the case by issuing a notice under Section 148 dated 23.03.2021.
  3. The reopening was triggered on the basis of information reflecting in the Individual Transaction Statement (ITS) under the AIMS module.
  4. The AO noticed from departmental records that:
    • The assessee had not filed any return of income under Section 139(1) for the year, and
    • As per available information, the assessee had:
      • Salary income of Rs. 60,00,788/-, and
      • Payment towards purchase of immovable property of Rs. 2,08,700/-.

Based on this, the AO concluded that income chargeable to tax had escaped assessment within the meaning of Section 147 of the Income Tax Act 1961.

Ex Parte Assessment and Addition of Entire Receipts

During reassessment proceedings:

  • Multiple notices under Section 142(1) were issued.
  • According to the AO, the assessee did not properly respond with the required details, nor could he substantiate his claim of having filed a return of income.

In the absence of a satisfactory explanation, the AO:

  • Treated the entire amount of Rs. 62,09,488/- (salary plus property payment) as “income from other sources”.
  • Completed assessment under Section 144 read with Section 147 and Section 144B, determining total income at Rs. 62,09,488/-.
  • Initiated penalty proceedings under Section 270A for alleged under-reporting of income.

Penalty Proceedings under Section 270A

Subsequently, the AO passed a separate penalty order under Section 270A dated 22.09.2022. In this order:

  • A penalty of Rs. 8,69,241/- was levied.
  • The penalty amount represented 50% of the tax payable on the so-called under-reported income.
  • The AO recorded that:
    • The assessee had not filed a return of income within the prescribed time.
    • The return purportedly filed in response to the Section 148 notice was either unverifiable or not supported by necessary documents.
    • The assessee also failed to respond to penalty notices.

On this basis, the AO concluded that the assessee had under-reported income as per Section 270A(2) and was liable for penalty.

Arguments Before the CIT(A) in Penalty Proceedings

The assessee approached the Learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [CIT(A)] and explained as follows:

  • He is a salaried assessee, and his salary income was already subjected to TDS by the employer.
  • In response to the Section 148 notice, he had filed a return of income:
    • Declaring total income of around Rs. 54,69,890/- (later correctly computed at **Rs.