Section 270A Penalty Cannot Survive Quashed Quantum Assessments Or Additions Sustained On Estimated Basis

By | July 25, 2026
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Section 270A Penalty Cannot Survive Quashed Quantum Assessments Or Additions Sustained On Estimated Basis

Issue

  • Survival of Section 270A Penalty upon Quashing of Quantum Assessment: Whether a penalty levied under Section 270A for under-reporting of income can be sustained when the underlying quantum assessment order itself is quashed on legal grounds by the Tribunal.

  • Levy of Section 270A Penalty on Estimated Additions: Whether penalty under Section 270A is legally justifiable when the addition in quantum proceedings is sustained merely on an estimated basis (2% of alleged unaccounted purchases) following a voluntary disclosure to buy peace.

Facts

Issue I (AYs 2017–18 to 2020–21)

  • Quantum & Penalty Orders: Additions were made in the quantum assessments of the assessees, leading to the initiation and levy of penalties under Section 270A, which were subsequently upheld by the CIT(A).

  • Tribunal Decision in Quantum Proceedings: In the parallel quantum appeal, the Tribunal quashed the underlying quantum assessment orders entirely on legal grounds.

Issue II (AY 2021–22)

  • Search & Scrutiny: Consequent to a search under Section 132 on a third party (MJPL), software data indicated jewelry transactions with the assessee, a private limited company engaged in retail sales.

  • Voluntary Disclosure: The AO observed that jewelry purchases lacked full invoice support. The assessee denied any unaccounted purchases but voluntarily offered additional income to buy peace, which the AO accepted while initiating Section 270A penalty proceedings.

  • Tribunal Action in Quantum Proceedings: In the quantum appeal, the ITAT observed that additions were made without corroborative incriminating material and restricted the addition to just 2% of the value of alleged unaccounted purchases on an estimated basis.

Decision

Issue I (In favor of Assessee)

  • Foundation of Penalty Obliterated: Held YES. Since Section 270A penalty was levied solely on the basis of additions made in the quantum assessments, once the quantum assessments were quashed, the foundation for the penalty no longer survived. [Para 5]

  • Deletion of Penalty: Held YES. The penalty under Section 270A could not be sustained and was ordered to be deleted. [Para 5]

Issue II (In favor of Assessee)

  • No Penalty on Estimated Additions: Held YES. Since the quantum addition itself was sustained solely on an estimated basis (2%), the levy of penalty under Section 270A for under-reporting was completely unjustified and liable to be deleted. [Para 14]

Key Takeaways

  • Penalty Depends on Quantum Validity: Penalty under Section 270A is strictly derivative. If the primary assessment order or addition is quashed, the corresponding penalty automatically fails.

  • Estimated Additions Exclude Section 270A Penalty: Where additions are restricted to an estimated percentage or nominal margin—especially arising from voluntary offers to buy peace without concrete incriminating evidence—under-reporting or misreporting penalties under Section 270A cannot be levied.

