No Under-Reporting Penalty Attracted When Reassessed Income

No Under-Reporting Penalty Attracted When Reassessed Income Matches Return Filed Under Section 148

Issue

Whether a penalty for under-reporting or misreporting of income under Section 270A can be sustained when the final reassessed income under Section 147 perfectly matches the income declared by the assessee in response to a Section 148 notice, and where the omission in the original return was due to a bona fide belief regarding tax-exempt agricultural land transactions.

Facts

Original Filing: The assessee, an individual, initially filed a regular return of income for the Assessment Year 2020-21 declaring a total income of ₹22.42 lakhs.
The Omission: Following a department search, it was discovered that the assessee had sold a parcel of agricultural land for ₹85 lakhs without offering the resulting capital gains to tax.
Reopening of Assessment: The income tax department reopened the case under Section 147 and served a notice under Section 148 upon the assessee.
Response to Notice: In direct response to the Section 148 notice, the assessee filed a new return declaring an enhanced total income of approximately ₹30.11 lakhs, which fully included a short-term capital gain of about ₹7.90 lakhs from the land sale, with all due taxes paid.
Assessment Conclusion: The Assessing Officer (AO) completed the reassessment under Section 147, entirely accepting the revised income figure submitted by the assessee in the Section 148 return.
Penalty Imposed: Despite accepting the return, the AO treated the difference between the original income (under Section 143(1)) and the final reassessed income as under-reported income due to misreporting. Accordingly, the AO levied a 200% penalty on the tax amount under Section 270A(9).
Assessee’s Explanation: The assessee explained that the initial non-disclosure was based on a bona fide belief that selling dry agricultural land to reinvest in another agricultural plot did not attract income tax.

Decision

No Differential, No Under-Reporting: The appellate authority held that the concept of under-reporting must be evaluated by comparing the income assessed by the AO against the return filed specifically in response to the Section 148 notice. Since there was zero difference between the reassessed income and the Section 148 returned income, the statutory baseline for under-reporting did not exist.
Bona Fide Exception Apparent: Under Section 270A, under-reported income explicitly excludes amounts where the taxpayer offers a bona fide explanation and discloses all material facts. The panel found the assessee’s explanation regarding agricultural land status to be completely bona fide.
Penalty Deleted: Because the AO accepted the returned figures and the explanation was legitimate, the court ruled that the AO should not have levied the penalty. The Section 270A penalty was officially deleted.

Key Takeaways

The Section 148 Baseline Rule: For reassessment proceedings, the benchmark for measuring “under-reporting” shifts to the return filed in response to the Section 148 notice. If the AO accepts that specific return without further additions, a penalty under Section 270A cannot be mechanically triggered.
Protection via Bona Fide Explanations: A subjective error or misconception of law (such as confusing the taxability rules of rural vs. dry agricultural land transitions) will not be penalized as deliberate misreporting if the taxpayer acts in good faith, cooperates with the reopening notice, pays the tax, and fully discloses the material facts.
No Automated Penalty Application: Tax authorities cannot use reassessment entry points to automatically enforce the maximum 200% penalty rate under the guise of misreporting without establishing a deliberate intent to deceive or a secondary discrepancy in the reassessment filing itself.

IN THE ITAT HYDERABAD BENCH ‘SMC’

Ratna Show Reddy Singareddy

Deputy Commissioner of Income-tax

VIJAY PAL RAO, Vice President
and MANJUNATHA G, Accountant Member

I.T.A.No. 42 (Hyd) OF 2026
[Assessment year 2020-21]

MAY 6, 2026

Vamseedhar, C.A. for the Appellant. Mookambikeyan S., Sr. AR for the Respondent.

ORDER

Manjunatha G., Accountant Member. – This appeal filed by the assessee is directed against the order of the learned Commissioner of Income Tax (Appeals) – Hyderabad -11, (for short “Ld. CIT(A)), dated 14.11.2025, pertaining to the assessment year 2020-21.

