Voluntary Disclosure in Reassessment Proceedings Negates Penalty Under Section 270A — ITAT Surat Rules in Favour of Assessee

Overview of the Ruling

The Income Tax Appellate Tribunal, Surat Bench, delivered a significant ruling in the case of Dipesh Narendrakumar Patel Vs ITO (ITAT Surat), holding that a penalty imposed under Section 270A of the Income Tax Act, 1961 cannot be sustained where the assessee proactively withdraws a deduction claim upon receipt of a notice under Section 148 and the Assessing Officer completes the reassessment by accepting the income so declared without making any further addition or variation.

The Tribunal deleted the penalty of ₹1,12,320 in its entirety, ruling that the essential ingredients of either under-reporting or misreporting of income were wholly absent in the facts of this case.

Background and Factual Matrix

Original Return Filing

The assessee, an individual, filed his return of income for Assessment Year 2019-20 on 03.08.2019, declaring a total income of ₹18,25,640. In that original return, a deduction of ₹1,80,000 was claimed under Section 80GGC of the Income Tax Act, 1961 on account of a donation made to Rashtriya Samajwadi Party (Secular).

Search and Seizure Operations

On 07.09.2022, a search and seizure operation was carried out under Section 132 of the Income Tax Act, 1961 targeting registered unrecognized political parties and associated entities based in the Ahmedabad region. The search allegedly uncovered that these political entities were accepting donations from various individuals through legitimate banking channels and subsequently returning equivalent amounts in cash to the respective donors — a modus operandi designed to enable bogus deduction claims.

Based on the information gathered during this search, the Revenue authorities took the position that the assessee's donation of ₹1,80,000 to Rashtriya Samajwadi Party (Secular) was not a genuine transaction and constituted a fictitious deduction claim.

Initiation of Reassessment Proceedings

Following the above findings, proceedings were initiated under Section 148A and an order under Section 148A(d) was duly passed. Consequently, a notice under Section 148 was issued to the assessee on 10.04.2023.

Response by the Assessee

In response to the notice under Section 148, the assessee filed a fresh return of income on 18.04.2023 declaring total income of ₹20,05,640. In doing so, the assessee voluntarily withdrew the deduction of ₹1,80,000 claimed under Section 80GGC and offered the corresponding amount to taxation. This disclosure was entirely of the assessee's own volition, made before the completion of reassessment proceedings.

Completion of Reassessment

The reassessment was completed under Section 147 read with Section 143(3) and Section 144B on 10.03.2025. The Assessing Officer accepted the total income of ₹20,05,640 as declared by the assessee in the reassessment return and made no addition, disallowance, or variation on account of the donation amount or on any other ground.

Penalty Proceedings and Lower Authority Decisions

Assessing Officer's Position

Despite accepting the income returned by the assessee without making any independent addition, the Assessing Officer proceeded to initiate penalty proceedings under Section 270A of the Income Tax Act, 1961. A notice under Section 274 read with Section 270A was issued on 10.03.2025. After considering the assessee's reply, the AO imposed a penalty of ₹1,12,320, treating the matter as one involving under-reporting of income arising out of misreporting within the meaning of Section 270A(9).