IN THE ITAT CHENNAI BENCH ‘C’
Nalli Trust
v.
Deputy Comissioner of Income-tax
GEORGE GEORGE K, Vice President
and MS PADMAVATHY S, Accountant Member
IT Appeal Nos. 450 to 454 (CHNY) of 2026
[Assessment years 2017-18 to 2021-22]
JULY  15, 2026
K. Ramakrishnan, CA for the Appellant. Shivalingam, Sr. AR for the Respondent.
ORDER
George George K. Vice President.- These appeals filed by the assessees are directed against five different orders of the Commissioner of Income Tax (Appeals), Chenna-20, all dated 19.08.2025 passed u/s. 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The orders of the CIT(A) arise out of the orders of the AO imposing penalty u/s.270A of the Act. The relevant Assessment Years are 2017-18 to 2021-22.
2. There is a delay of 90 days in filing these appeals. The assessees have filed affidavits seeking condonation of delay explaining therein the reasons for the delay. The reason stated is that, the they had already preferred appeals against the quantum assessment. Hence, the assessees were under bonafide belief since appeals have been filed against quantum assessment on jurisdictional grounds, there was no need to file separate appeals against the penalty orders. Subsequently, the assessees counsel advised that independent appeals need to be filed challenging the penalty orders. After the advice of the counsel, the assessee promptly filed the present appeals with delay of 90 days. On perusal of the reasons stated, we are of the view that no latches can be attributed to the assessee as there is sufficient cause for belated filing of these appeals. Hence, we condone the delay and proceed to dispose off the appeals on merits.
ITA Nos.450 to 453/CHNY/2026 (AYs 2017-18 to 2020-21)
3. At the outset, the Ld. AR for the assessee submitted that the Tribunal, vide its order dated 17.03.2026 in Nalli Trust v. Dy. CIT [IT Appeal Nos. 3072 to 3076 (CHNY) of 2025], had already quashed the quantum assessments. It was, therefore, contended that since the very basis for levy of penalty no longer survives, the orders of the CIT(A) confirming the penalty levied u/s. 270A of the Act are liable to be set aside and the penalty deleted.
4. The Ld.DR was duly heard.
5. We have heard the rival submissions and perused the material available on record. The penalty u/s. 270A of the Act has been levied solely on the basis of the additions made in the quantum assessments. Since the Tribunal, vide its order dated 17.03.2026 in ITA Nos.3072 to 3075/CHNY/2025, has quashed the quantum assessments on legal grounds, the very foundation for the impugned penalty no longer survives. Consequently, the penalty levied u/s.270A of the Act cannot be sustained and is hereby deleted. It is ordered accordingly.
ITA NO.454/CHNY/2026 (AY 2021-21)
6. Brief facts of the case are as follows: The assessee is a private limited company engaged in the business of retail sale of silk sarees and jewellery. A search u/s. 132 of the Act was conducted in the case of M/s. Mohanlal Jewellers Pvt. Ltd. (MJPL), during which certain data contained in the “J-Pack” software indicated transactions with the assessee. During the assessment proceedings, the AO observed that jewellery purchases aggregating to 2340.210 grams were not fully supported by invoices. Although the assessee denied having made any unaccounted purchases, it voluntarily offered an additional income of Rs.26,00,492/- to buy peace and avoid protracted litigation. The AO accepted the offer and completed the assessment u/s. 143(3) of the Act on 28.03.2023 by making an addition of Rs.26,00,492/-. Simultaneously, penalty proceedings u/s. 270A read with section 274 of the Act were initiated. In response to the show-cause notice, the assessee submitted that wherever gold metal was issued to MJPL for conversion into jewellery, MJPL had raised invoices only towards making charges, which were duly paid through banking channels after deduction of tax at source. The assessee furnished copies of the making charge invoices, metal issue vouchers and other supporting documents, and explained that all jewellery received from MJPL had been duly accounted for either as direct purchases or through the bullion purchase account, with the corresponding sales also fully recorded in its books. It was contended that there was neither any false entry nor any misrepresentation or suppression of facts so as to attract penalty u/s. 270A. The assessee further submitted that the additional income was offered purely to buy peace, avoid prolonged litigation and concentrate on its business, and that such voluntary offer could not be treated as an admission of misreporting, relying on the decision of the Hon’ble Supreme Court in Sir Shadi Lal Sugar & General Mills Ltd. v. CIT 168 ITR 705 (SC). The AO, however, rejected the explanation and held that the assessee had failed to record receipts arising from unaccounted sales in its books of account, thereby resulting in misreporting of income within the meaning of section 270A(9)(e) of the Act. The AO computed the gross profit attributable to such alleged unaccounted sales at Rs.26,00,492/-, determined the tax thereon at Rs.6,54,492/-, and levied penalty at 200%of the tax payable on the under-reported income, amounting to Rs.13,08,984/-.