2. The brief facts of the case are that, the assessee is an individual and filed his original return of income for A.Y. 2020-21 on 09.01.2021, admitting the total income of Rs.22,42,400/-. A search and seizure operation under section 132 of the Income-tax Act, 1961 was conducted in the group cases of M/s. Bala Vikasa Social Service Society on 15.03.2023 and as a part of search, the case of the assessee was also covered. During the course of search, it was found that, the assessee had sold immovable property for a consideration of Rs.85,00,000/-, however, has not offered capital gains to tax. Consequent to search, the assessment has been reopened under section 147 of the Act, and during the course of assessment proceedings, the A.O. called upon the assessee to file relevant details of computation of capital gain, if any, for sale of property. The assessee filed the return of income in response to notice under section 148 of the Act, on 26.07.2024, declaring total income of Rs.30,11,280/-, which includes short-term capital gain of Rs.7,90,475/- from sale of property. The A.O., after considering relevant submissions of the assessee and also taking note of the return of income filed by the assessee, completed assessment under section 147 of the Act, on 07.02.2025 and accepted the income declared by the assessee. The A.O. had also initiated penalty proceedings under section 270A of the Act, for under-reporting of income, is in consequence of misreporting thereof.

3. During the penalty proceedings, the A.O. called upon the assessee to explain as to why the penalty shall not be levied for under-reporting of income, is in consequence of misreporting of income of Rs.7,90,475/- in respect of short-term capital gain offered in the return of income filed in response to notice issued under section 148 of the Act. In response, the assessee submitted his explanation on 17.02.2025 and on 21.07.2025 and claimed that, he had sold dry agricultural land for a consideration of Rs.85,00,000/-and also purchased another agricultural land from the sale consideration, and on the bonafide belief that sale of agricultural land and purchase of another agricultural land does not attract tax. The assessee further submitted that, he has also admitted capital gain for sale of property in response to notice under section 148 of the Act, and therefore, it cannot be said that the assessee has under-reported income, is in consequence of misreporting of income.

4. The A.O., after considering relevant submissions of the assessee and also taking note of the provisions of section 270A(9) of the Act, observed that, there is a difference between income computed in the assessment order passed under section 147 r.w.s. 143(3) of the Act, and the income determined in the order passed under section 143(1) of the Act, and the difference in amount of income admitted by the assessee falls under the category of under-reporting of income, and further, the same is liable for penalty under section 270A(9) of the Act, for under-reporting of income, is in consequence of misreporting of income, and therefore, rejected the explanation of the assessee and levied penalty of Rs.4,79,780/-, which is 200% of the amount of tax payable on under-reporting of income.

5. Aggrieved by the penalty order, the assessee preferred appeal before the learned CIT(A) and challenged levy of penalty under section 270A(9) of the Act. Before the learned CIT(A), the assessee submitted that, he was under the bona fide belief that sale of agricultural land and purchase of another agricultural land, no tax is leviable and accordingly not has disclosed the transactions in the return of income filed under section 139(1) of the Act. The assessee further submitted that, he has voluntarily admitted short-term capital gains and paid taxes in the return of income filed in response to notice under section 148 of the Act, and therefore, the case of the assessee cannot be considered under section 270A(9) of the Act. The learned CIT(A), after considering the submissions of the assessee and also taking note of provisions of section 270A(9) of the Act, observed that, the assessee has under-reported income, is in consequence of misreporting of income by misrepresentation or suppression of facts which is evident from the relevant return of income filed by the assessee under section 139 of the Act, and return of income filed in response to notice under section 148 of the Act. Further, it is also pertinent to note that the assessee has not offered the short-term capital gain voluntarily, but due to the very fact that the sale of agricultural land was unearthed during the course of search operation and the search had not taken place, the assessee would not have disclosed capital gains. Therefore, it is a clear case of under-reporting of income, is in consequence of misreporting thereof, and therefore, the A.O. has rightly levied penalty under section 270A(9) of the Act, and thus, rejected the explanation of the assessee and upheld the penalty levied by the A.O.

