ITAT Pune Quashes Section 270A Penalty: Vague Notice and Bona Fide Claim Shield Assessee from Misreporting Charge

Overview

A significant ruling has emerged from the Income Tax Appellate Tribunal, Pune Bench, in the matter of Mustafa Alihusain Sunelwala Vs ITO, where the Tribunal set aside a penalty of ₹15,48,234/- levied under Section 270A of the Income Tax Act, 1961. The decision rests on two critical pillars: first, the penalty notice under Section 274 failed to identify which specific limb of Section 270A(9) was being invoked; and second, the assessee's claims — however ultimately disallowed — were made under a genuine and bona fide belief, with full disclosure of material facts.

This ruling carries significant implications for how penalty proceedings under Section 270A must be conducted, reinforcing that procedural rigour is not a technicality but a substantive requirement of law.

Background and Factual Matrix

The Assessee's Return and Scrutiny Selection

The assessee, an individual and non-resident, filed his return of income for Assessment Year 2022-23 on 15.07.2022, declaring a total income of ₹40,17,320/-, which included capital gains of ₹38,11,873/- arising from the sale of property. Given his non-resident status, tax had been deducted at source under Section 195 of the Income Tax Act, 1961. The assessee also claimed a refund of ₹45,24,010/-.

The case was flagged for scrutiny under CASS on account of a high refund-to-income ratio. Notices were duly issued under Section 142(1) and Section 143(2) of the Act. The assessee responded partially to the notices, submitting certain documents and details. A subsequent show cause notice was also partly responded to.

Assessment Completed Ex-Parte

Since the assessee's compliance was not complete, the Assessing Officer (AO) proceeded to finalise the assessment ex-parte under Section 144 read with Section 144B of the Income Tax Act, 1961, vide order dated 11.03.2024. The AO made the following disallowances:

  • ₹7,92,500/- on account of cost of improvement claimed by the assessee, disallowed for want of supporting documentary evidence
  • ₹25,90,875/- on account of deduction claimed under Section 54F of the Act, disallowed on the ground that the assessee owned more than one residential property, making him ineligible

The aggregate disallowance amounted to ₹33,83,375/-.

Penalty Proceedings Initiated

Alongside the assessment, the AO initiated penalty proceedings under Section 274 of the Act for alleged underreporting of income in consequence of misreporting thereof. The assessee submitted replies on 02.04.2024 and 04.05.2024, but the AO found these replies unsatisfactory due to the absence of documentary evidence or any reasonable cause. The assessee had also not preferred any appeal against the assessment order.

Accordingly, the AO levied a penalty of ₹15,48,234/- at the rate of 200% of tax on the underreported income under Section 270A of the Act vide order dated 27.09.2024.

Proceedings Before CIT(A)/NFAC

Assessee's Contentions

Before the Commissioner of Income Tax (Appeals)/NFAC, Delhi [CIT(A)], the assessee filed detailed written submissions asserting:

  1. The claim under Section 54F was made under a bona fide belief, based on incorrect professional advice from his Chartered Accountant
  2. The penalty proceedings were fundamentally flawed as the AO had failed to specify which sub-section of Section 270A governed the alleged misreporting
  3. The AO had not complied with the mandatory requirements of Section 270A(9) of the Act

CIT(A)'s Decision