7. Aggrieved by the penalty levied u/s. 270A of the Act amounting to Rs.13,08,984/-, the assessee preferred an appeal before the CIT(A). Besides reiterating the submissions made before the AO, the assessee contended that in certain transactions, M/s. Mohanlal Jewellers Pvt. Ltd. (MJPL) had not raised invoices for the entire value of the gold jewellery, as the assessee had supplied equivalent quantity of gold for conversion into jewellery and, therefore, invoices were raised only towards making charges. It was further submitted that the receipt of gold by MJPL was duly recorded on the receipt side of the “J-Pack” ledger in the name of “Nalli T. Nagar”, which had not been considered by the AO. In support of its claim, the assessee furnished reconciliation statements of MJPL issues with Nalli Trust receipts and MJPL receipts with Nalli Trust issues, along with the jewellery receipt and issue statements of Nalli Trust. After examining the reconciliation statements and the material placed on record, the CIT(A) directed the AO to verify the purchases of gold/gold ornaments and the corresponding quantity of gold issued for job work as reflected in the books of account, ascertain whether there was any excess purchase from MJPL, and treat only such excess, if any, as unaccounted purchases for the relevant assessment year. The CIT(A) further directed that penalty u/s.270A could be levied only on the unaccounted income arising from such unaccounted purchases and not on the additional income voluntarily offered by the assessee during the assessment proceedings. Accordingly, the appeal was partly allowed with the above directions.
8. Aggrieved by the order of the CIT(A), the assessee is in appeal before the Tribunal. The Ld. AR submitted that the additional income voluntarily offered by the assessee was only an estimated amount based on the average gross profit margin of its jewellery business, which was accepted by the AO while completing the assessment u/s.143(3) of the Act. It was further submitted that, in the quantum proceedings, the Tribunal in the assessee’s own case in ITA No.3076/CHNY/2025 had held that the estimation of gross profit at 23%was excessive and restricted the same to 2%of the disputed transactions. Therefore, the very basis on which the penalty was levied no longer survives. The Ld. AR further contended that penalty u/s.270A is not leviable where the addition is made purely on an estimated basis and, in support of this proposition, relied upon the decision of the Bangalore Bench of the Tribunal in the case of Dy. CIT v. L. Javerchand Jewellers (P.) Ltd. [IT Appeal No.1542 (Bang) of 2024, dated 9-1-2025]. It was also argued that neither the assessment order nor the notice issued u/s.274 of the Act specified whether the penalty proceedings were initiated for under-reporting of income u/s.270A(2) or for misreporting of income u/s.270A(9). Accordingly, it was submitted that the penalty levied u/s.270A deserves to be deleted.
9. The Ld.DR supported the findings of the AO and the CIT(A).
10. We have heard the rival submissions and perused the material available on record. Consequent to a search u/s. 132 of the Act conducted in the case of M/s. Mohanlal Jewellers Pvt. Ltd. (“MJPL”), certain data contained in the “J-Pack” software was found indicating transactions with the assessee. During the course of the assessment proceedings, the AO observed that jewellery purchases aggregating to 2340.210 grams were not fully supported by invoices. The assessee consistently denied having made any unaccounted purchases from MJPL and furnished detailed reconciliation statements, making charge invoices, metal issue vouchers and other supporting documents. Nevertheless, with a view to buy peace and avoid protracted litigation, the assessee voluntarily offered an additional income of Rs.26,00,492/-, which was accepted by the AO while completing the assessment u/s. 143(3) of the Act on 28.03.2023.
11. The CIT(A) confirmed the addition primarily on the ground that the assessee had voluntarily agreed to the addition. Aggrieved, the assessee carried the matter in appeal before the Tribunal in ITA No.3076/CHNY/2025. The Coordinate Bench of the Tribunal, vide order dated 17.03.2026, partly allowed the appeal by holding that the addition had been made solely on the basis of the voluntary disclosure made by the assessee without any corroborative incriminating material. The Tribunal further found that the detailed reconciliation furnished by the assessee had not been properly appreciated by the AO and that an admission, by itself, cannot constitute the sole basis for making an addition unless supported by independent evidence. Accordingly, the Tribunal held that estimation of gross profit at 23%was excessive and directed the AO to restrict the addition to 2% of the value of the alleged unaccounted purchases. The relevant findings of the Tribunal read as under:
“14. We have heard the rival submissions and perused the material available on record. It is observed that the addition has been made solely on the basis of disclosure made by the assessee. The assessee has consistently maintained that all transactions are recorded. No unaccounted purchases exist. The disclosure was made to buy peace and to avoid protracted litigation. It is a settled position of law that admission cannot be the sole basis of addition unless supported by corroborative evidence. The assessee has furnished reconciliation of transactions with MJPL, details of payments, Gold metal exchanges, Making charges invoices. The AO has not brought any independent evidence to conclusively prove that the purchases were unaccounted. Even assuming that there were unaccounted purchases, the settled principle is that only the profit element embedded in such purchases can be taxed and not the entire amount. This principle has been consistently upheld in various judicial pronouncements.
15. In the present case, the assessee applied 23% GP, which appears highly excessive. In the jewellery trade, especially in similar factual circumstances, net profit estimation of around 2% on disputed transactions has been accepted as reasonable. Accordingly, in the interest of justice, a 2% profit rate on the alleged unaccounted purchases would meet the ends of justice and based on the order of the co-ordinate bench of the Tribunal in the case of M/s Gold AIK Vs The ITO ITA No.1046-1051/Chny/2024 dated 06.11.2024 [Page 3-29 of Paper Book]. The reliance placed by the CIT(A) on the voluntary disclosure is misplaced because the disclosure was conditional and without admission of concealment. It was made to avoid litigation, there is no estoppel against statute. Therefore, the assessee is entitled to contest the addition.