6. Aggrieved by the order of the learned CIT(A), the assessee is in appeal before the Tribunal.

7. The learned counsel for the assessee, Shri Vamseedhar, C.A. submitted that, the learned CIT(A) erred in sustaining the penalty levied under section 270A(9) of the Act, even though there is no difference between the returned income and assessed income, and unless there is a difference in the returned income and assessed income, the concept of under-reporting of income cannot be applied. The learned counsel for the assessee further submitted that, the assessee had sold agricultural land and had also purchased another agricultural land, and the assessee was under the bona fide belief that the sale of agricultural land does not attract capital gains. However, upon noticing the fact that the assessee is liable to pay tax on sale of land, he had disclosed capital gains in response to notice under section 148 of the Act, and also paid taxes. Therefore, the A.O. was not right in invoking the provisions of section 270A and levying penalty for misreporting of income. The learned CIT(A), without appreciating the relevant facts, simply upheld the penalty levied by the A.O. Therefore, he submitted that the order of the learned CIT(A) should be set aside and the penalty levied by the A.O. should be deleted.

8. The learned Senior A.R. for the Revenue, Shri S. Mookambikeyan, on the other hand, supporting the order of the learned CIT(A), submitted that, it is a clear case of under-reporting of income, is in consequence of misreporting of income, which is evident from the return of income filed under section 139 of the Act, and the revised return filed in response to notice under section 148 of the Act. The assessee has not reported capital gains in the original return of income. Although the assessee has reported capital gains in the revised return filed in response to notice under section 148 of the Act, but fact remains that there is a difference between determined under section 143(1) of the Act, and income assessed, which falls under sub-section (3) of section 270A of the Act. Since the assessee has misrepresented or suppressed the facts with regard to the capital gains, the A.O. has rightly invoked section 270A(9) of the Act. Thus, there is no merit in the arguments of the assessee and thus, the appeal filed by the assessee should be dismissed.

9. We have heard both parties, perused the material available on record, and had gone through the orders of the authorities below. There is no dispute with regard to the fact that the assessee has not disclosed the capital gains derived on sale of agricultural land in the return of income filed under section 139 of the Act. It is also not in dispute that the assessee has disclosed the capital gains derived from sale of agricultural land in the return of income filed in response to notice issued under section 148 of the Act, and paid relevant taxes. The A.O. completed the assessment and accepted the return filed in response to notice under section 148 of the Act. Therefore, it is necessary for us to decide the issue of levy of penalty under section 270A(9) of the Act, in light of the above facts and also the arguments of the learned counsel for the assessee.

10. The A.O. invoked provisions of Section 270A(9) of the Act, and levied 200% penalty on tax sought to be evaded in respect of underreporting of income. The amount of under reported income has been explained under sub-section (3) of Section 270A of the Act, and according to sub-section (3), in a case where the income has been assessed for the first time, if return has been furnished, the difference, if any, between the amount of income assessed and the amount of income determined under Section 143(1) of the Act, shall be treated as under-reported income. In the present case, there is no difference between the income assessed for the first time and the income determined as per section 143(3) of the Act, because there was no regular assessment under section 143(3) of the Act. However, there is a difference between the income assessed by the A.O. in the order passed under Section 143(3) r.w.s. 147 of the Act, and the income determined under Section 143(1) of the Act. However, there is no difference between the income returned by the assessee in response to notice under Section 148 of the Act and the income assessed by the A.O. Therefore, the concept of under-reporting of income has to be understood in the context of return of income filed in response to notice under section 148 of the Act, and the income assessed by the A.O., and if we consider the income assessed by the A.O. and the income returned by the assessee, then there is no difference, and therefore, in our considered view, the concept of under-reporting of income for the purpose of section 270A of the Act, does not arise. Further, insofar as the merits of the case are concerned, the assessee was under the bona fide belief that the sale of dry agricultural land and purchase of another agricultural land does not attract tax, and this fact has been explained to the A.O. Therefore, once the amount of income in respect of which the assessee offers explanation and the A.O. is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts, then for the purpose of section 270A of the Act, the under-reporting of income shall not include the income on which the explanation is offered by the assessee. Since the explanation of the assessee with regard to the sale of agricultural land is bona fide, in our considered view, the A.O. ought to have accepted the explanation of the assessee and not levied penalty under section 270A of the Act. The learned CIT(A), without appreciating the relevant facts, simply upheld the penalty levied by the A.O. Thus, we set aside the order of the learned CIT(A) and direct the A.O. to delete the penalty levied under section 270A of the Act.

11. In the result, the appeal of the assessee is allowed.