16. In view of the above, the addition of Rs.26,00,492/- is not sustainable in full. The AO is directed to restrict the addition to 2% of the value of alleged unaccounted purchases (2340.210 grams). Accordingly, the appeal of the assessee is partly allowed.”

12. In the instant case, the assessee had voluntarily offered an additional income of Rs.26,00,492/- by estimating the gross profit at 23%on the alleged unaccounted purchases. It is an admitted position that, in the quantum proceedings, the Coordinate Bench of the Tribunal has held such estimation to be excessive and directed the AO to restrict the addition to 2%of the value of the alleged unaccounted purchases. The Tribunal has categorically recorded a finding that the disclosure made by the assessee was only to buy peace and avoid protracted litigation and that an admission, by itself, cannot constitute the sole basis for an addition unless supported by corroborative evidence. We further note that the assessee had furnished reconciliation statements of transactions with M/s. Mohanlal Jewellers Pvt. Ltd. (MJPL), details of payments made through banking channels, gold metal exchange records, making charge invoices and other supporting documents to substantiate that all transactions were duly accounted for in its books. These facts have also been duly noticed by the CIT(A) in the impugned order dated 19.08.2025. After examining the material placed on record, the CIT(A) directed the AO to verify the reconciliation statements and determine the actual unaccounted purchases, if any, and further held that penalty u/s. 270A could be levied only on the unaccounted income arising from such verified unaccounted purchases and not on the additional income voluntarily offered by the assessee during the course of assessment proceedings. The relevant findings of the CIT(A) are reproduced below:
6.3 The next contention of the appellant is that all the transactions reflected in the J-pack ledger have been accounted in its books of accounts. The appellant has submitted that in some transactions, M/s MJPL used to raise invoice for the entire amount of the gold jewellery, which was then settled by payment through banking channel. However, no such invoices were furnished for the year under consideration. The appellant has further submitted that there were some transactions where M/s MJPL had not raised invoices for the entire amount of gold jewellery because the appellant had issued equivalent weight of gold to M/s MJPL and in such transactions, invoice was raised for making charges alone. The appellant has also submitted that the receipt of the metal by M/s MJPL was also recorded on the receipt side of the J-pack ledger in the name of “NALLI T.NAGAR”. The appellant has claimed that these transactions were not considered by the AO during the assessment proceedings. In this regard, the appellant has furnished a reconciliation statement of MJPL issues with Nalli Trust receipts as well as MJPL receipts with Nalli Trust issues. The appellant has also furnished jewellery receipt statement of Nalli Trust and jewellery issues statement of Nalli Trust.
6.4 On perusal of the submissions made by the appellant, it is observed that the “NALLI T.NAGAR” ledger, which was maintained by M/s MJPL in J-pack, contains entries on the receipt side also. It is settled law that it cannot be considered that part of the seized material is correct and the remaining is incorrect. Since some of the entries on the “Issued” side of the said ledger in the earlier years had clearly matched with the transactions recorded in the books of account of the appellant, it is proved that the said ledger pertains to the appellant only and all the transactions recorded on ‘Issued’ as well as ‘Receipt’ side pertain to the appellant. Since the seized material clearly indicate some metal receipts, the same has to be taken into consideration for arriving at the unaccounted purchases by the appellant. Further, on test checking of the reconciliation submitted by the appellant, it is seen that for some transactions, the quantity of metal issued by the appellant, which is in the nature of job work, matches with the metal quantity entered in the receipts side of J-pack ledger. It is quite reasonable to consider that for such transactions are not in the nature of sales for which M/s MJPL would not have raised any sale invoice for these transactions and the invoice would have been raised only in respect of Making Charges. The appellant also made the same claim that in case of metal issue for job work, it had received making charge invoice and the payments were made through banking channel after deduction of tax at source. It appears that the job work transactions recorded in the books of the appellant have not been considered by the AO while making the addition and levying the penalty. Therefore, the appellant is directed to submit the details of transactions recorded in its books of accounts with respect to job work and also furnish the reconciliation of entries made in J-pack ledger and its books of accounts along with documentary evidence to the AO. Thereafter, the AO is directed to verify the purchase of gold/gold ornament and equivalent metal issued for conversion of the gold on job work as recorded in the books of account of the appellant and consider the same as the quantity of gold/gold ornament as recorded in the books of accounts of the appellant to find out if there is any excess purchase by the appellant from M/s MJPL and this difference alone to be considered as unaccounted purchases for the year under consideration. On the basis of verification as directed above, the AO has to rework the unaccounted purchases of the appellant, if any, for the year under consideration and then adopt the gross profit @ 23%, to find the unaccounted income of the appellant. The penalty u/s 270A(9)(e) can only be levied on such unaccounted income arising out of unaccounted purchases and not on the additional income offered by the appellant in the course of assessment proceedings. With these directions, the grounds of appeal are partly allowed.”
13. As discussed hereinabove, the additional income of Rs.26,00,492/- was voluntarily offered by the assessee on an estimated basis by applying a gross profit rate of 23% on the alleged unaccounted purchases, which was accepted by the AO in the quantum assessment. However, the Coordinate Bench of the Tribunal, while adjudicating the quantum appeal, has categorically held that there was no corroborative evidence to support the addition based solely on the voluntary disclosure made by the assessee and, accordingly, restricted the addition to 2% of the value of the alleged unaccounted purchases of 2340.210 grams. The Tribunal has also held that the disclosure was made only to buy peace and avoid protracted litigation and that an admission, in the absence of supporting evidence, cannot by itself justify an addition.
14. In view of the aforesaid findings in the quantum proceedings and considering the facts of the present case, we are of the considered opinion that the case of the assessee does not fall within the ambit of under-reporting or misreporting of income contemplated u/s.270A of the Act. The addition itself having been sustained only on an estimated basis, the levy of penalty u/s. 270A cannot be justified. Our above view is fortified by the decision of the Bangalore Bench of the Tribunal in L. Javerchand Jewellers (P.) Ltd. (supra), wherein it has been held as follows:-
“10.7 Therefore, it goes without saying that for the applicability of section 270A of the Act, the conditions stated therein must be strictly followed. A mere declaration of additional income which was estimated as being around 30% of regular turnover and even offered for taxation before the completion of assessment by itself will not amount to under reporting resulting in misreporting of income. We are of the opinion that penalty u/s 270A of the Act cannot be levied when the income was arrived at based on estimation. Further the return income was duly accepted by the AO as no other disallowance or additions were made to the returned income. Therefore we completely disagree with the argument of the ld. DR that AO has not resorted to any estimation since the additional income offered by the assessee which is solely based on estimation is utterly accepted by the AO. Eventually, the Income assessed u/s 143(3) of the Act r.w.s. 153C of the Act is nothing but acceptance of Income based on complete estimation. Who had estimated the income is irrelevant especially when such income is accepted by both the parties.
10.8 ……………
10.9 We are further of the considered opinion that the penalty by hereditary nature is always discretionary. The legislature has used the word “may” in section 270A(1) of the Act which clearly says that it is discretionary on the part of the AO to levy penalty or not. We are also of the opinion that penalty is not at par with the tax and interest and therefore, penalty should not be levied in a light hearted manner or in routine manner and not very additions/ disallowances are liable for penalty. The primary onus is on the revenue to prove that assessee falls under particular limb of default. The AO have to bring the case in the four corners of the sections in order to levy penalty which in our opinion, the AO failed to do so. Therefore, we are of the opinion that the explanation offered by the assessee is bonafide and the assessee has disclosed all material facts to substantiate the explanation during the course of assessment proceeding and accordingly no addition was made in the assessment proceedings.”
15. In view of the foregoing discussion and respectfully following the decision of the Bangalore Bench of the Tribunal in. L. Javerchand Jewellers (P.) Ltd. (supra), we hold that the penalty levied u/s. 270A of the Act is unsustainable. Accordingly, we direct the AO to delete the penalty of Rs.13,08,984/- levied u/s. 270A of the Act. It is ordered accordingly.
16. In the result, the appeals filed by the assessees are allowed.